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Investment Strategy
Monday, November 1, 2010
Just sit and relax

Third quarter results have a big message for investors – take time out to consult your financial adviser because market moves suggest a judgment call is needed on weightings, risks and profits.

That’s the interpretation of the latest quarterly returns from Craig Pheiffer, GM investments, at Absa Investments.
“Many developments appear to be reaching critical mass,” says Pheiffer. “Will current trends continue or is it time for profit-taking? Or perhaps you were initially cautious, but now see signs of traction and are ready for a little more risk?
“Where are the numbers taking us? That’s a matter of interpretation and is obviously linked to each investor’s situation and risk tolerance. It’s time to review and perhaps recalibrate.”
Total returns for the third quarter to end September 2010 indicate:
• Local equities, as reflected by the JSE All Share Index, are up 13,29% for the quarter and up 8,69% for the year to date (ytd);
• The All Bond Index is up 8,04% for the quarter and 14,11% ytd;
• Listed property (a star performer so far) is up 13,67% and up 25,68% ytd;
• Prime-linked preference shares are up 5,20% and 13,32% ytd;
• Resources are up 7,11% for the quarter but still down 3,63% ytd;
• The rand has appreciated from R7,67 to the dollar at the end of Q2 to R6,96 by the end of Q3;
• Gold is up 5,7% for the quarter in dollars but down 4,1% in rands.

“Performance in each asset class raises a question,” notes Pheiffer. “Local equities bounced back after shedding 8,17% in the second quarter. Improving economic fundamentals and corporate earnings have boosted equity markets both globally and locally. Over the third quarter Imperial was up 32%, Naspers was up 31%, Old Mutual rose 30% and Richemont gained 27%. After such a strong run, investors need to consider very carefully whether there is still value in their stock selections.
“The rand has had a great run, but for how long? Are you adequately diversified offshore or do you need to adjust your offshore weighting? Resources, one casualty of the rand strength, revived after retreating 11,87% a quarter earlier. The relative underperformance of resource counters over the quarter and the year so far seems to imply that future commodity softness is expected.
“Yet global GDP growth of over 4% is predicted for this year and the next, which rather suggests stable to firmer commodity prices. So is the resource revival the start of a trend or a false dawn?”
Offshore influences also need to be considered, says Absa Investments.
The bond market uptick was not only driven by expectations of a September rate cut, but by a strong yield play in emerging market bonds by fund managers in the developed world. South African markets are among the most liquid in emerging markets, so any reversal of international sentiment would be rapidly reflected in our bond market.
The same applies to equities. Foreign inflows into the JSE amounted to R19.5 billion for the year so far, but in the third quarter net inflows were almost flat – perhaps a sign that offshore fund managers are starting to sense more opportunities closer to home as talk of double-dip recession recedes.
“The foreign appetite for our consumer-related stocks also raises some questions,” says Pheiffer. “Has it made some counters expensive? Is profit taking indicated?
“As long-term investors you sometimes just sit. At other times, you sit and think. This is one of those times.”

Copyright © Insurance Times and Investments® Vol:23.11 1st November, 2010
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