Today I have included an extract from Pieter Koekemoer’s view on the financial markets. I enjoy reading his view on the market and I am sure you will too.
Notes from my Inbox by Pieter Koekemoer
Imagine how much harder physics would be if electrons had feelings.− Theoretical physicist Richard Feynman
Financial markets remain inherently unpredictable and rarely produce short-term behaviour that is exactly in line with expectations. It is useful for all market participants – professionals included – to remain humble in light of the limited nature of our collective and individual knowledge about how markets will perform in the short run. Unlike physics, where the fundamental laws of nature have been shown to apply universally, investors have to rely on much vaguer guidelines, often severely influenced by the sentiment of the day, when trying to interpret an uncertain future.
Recent market events again provided a reminder of how unpredictable the short term is. Despite increasingly full valuation levels, equity markets around the world continued to produce above-average performance, with 12-month real rand returns of 24.6% and 26.1% for local and global equities respectively. It is also worth pointing out that concerns about local equity valuations have become a broadly held consensus view. According to the BofA Merrill Lynch Fund Manager Survey, there are currently more equity bears than bulls in South Africa for the first time since the survey started in 1998. Perhaps counter intuitively, this means that the market is less likely to decline in value as all these professional bears have presumably already reduced their equity exposure before completing the questionnaires…
Meanwhile, income assets, especially in the local context, have already corrected significantly. Local listed property, bonds and cash all produced negative real returns over the past 12 months. This divergence in relative fortunes have been reflected in unit trust inflows, with high equity multi-asset funds (e.g. Coronation Balanced Plus) attracting a noticeably larger share of new money, mostly at the expense of managed income funds (e.g. Coronation Strategic Income). We are concerned that some investors may be increasing their exposure to equities to boost short-term returns, without taking the implications of deploying more risk into account. This is especially relevant in an environment where valuation levels would make the case for a below-average exposure to local equities.
We can reiterate three points with a high degree of conviction. Firstly, most investors are best served by thinking carefully about their long-term needs and risk budget, identifying an appropriate multi-asset fund that matches these needs, and then holding this fund for the long term. Secondly, the fuller valuations that follow after periods of exceptional returns make it prudent to expect lower returns in future. And thirdly, we know that a long-term valuation based philosophy is the investment strategy with the highest probability of success.
Pieter Koekemoer is head of the personal investments business. His key responsibility is to ensure exceptional client service through a combination of appropriate product, relevant market information and strong investment performance.
powered by