- Product Info
- Optional Extra
- Learn
- Shares 101
- Roadmap to Wealth
- How to Select my Shares
- Understanding Investing
- Understanding Markets
- Analysing a Company
- Managing my Portfolio
- Investing in Krugerrands
- Calculators
- Shares FAQ
- Krugerrands FAQ
- Share Swarm
Invest In Shares Now? - Quarter 4, December 2012
The JSE All Share Index is regularly breaching new highs despite the onslaught of bad news telling us that the global and local economies are not in good shape. For share investors this is a tricky time because you need to distinguish between news and investment information. In reality there are a few sectors of our market that are very expensive whilst there are still great pockets of value for savvy investors.
Understand The Fundamentals
For the 12 months ending in November 2012, the JSE All Share Index rose by 19.7% which makes it a good year for investors. However the Index return does not tell the full story, the Financial index grew by 31.6% and the Industrial index by 27.9% compared to the Resources index which declined by 5%. Resources companies include Anglo and BHP - two of the biggest companies on the JSE. These companies are really not expensive at current levels.
If investors ask me if the JSE is expensive, I always look at the PE ratio of the market. If the PE of the market is 14, it means that it will take 14 years' worth of current profits to pay for the current price of the market. Over the long term, PE ratio of the market will range from 12 to 14 in normal conditions. It becomes very expensive when the PE goes above 20. This means that at current levels, the overall stock market is not expensive. In fact if history repeats itself, then the market should deliver a return of 15% per year for the next five years. This is what has normally happened when the market started at a PE of 14. However I would urge investors to be cautious in their stock purchases, there are portions of the market that are overvalued.
The bulk of the growth that we have seen from the stock market was driven by a few large South African companies that are internationally owned, such as Naspers, SAB Miller, and the cash-based retail companies and healthcare companies. These are typically big companies that have a good story behind them and are great businesses, but their shares are expensive. The reason these companies are so popular with international investors is that these investors have limited investment opportunities with their capital and they have access to cheap money. When their interest rates are close to zero, the opportunity to buy emerging market companies that pay growing dividends is very compelling for international investors.
As reflected by the performance of the Resources index, some sectors of our market are actually very cheap and are not being bought by investors at the moment. Examples of these sectors include mining, construction and engineering businesses. In particular, the platinum sector has been decimated and is currently offering investors great value. Many of the quality fund managers that I monitor are currently heavily invested in Anglo, BHP and the platinum mines. If one considers BHP and Anglo, they are both at a PE of 10 which is not expensive at all. The platinum sector has been slaughtered in recent times because of the strikes and concerns about the state of the global economy. This trend could reverse itself very quickly if global investors start seeing further signs of economic recovery in the West. As South Africa accounts for the majority of the World's platinum reserves, investors will have no choice but to buy our platinum shares if they want to benefit from a recovery in the platinum sector.
Another sector of our market that has been severely punished is the construction sector. This industry is very cyclical and is heavily dependent on the state of our economic growth. Once again, there is great value to be found in this sector and savvy investors will be looking for buying opportunities now.
Be Cautious
People buying individual shares can easily get severely burnt if they buy the popular (and expensive) companies at current levels. Those who buy a broader range of South African companies are likely to be buying great businesses at low prices. For novice investors who have capital to commit to the market, you would do well to consider some of the following exchange traded funds (ETF's) that you can buy via your FNB Share Investing account:
NewFunds eRafi Overall
BettaBeta EWT 40
Satrix 40
In conclusion, this is a time to be cautious with your stock picks, but there is still great value to be had from our broader market.
Warren Ingram, CFP®, has been advising people about their money since 1996 and is a director of Galileo Capital, www.galileocapital.co.za.
Do you have any personal finance questions you would like to ask Warren? Email him at Warren@galileocapital.co.za