Tilman Friedrich’s Benchmarks January / February 14
Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner ® practitioner, specialising in the pensions field. Tilman is co-founder, shareholder and managing director of RFS, retired chairperson, now trustee, of the Benchmark Retirement Fund.
Since the start of 1989, the S&P 500 index gained an average 7.6% per year, over this 25 year period. US inflation over this period was an average of 2.7% per year, thus producing a real return of close to 4.8 %, excluding dividends.
The FTSE/JSE Allshare index gained an average of 13.4% per year while Namibian inflation over this period was an average of 8.3%, producing a real return of 4.7%, excluding dividends, on par with the real return of the S&P 500 index.
What this indicates is that despite the local ‘bull run’ over the past 5 years that produced a real return of 14.4% per annum, this has largely been a catch-up exercise of our local bourse when measured against the US market.
It also shows that over the past 25 years, local equity markets have produced returns close to the 8% generally expected of equities in the long run, when one adds dividends of between 2% and 4% to the real return of 4.7%.
It is also interesting to compare 1 year trailing P:E ratios of these two indices, currently being 17.2 and 17.9 for the S&P 500 and the FTSE/JSE Allshare. At the end of 1988 S&P 500 P:E ratio was 11.9.
Our statistics for the FTSE/JSE P:E unfortunately does not go as far back to compare. Below is the table of these statistics including a trend line for the two data lines.
Over 26 years since the start of 1988, this graph suggests that the S&P 500 P:E ratio is currently well below its long-term trendline while the FTSE/JSE Allshare is actually above its long-term trend line. Graphs 5.6.1 and 5.6.2 indicate that both markets are above their long-term trend line, the S&P 400 by 24% and the Allshare by 35%.
This leads us to conclude that both markets are expensive and that caution should be exercised when investing in equities as an asset class and that share selection should be a key success factor.
Foreign investors seem to have found a level of comfort with their local investments as the result of which they are no longer withdrawing capital from our local markets.
Further tapering by the US Fed is likely to result in continued but slower outflow of capital which should assist the Rand in moving towards fair value.
Although the Rand has regained some ground against the US$ probably on the basis of declining foreign investment capital outflows, our indicators suggest that it is still undervalued and should revert to around 10 to the US$ over time.
The recovery of the Rand has also relieved some pressure on the SA Reserve Bank to raise interest rates in the short term although the knock-on effect of higher offshore interest rate levels will lead to local rates rising over the medium term.
This scenario should result in fair returns on equities for this year, both local and offshore while fixed interest investments are likely to produce low, possibly even negative returns in the face of rising interest rates.
On the basis of the global economic environment and our expectations of global financial markets we retain our investment call on a globally well diversified portfolio, comprising of value companies in the industrial, financial and technology sectors with strong cash flows and high dividend yields.
Resource stocks, having been in the doldrums since their peak in May 2008, should also offer buying opportunities despite our expectation of muted global commodity, Retirement Fund Solutionprices.
Listed property is likely to track the performance of equities in the short-term, implying short-term opportunities but is likely to feel the impact of an increase in interest rates more severely than equities. Pension fund members and the typical local investor would generally hold the major portion of his or her assets locally.
In terms of the weighting of the equity exposure we therefore believe that the local investor should, as a matter of principle, maintain an ‘overweight’ to foreign investments in general, and to foreign equity more specifically, but looking for undervalued shares rather than equity in general.
This asset class should still be able to deliver returns superior to other conventional asset classes. Due to the continued Rand weakness however, foreign holdings should probably not be expanded at this point in time until the Rand has reverted to fair value which we consider to be at R 10 to the US$.
At its current level such reversion would imply a loss of around 7% on capital moved offshore at the current exchange rate. Download the complete Benchtest fund investment overview for February 2014 at http://www.rfsol.com.na/benchmark