The future is looking positive, with a healthy JSE OVER the past few months, I have noticed how people are becoming increasingly gloomy about their investments and the outlook for stock markets in the near future. One can understand how political uncertainty in South Africa and economic woes in Europe can be worrying for anyone. What should rational investors do in this climate, and are there good reasons to be balanced in your investment outlook?
While I have no insight into South Africa's political situation, what I do know is that the continuous debate on nationalisation, as well as the dismal performance of state-owned enterprises and the lack of job creation, have caused massive harm to our economy.
Europe is not much better, If South Africa is looking scary, at least we can see the solutions to our problems. Europe is stuck in a quagmire from which there is no easy exit. Meanwhile, the Americans are slowly getting their house in order. A positive future , You might wonder if there is a positive aspect to this story for South African investors — I believe there is.
Just as everyone is becoming increasingly depressed about our economic prospects, for the first time in nearly five years, South African institutional investors are becoming more positive about our investing future. More interestingly, nearly 80% of them feel like the JSE is fairly valued at these levels. This is according to the Investor Confidence Index, published by the Institute of Behavioural Finance in South Africa.
According to their survey of South Africa's institutional investors, less than 10% of them think the JSE is expensive, while 79% feel that it is fairly priced. This is not a prediction of the JSE's returns, the fund managers are simply being asked whether they believe the market is cheap or not. They usually make this determination through a rational, logical process, which means that there is not much emotion involved.
I believe there is no merit in the forecasts (otherwise known as predictions) of institutional investors, but I do believe that most of them are good at determining whether something is cheap or not. As along-term investor, one can derive some comfort from their determination that the market is fair value because it means you can expect the JSE to deliver normal returns from these levels going forward.
One of the greatest determinants of investor returns is the initial price you pay for your investment and therefore current valuations are important. Over the past 112 years, the average return of the JSE has been 7,5% per year above inflation. If inflation remains close to six percent, the normal expected returns from the JSE will be 13,5% per year. This is a good return on capital for long-term investors who are not too time-sensitive.
Given all the things that could keep me awake at night worrying about our stock market returns, I derive comfort from the fact that history eventually repeats itself and this time will be no different. Therefore, I am not going to give in to the gloom, I would rather use this opportunity to buy good assets at a fair price. If people increasingly give in to the market depression, there will be opportunities to buy these assets at even better prices, so don't commit all your capital to one purchase, rather phase-in over the next few months. — Moneyweb.
Warren Ingram, CFP (certified financial planner), was the FPI (Financial Planning Institute) financial planner for the year 2011. He is a director of Galileo Capital. PHOTO: