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Tuesday, February 1, 2005
Equity advice

Many investors will be taking a ‘breather’ from the markets in January and February, using the period to take a little profit and reassess prospects before making major new commitments. So look out for a minor market correction.
The prediction comes from Paul Hansen, Director, Retail Investing, at Stanlib. The danger at a time like this is that private investors may misinterpret apparent signs of weakness and over-react – especially as South African unit trust-holders have shown themselves to be extremely skittish in recent years.
In the coming weeks, he predicts occasional headlines about JSE ‘weakness’ and profit-taking, but this is a signal that the market is taking a breather after exceptional strong performances last year, and not a sign that values are about to plunge.
There is nothing wrong with taking a little profit if your equity and property fund investments generated big returns. One small cap fund achieved 64,2% growth in 2004 while some capital growth, industrial and value funds were up by more than 45%. With gains of this magnitude, a little profit-taking is understandable.
Stick with a diversified strategy. Unless there are sound or urgent reasons for liquidating positions, this is not the time to retreat entirely to the sidelines. After all, even conservatively structured income funds significantly outperformed money market instruments in 2004. The top-ranked income fund (a typical option for conservative investors) achieved a return of 11,9% in 2004, way above the 7’7% return of money market funds.
“Use the breather-period to assess new equity opportunities. The JSE is not over-priced. Value is still present and a slight correction in coming weeks will accentuate value opportunities,” he advises.
Mr Hansen points out that last year’s uptick in the JSE price-to-earnings (PE) ratio has to be put into context. For the past 20 years, the average PE for financial and industrial shares was 13.2. “The current PE of 13.9 is hardly a sign that the JSE has become expensive.”
Adds Mr Hansen, “You could argue that the PE deserves to be even higher as our prime rate is currently 35% below its 20-year mean and our economy is growing at more than twice the average rate for that period.”

Copyright © Insurance Times and Investments® Vol:18.1 1st February, 2005
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