Buy cheap, sell expensive

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By Jeremy Gardiner

The second quarter of 2008 continued along a theme that is becoming all too familiar and is a trend that has now been in place for seven years. Simply put, if you weren’t in commodities, you didn’t make any money. In fact, you probably lost money.

The resources-heavy JSE All Share Index is maintaining its positive facade, as commodities are keeping it positive (up 6.4% so far this year), but the truth is that if you were invested in anything else that relates to the consumer, financials, the economy or property, times are tough indeed.

With resources up 33% so far for 2008 and financials down 25%, the deviation has been enormous.

Given the above, investors must be careful not to react emotionally, because emotional reactions often come at a significant cost. The primary risk investors are currently facing is being overweight either commodities or cash. While the long-run commodity story is fundamentally sound, in the short term anything is possible, and a significant correction within the next two years is quite possible. Investors need to understand this risk. Commodities are an important part of any investment portfolio, but your exposure should be appropriate to your risk profile. Similarly, be careful of being overweight cash for too long. The risk of being out of the market when it turns up is as high as the risk of being in when the markets turn down.

While South Africa’s first quarter GDP growth was relatively robust, there is no doubt that non-commodity growth is slowing fast. Expect another three months of bad inflation numbers before inflation peaks. From a psychological perspective, the Governor has achieved his objective and therefore interest rates may already have peaked, although the possibility of another hike of 50 basis points cannot be ruled out. Of course, all this rests on the oil price. Food prices are stabilising, but if oil goes for another significant rise from here, everything else will rise as well – food, inflation, everything! The earliest we can probably expect any interest rate relief is in the second half of 2009.

If, as we expect, South African company earnings decline rather than collapse, or even rebound in 2009, equities (aside from commodities) are looking cheap. The old cliché states: ‘buy cheap, sell expensive’. Pay careful attention to this, as we are definitely closer to the bottom than the top, and selling equities now could be an expensive mistake.

Source: Jeremy Gardiner, Investec Asset Management, July 3, 2008.

 

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