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Can you make money if the market moves sideways?

Mar 07 2017 06:01
Lameez Omarjee

Johannesburg – The market has been trading sideways for the past three years, and although this reflects underperfomance in investments it may present opportunities for investors going forward, says an expert.

Speaking to Fin24 in a telephonic interview on Monday, CFA and independent Exchange Traded Funds (ETF) strategist and adviser Nerina Visser said that there are two ways to perceive the sideways movement of the market.

For some people, it is not “good news” that their investments have gone nowhere in the past three years.

“If you are dependent on income from investments or need to live off investment then it’s not great if the market has gone sideways for three years,” said Visser.

However it can be good for a forward-looking basis, with the market being at the same levels as it was three years ago, it presents a good investment opportunity.

Considering market valuations, in terms of P/E (price to equity), the price has gone “nowhere” in the past three years. As for earnings, they have increased, said Visser. Companies have been able to improve profit growth, and generate higher earnings in the last three years.

“When your earnings number goes up but the price is still the same, this means you can buy the market at a cheaper level, or a cheaper valuation than it was three years ago,” she said.

Visser added that it is normal or investors to feel “despondent” about their investments if the past performance has been bad, but it is important to take a forward-looking approach when investing.

In the long term, the sideways movement by the market speaks of consolidation. This creates a good base level from which markets can run higher again.

“We do know that eventually it will move higher again, we just don’t know when it will happen,” she said.

She added that when markets move sideways, it tends to be better for stock picking.

“When the market moves sideways there are more opportunities for stock picking.”

In 2016, this would have been the mining or resources sector as commodity shares were the stronger performers. You could pick the right stock or you could get it wrong, she cautioned.

Stock picking would be more favourable to broad-based ETF markets, which generally wouldn’t outperform. In this case it is important for investors to find “pockets of excellence” or areas where the markets are doing well, she explained.  

Among the factors contributing to the market’s sideways movement is global and local growth.

“Economic growth globally has been muted over the last couple of years.”

Stronger growth in world markets is emerging again, added Visser. In South Africa, growth has also been muted and this has not supported markets either.  

“We are seeing a lack of policy direction from government, there’s a lot of uncertainty about how things will pan out in the future,” she said. The political and policy uncertainty makes it difficult for markets to perform strongly.

Lastly, the strength of the rand has impacted dual listed companies, with offshore earnings. The stronger rand has had a drawdown effect on the market overall. 

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