BUSINESS

Is it time to sell and go away?

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Over the next few weeks, investors are likely to hear the old saying “sell in May and go away”, particularly since global markets have rallied so strongly over the past year (more so the past five years).

The local JSE All Share Index is at record levels (in Rand terms), and so are the benchmark
UK FTSE 100 (in Pounds), US S&P 500 and global MSCI World Equity indices (the latter two in US Dollar terms). In the UK, US and locally, investors are grappling with whether equities are overvalued; this is not a simple exercise. Investors need to consider future company profits, behaviour of other investors, and other financial variables such as interest rates. But there is no doubt that the economic backdrop in the US and UK is favourable for equities – inflation is low, growth is picking up and central banks are in no hurry to tighten their monetary policy.

Not all markets have done well

Importantly, however, a number of key global equity indices are nowhere near record highs. European equities, as represented by the Eurostoxx 50, are still 16% below the 2008 peak as the Global Financial Crisis and then the Eurozone debt crisis wreaked havoc with investor confidence and company earnings. The Eurozone’s economy is only now exiting its doubledip recession, and company earnings are slowly improving from a depressed base.

So far this year, Japan’s equities have lost more than 12%, after surging in 2013. But Japan’s Nikkei 225 Index is still 20% and 61% below the 2008 and 1989 peaks respectively. Japan’s government is keen on its corporate sector and to spur greater ownership of Japanese equities by local investors, potentially providing support going forward.

Emerging markets, as represented by the MSCI Emerging Markets Index, are 19% below the 2007 peak in US Dollar terms, and 8% in local currency terms (taking into account that many emerging market currencies, including the Rand, have fallen against the US Dollar).

Over the past ten years emerging markets have been the star performer with their higher economic growth rates and, after the 2008 Global Financial Crisis, stronger government and corporate balance sheets. But over the past three years, emerging market growth rates have slowed, debt levels have climbed and companies have been unable to increase profits. Old structural shortcomings like political uncertainty and reliance on foreign capital have also resurfaced.

Locally, there are also pockets of potential value as the JSE’s resources and construction indices are still below the 2008 peak. Some JSE sectors that are closely linked to the struggling local economy – such as food producers and retailers – are currently trading below 2013 peaks. The market has largely been driven by the Rand-hedge mega-cap shares such as British American Tobacco, SABMiller and Richemont. More recently, interest-rate sensitive shares, such as banks, have rallied as the market has toned down its expectations for further rate hikes.

Not the time to sell and go away

Overall, some global markets have done well, but not across the board. This means there are areas offering decent value for longer-term investors. But the environment is complex and constantly shifting which is why a diversified portfolio actively managed by a professional is important. As far as “sell in May” is concerned, trying to time the market, whether by using rules-of-thumb or old sayings, is not something that should be practiced. Creating wealth requires patience and is a long-term process of buying assets at a decent price, diversifying and allowing time for compound growth in order to achieve the desired returns.

Local manufacturing still disappointing

According to the latest StatsSA data, local manufacturing production increased by 0.7% year-on-year in March. The best performing sectors were basic iron and steel, and wood and paper products, rising by 4.6% and 9.8% year-on-year respectively. In the first quarter, manufacturing declined by 1.6% compared to the final quarter of 2013, manufacturing will therefore detract from gross domestic product growth in the first quarter.

No incentive to expand capacity

In a different report, StatsSA revealed that capacity utilisation in manufacturing slipped back in the first quarter to 81% from 84%, and that under-utilisation increased from 16% to 19%. Firms listed insufficient demand as the main reason.

The BER/Kagiso Purchasing Managers’ Index (PMI), also released last week, is a more current indicator of the local manufacturing sector’s health. The PMI dipped below the 50 point level that separates contraction from expansion in April, moving to 47.4 from 50.3 in March. This suggests that output in the local factory sector is likely to underperform in the near term following the subdued performance over the past two months. All of the PMI sub-indices declined in April, except for suppliers’ performance. The forward-looking component, the ratio of new sales to inventories, fell further below 1, also indicating that firms have enough stock to match sales and therefore no incentive to increase output.

SA lags the global manufacturing sector

The weak performance of the local manufacturing sector once again is in contrast to other economies. However, there is some good news in this as stronger global economies should eventually pull South Africa along with it. There is already evidence of local manufacturing exports picking up, partly due to the weak Rand. However, South Africa’s performance has also lagged its emerging market peers. The HSBC Emerging Markets PMI is slightly above 50, but the trend over the past three years has been weak. China’s official manufacturing PMI inched up to 50.4 in April but the HSBC PMI, which focuses on smaller private firms, remained below 50 in April.

Among the developed nations, the UK posted the best performance, with its manufacturing PMI rising to an eight-month high of 57.3 in April from 55.3 in March. The US ISM Index rose to a four-month high of 54.9 in April from 53.7. The Eurozone’s manufacturing PMI also rose to a three month high of 53.5 in April from 53.0 in March. Significantly, all of the Eurozone economies had PMIs above 50 – for the first time since 2007.

This indicates that a broad-based recovery is finally gaining traction in the troubled Eurozone, but growth is still very slow and held back by high unemployment, contracting bank lending and fiscal austerity. However, any improvement is welcome as the Eurozone remains an important export destination for us, as well as a major source of our tourists.

Old Mutual Wealth

 

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