Is the bull run going to hit cow pats?
Analysts are divided over the cause of the soaring stock market, writes LUCIENNE FILD
WHILE you were sitting on the sidelines worrying about the Y2K bug, the stock market launched into a bull run that is charging ahead. But the casualties will be investors who dive in for the wrong reasons.
Over the past six weeks the market has achieved a phenomenal growth of around 25%. And for the first time in years the JSE is breaking records - this week the All Share Index closed above the 9 000 point mark for the first time in its 112-year history. Leading the charge are banking and financial services stocks.
But analysts and stockbrokers are divided over whether this is just a relief rally after a smooth Y2K transition, or whether the bull run is based on strong economic fundamentals.
Deon Vernooy, head of research at Gensec Asset Management, says the market has done too much too quickly over the past six weeks. "I find it difficult to see the market continuing at this pace over the short term."
Expect the market to cool down shortly and possibly even backtrack a little, he says. But Vernooy has a bullish longterm outlook. For the next 12 months and beyond he expects a strong earnings growth on the back of lower interest rates and higher commodity and metal prices.
And it is about time too. Vernooy says the average real return of 5.6% a year on equities during the past five years was one of the lowest since 1960.
He predicts that the average real equity return on SA equities will, over the next few years, improve towards around 7% to 9% annually.
Which sectors is he backing? Vernooy believes the easy money has been made in commodities and he is looking at financials and industrials.
David Shapiro, director at SG Frankel Pollak, admits this market run has left him confused. "There is this euphoria and no one knows why."
The positive outlook driving this run has been around for three to four months, he says, and there has been no change in market fundamentals supporting it.
Shapiro says stronger inflows had been expected once Y2K was no longer an issue, but the present market levels have surpassed all expectations.
"The market has already reached the levels we had predicted for the end of the first quarter."
The predicted economic growth of around 3.4% this year is fine, he says, but is not enough to propel the market to new record highs. Government will have to take bold steps, he says, and target annual growth rates of 5% to 6% annually through job creation.
Shapiro says although you should have entered the market at the beginning of October, there is still time provided you pick the right stocks.
He says local companies with an international flavour are your safest bet. These companies will survive regardless of what the SA economy does.
He says there is still some upside left in commodity counters and a few IT companies should do well. In the financial sector, Shapiro is sticking to the big banks.
And then there are the real bulls on the market.
Louis Fourie, economist at Citadel Investment Services, believes that for the first time in six years the market is running for all the right reasons.
"The SA market is on the verge of entering a period of solid performance based on good economic fundamentals."
If investing in equities suits your profile, take the plunge - if it's for the long term. "You might have missed out now, but over the next five years you should catch up provided you follow the right investment approach," says Fourie.
He says industrials will perform because the economy is recovering well. Financials will also deliver, he says, and so will IT stocks. But IT stocks need to be picked carefully because they are volatile.
John McNab, the head of investments at Investec Guinness Flight, expects the JSE to grow by another 25% this year. "We have entered a bull market driven by strong global growth, higher commodity prices and lower interest rates - a near perfect mix for the SA economy," he says.
But because the market has moved up rapidly since December, investors can expect volatility this quarter. This should not put you off if you are a long-term investor.
"We are in for a nice short- to medium-term bull market," he says. But what the market will do over the long-term is difficult to predict.
McNab says while commodity stocks still have some life left, he wouldn't pile his money into mining and resources unit trust funds.
Rather look at unit trusts in the financial and industrial sectors. If you can afford risk, consider smaller companies and micro cap unit trust funds.
General equity funds are a good bet and should form the core of your portfolio, he says.
Anton Kok, chairman of the Association of Unit Trusts, advises investors to get into the market before they lose out on more growth.
"I haven't been this positive about the market in a long, long time." He says last year most investors who were invested in funds not exposed to commodity stocks lost money.
By the third-quarter these investors ran scared and moved into cash. Then the market started running and these investors lost again.
"If you are in the market you should be there for the long term. Close your eyes when things look bad. Inevitably the market will pick up again."
Kok says fundamental reasons for investing in the market are the best they have been for three years.
If there is a correction, he says, it should be temporary.
He says general equity funds should form the core of your portfolio. Depending on your risk profile you could also include financial, consumer, international, and even smaller companies and micro cap funds in your portfolio.
So if you are able to commit to a long-term investment, you had better get into the market now. But if you are hoping to make a quick buck by jumping in and out before it cools, you could get hurt.