Sell, sell, sell!

Image courtesy stock.xchnge

Image courtesy stock.xchnge

It’s something that investors hear quite often during a bull market: Sell your stocks; the JSE is about to experience a major correction.

This advice is currently doing the rounds again in some circles. Against the background of the imminent tapering of the Fed’s quantitative easing programme, expensive share prices in especially the industrial sector of the local bourse and a steady supply of negative news flow, some believe the time to sell is now.

Dwaine van Vuuren, founder of Power Stocks Research, says apart from many technically overbought conditions that currently exist due to the recent three-month run-up in the markets to new all-time highs, there is indeed a toxic mix of factors combining that virtually guarantees a correction of the order of 8% to 12% in the near future.

“The most glaringly obvious is the current JSE Top40 P/E (price-earnings ratio) of around 19 times. Nothing good has ever come one-year out from P/Es at current levels and due to a collapse in earnings of the JSE’s underlying constituents recently, and next earnings season some four to five months away, the JSE valuation is currently a bug looking for the veritable windshield,” he says.

Van Vuuren says the JSE needs to correct around 20% to get back to the dotted regression line (normality), but given that the assumption is that we are in an on-going bull market then this is more likely to be of the order of 8% to 15% at most before aggressive buying sets in again.

Dr Adrian Saville, chief investment officer at Cannon Asset Managers, says the macro environment locally, does point to some reasons for concern. Sluggish economic growth prospects, inflation that is likely to exceed 6% for the balance of the year, anxiety over strike action and challenges in the labour market point to difficulty for SA firms, particularly large industrials.

From a valuation perspective, at the aggregative level, the JSE is slightly on the rich side of fair value, he says. However, midsize and smaller businesses in this sector, does not strike him as being excessively priced. Also, the financial cluster looks relatively fairly valued while the resource basket looks cheap.

If the large industrials do correct, the market will correct, because it will not be immune to contagion, he says. Saville says the decision to exit the market is a complex one.

An investor has to consider the costs involved in getting in and out of the market. This includes transaction costs, the difference between bid-offer spread and perhaps tax costs and will vary depending on the nature and the size of the investment, he says.

Saville says the available evidence suggest that an investor would probably need to time the market correctly in about two-thirds of cases in order to justify the costs of transacting.

“The available evidence suggests that on balance people are not really as good at either forecasting or timing the market.” Daniel Wessels, financial advisor at Martin Eksteen Jordaan Wessels, says he would not advise investors to sells their local shares at the moment. Trying to time the market, does not add value, he says.

Wessels says 2012 was an excellent example where investors tried to time the market and lost out on a significant surge in share prices. (The All Share gained about 23% last year.) Wessels says investors will generally do better by having a definite investment policy that specifies a more or less fixed asset allocation strategy.




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