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Investment Strategy
Monday, December 1, 2008
Look now

From a valuation perspective, there is a strong argument to be buying the local market at current levels, says Mark Seymour of Alphen Asset Management.
Based on historic returns the market is prone to solid gains when initiated off a low base of single digit price-to-earnings ratios and high dividend yields (see our two tables), he says.

“Economic doom and gloom is the necessary catalyst for driving markets to very cheap levels and, now that this scenario is playing itself out, the time has come to take advantage of this rare opportunity.”
The second table reflects market returns for periods between significant market corrections, when the market is in recovery and creating new highs. “It is worth noting,” says Seymour, “that the annualised return does not include dividends reinvested and would otherwise be 2% to 5% higher.”
It seems superfluous to point out the obvious, but the average investor is in a state of high anxiety about his current equity exposure to the All Share Index, which, at the time of writing, was down nearly 45% from its highs, and the economic news remains unrelentingly bad. “Given this,” he says, “it is worth dissecting the state of market returns through the cycle and seeing where we currently stand.”
During a sharp market correction, the price falls from a high-point (draw-down) and eventually reaches a trough (See the first Table). Next, the market recovers whereby the price rises above the low-point and eventually reaches the high-water mark (price of the previous high). Third, the market rallies above the high water-mark creating a new high.

“At present we are well entrenched in the draw-down phase, however valuations are supportive of a turn-around sometime, at which point the market will enter the recovery phase,” believes Seymour.
“We acknowledge that the timing of the recovery is impossible to calculate and would therefore recommend a gradual and focussed strategy of accumulating equity exposure back to benchmark or strategic levels.”

Copyright © Insurance Times and Investments® Vol:21.11 1st December, 2008
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