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Investment Strategy
Thursday, November 1, 2007
Old links die hard

If you’re a confused investor it’s probably because you’re following the wrong investment trends. The problem for the typical saver-investor is that old linkages no longer apply to the same extent, says Paul Hansen, Stanlib’s retail investing director.

Years ago, when interest rates were going up, the JSE was going to stall or fall. These days, that simplistic linkage doesn’t quite hold. A month after the previous 0,5% rate rise, the JSE was at record highs near the 30 000 point-mark, yet is now at around 30 800 (mid-October). Bond yields are sharply higher, up from 7,6% to 8,4% on government’s 10-year bond – a leap that would have caused jitters a few years ago as analysts use this benchmark to calculate the present value of shares and higher yields torpedo present values.
Comments Mr Hansen, “In a year interest rates are up 300 basis points the JSE has powered ahead, up now 37,4% during the past year. Obviously, local rate rises don’t smack local equities to the old extent.
“Ten years ago, the braking effect would have been marked.”
What’s changed? Two key things have happened, and these involve the commodities and rate cycles. A decade ago, global commodities were in the doldrums. More recently, resources have taken off thanks to huge demand in India and China. The JSE’s mining sector is up about 40% this year, underpinning JSE growth (it was at 40 895 mid-October)..
Ten years back, inflation was much higher. When rates rose, the leap was substantial. The long-term average in a South African interest rate up-trend is 6%. So, in the late 90s the expectation after a 3% rise would have been that we still had 3% to go – a big worry for any equity market.
The current up-trend might continue, but it would be a major shock if rates rose another 300 basis points, while some market-watchers (Stanlib included) believe the current cycle may have run its course.
He explains, “The world commodity boom obviously won’t be derailed by local rate rises, and the historic average of 6% for an interest rate up-run no longer looks credible as inflation is much better controlled. “Another factor that tends to override some interest rate concerns is positive emerging market sentiment. The    MSCI Emerging market index of which South Africa forms a part – is up 22% this year. That’s way ahead of the MSCI world index rise of 9,5%.”
So, if you reduced your equity positions on bad news about rates and bond yields, does this mean you are totally out of date?
“Not exactly,” says Mr Hansen; “the last rate rise and worries about the National Credit Act caused banking shares to retreat 13% for a time. Well-diversified equity investors were little affected. Those taking a strategic view have been well invested in infrastructure stocks for some time as long-term national strategy supports the category. The JSE’s construction sector is up about 60% this year (at 86 255 mid-October) – so long-term policy direction must also be considered.
“You can’t ignore interest rates, but other variables are also important. Investors should also consider emerging market sentiment, resources and long-term inflation. Don’t watch just one indicator – follow the lot.”

Copyright © Insurance Times and Investments® Vol:20.10 1st November, 2007
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