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Cape Town - A Cape Town-based investment analyst is concerned that last year’s 21.4% surge in the JSE’s All Share index (Alsi) is worryingly similar to the 1998 equities upsurge which occurred just before the global financial meltdown.
Terence Craig of Element Investment Management (Element) advises caution and recommends that investors safeguard their capital.
“Each time the Alsi PE (price to earnings ratio) reached this level, there has been a material correction or crash…post the 1969 bubble,” Craig said in a recent note.
“Our investment careers do not go back as far as 1969, but we were investors through the other ALSI PE peaks in the 1990s. All… the peaks had one thing in common – investors ignored the warning signs that SA equities were expensive and thought the good times would continue. They did not!” he said.
He said South African equities seemed expensive and last year’s gains were supported by multiple PE expansion rather than strong fundamental earnings and cash flow. This is hardly a good formula for great investment returns.
There are currently signs in South Africa that are similar to the pre-1998 global financial crisis.
In 1998, according to Craig, emerging market currencies came under unyielding burden following a global contamination caused by the failing of the Thai baht.
“The recent depreciation of the Turkish Lira as a result of unrest, corruption, cabinet minister firings etc. gives us much cause for concern and the Rand has started 2014 with a weakening bias,” said Craig.
Before the 1998 global crisis, capital quickly moved from emerging markets back to developed markets. “We have seen the beginning of this trend again in 2013,” he said.
According to Craig, last year was the third year in a row where foreign investors were net sellers of South African equities market.
“Even if inflows do return to emerging market equities in 2014, South Africa’s high relative valuation should limit potential inflows,” Craig said.
- Fin24
Terence Craig of Element Investment Management (Element) advises caution and recommends that investors safeguard their capital.
“Each time the Alsi PE (price to earnings ratio) reached this level, there has been a material correction or crash…post the 1969 bubble,” Craig said in a recent note.
“Our investment careers do not go back as far as 1969, but we were investors through the other ALSI PE peaks in the 1990s. All… the peaks had one thing in common – investors ignored the warning signs that SA equities were expensive and thought the good times would continue. They did not!” he said.
He said South African equities seemed expensive and last year’s gains were supported by multiple PE expansion rather than strong fundamental earnings and cash flow. This is hardly a good formula for great investment returns.
There are currently signs in South Africa that are similar to the pre-1998 global financial crisis.
In 1998, according to Craig, emerging market currencies came under unyielding burden following a global contamination caused by the failing of the Thai baht.
“The recent depreciation of the Turkish Lira as a result of unrest, corruption, cabinet minister firings etc. gives us much cause for concern and the Rand has started 2014 with a weakening bias,” said Craig.
Before the 1998 global crisis, capital quickly moved from emerging markets back to developed markets. “We have seen the beginning of this trend again in 2013,” he said.
According to Craig, last year was the third year in a row where foreign investors were net sellers of South African equities market.
“Even if inflows do return to emerging market equities in 2014, South Africa’s high relative valuation should limit potential inflows,” Craig said.
- Fin24
