Durban - The big problem with a volatile stock market is the lack of clear direction.
Most investors prefer equity markets to go up, but whether it's up or down, investors can plan accordingly if there are at least a few months' indication of possible direction.
Markets like the ones we're experiencing now - not only on the JSE but globally - make investment planning very difficult.
That said, an extended dose of volatility has a healthy consequence in that it emphasises the long term for equity investors. Being a successful investor is not only about making the right choices at the right time, but as much about having the conviction to ride out the bumpy times according to your investment strategy.
And maybe the JSE is not totally directionless.
For the year-to-date, the all-share index has gained 7.47%, not a bad return for a little over three months. Resources are driving the local market (the Res 20 index is up 26.81% for the year so far).
Financials are the drag (the Fin 15 index down 11.15% for the same period), but this is one sector where clear long-term value is starting to emerge.
The JSE is also looking pretty strong compared to the major developed economy stock markets. All are in the red year-to-date, the Dow Jones having lost 7.08%, the S&P 500 9.23%, Nasdaq 13.65% and the FTSE 100 8.70%.
Long-term view
But what should local investors be doing now? Taking a long-term view, and looking for quality equities offering value. For a couple of reasons, now also seems a good time to explore global equities, particularly the mainly international large capitalisation shares.
But just a note of caution first on cash. It's the safe option and may seem the logical place for investment capital in troubled equity markets.
Investors should increase cash holdings by all means, but not at the expense of ignoring the opportunities equities are offering.
Tony Barrett, head of wealth management at Barnard Jacobs Mellett (BJM) Private Clients Services, says a "cash investment at this moment carries a disguised lost opportunity cost that few portfolios can handle".
BJM has issued a "cash cautionary" to its high net-worth private clients, saying while a cash-heavy portfolio seems the sensible and mature option, the lost opportunity cost of such a strategy should not be ignored.
"A number of JSE stocks have literally been decimated since the top of the market in October 2007. These are still by and large solid companies with good business operations and good future potential," Barrett says.
Offshore
Local investors are often urged to diversify offshore, and now seems an opportune time to look at developed economy shares. "
When everything looks bleak and dark is the time the discount comes through in equity markets," says Richard Stanley, MD of Singer & Friedlander Investment Management. Stanley was in South Africa to present on Marriott's offshore funds.
It has partnered Marriott for the past 10 years and runs its foreign portfolios.
Simon Pearse, MD of Marriott, says dividend yields on large cap developed market stocks are higher than anything you will find in the South African market.
Marriott, which emphasises long-term growth in income for investors, says it is finding such income in selected large company shares that typically are constituents of the S&P 500, FTSE 350 and FTSE Eurofirst 300 indices.
"Dividend yields on these shares are the highest they have been in 20 years," Pearse says.
What shares are in these offshore portfolios? Below is a list of top holdings with dividend yields in brackets:
- British Petroleum (5.1%)
- Bank of America (6.8%)
- Telefonica (5.5%)
- Verizon (4.8%)
- Glaxosmithkline (5.1%)
- Barclays (7.9%)
- Lloyds TSB (8.3%)
- Vodafone (4.8%)
- HSBC (5.8%)
As can be seen, the list includes a number of banks. Stanley says he's looking at increasing exposure to international financial services companies, despite ongoing concerns about sub-prime exposure write-downs.
For instance, HSBC is a favoured share despite of, or maybe because of, its US$3bn write-down and $9.4bn credit loss.
The Marriott offshore funds have no exposure to emerging-market shares. This is because emerging markets have strongly outperformed developed markets since 1999.
For example, the average return of emerging market stock markets from 1999 to the beginning of 2008 is about 350%. The average for developed markets, on the other hand, is down 8.6%.
"Emerging markets have boomed and are expensive. That's why we're looking to larger capitalisation companies in the first world," Stanley says.
There are concerns, particularly what might still happen to the US economy and how much more subprime contagion is still lurking. Stanley's bull view is the worst might have been seen.
But he's avoiding companies with "undue leverage - re-financing remains an issue".
However he feels value is already evident on a medium-term (one to three years) view, and that investors can buy "quality international names at attractive entry points and yields".
- Fin24.com