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Investment Strategy
Monday, March 1, 1999
Selective care

Peter Linley investment head for Old Mutual Unit Trusts says the local economic outlook for 1999 is poor. “However, interest rates should resume their fall if local currency remains stable and the balance of payments improves. It is our view that the interest rate cycle has peaked both locally and internationally.
“Declining interest rates will boost confidence and economic activity towards the end of the year and provide impetus for improved investor sentiment and company profitability.
“Falling short term interest rates and a slowdown in inflation should also lend strong support to the bond market.” In terms of macro-economic policy, he does not foresee any changes following the elections in June. “However, we are uncertain about future Reserve Bank policy, when Tito Mboweni takes over as Governor.
“Privatisation has to be accelerated,” he says, “in order to encourage economic growth. There is no doubt about the fact that volatility will continue in the markets and, for example, in terms of necessary diversification of portfolios the current 15% limit for investments overseas is simply not enough.” However, Mr Linley says that while the risk free return on cash is attractive, the potential return on both the bond and equity markets will reward those investors prepared to take on some risk. Investors should guard against being momentum investors and worrying about events already priced into the market. How- ever, it remains critical that that they maintain well-balanced portfolios.
“The market’s rating is cheap and discounts a significant amount of negative sentiment and fear. The market knows this and has priced in the likelihood that economic prospects for 1999 are poor. However, the issue on which investors should focus is prospects for 2000. Critical to the outlook is an improvement in the balance of payments and the lack of a further shakeout in emerging markets.”
Themes favoured by Old Mutual in 1999 include international investments, banks, bonds, value shares and large market cap stocks. “Although the rand has strengthened against the dollar we see an ongoing gradual depreciation of the currency reaching R6,50 to the dollar by year-end.


“Investors should ensure they have diversified their investments offshore and we recommend that up to 40% be allocated for global investments depending on individual criteria.”
Mr Linley further suggests that investors keep an eye on consumer shares, which will benefit from any rise in commodity prices when world growth starts to accelerate. He also expects small companies to do better in 1999.
Summary of the investment outlook:
• Volatility to continue
• Global uncertainties
• Electioneering
• Equities and bonds preferred over cash
• Re-rating of JSE from low levels
• Declining interest rates
• Inflation below 5%
• Equity sectors to favour:
o Banks
o ‘Value shares’ in short term
o Stock picking remains critical
o Consumer and commodities look interesting
An underlying risk is our emerging market status with commodity dependence.

Copyright © Insurance Times and Investments® Vol:12.2 1st March, 1999
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