If you’re looking for a time to buy SA stocks, this is it

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By Mark Seymour

From a valuation perspective, there is a strong argument to be buying the local market at these levels.

Based on historic returns the market is prone to solid gains when initiated off a low base of single digit price-to-earnings ratios and high dividend yields (see tables 1and 2 below). Economic doom and gloom is the necessary catalyst for driving markets to very cheap levels and, now that this scenario is playing itself out, the time has come to take advantage of this rare opportunity.

Click on the table below for a larger image.

a-1.jpg

Table 1. Market crashes over the last 50 years

Source: I-Net Alphen Asset Management

Table 2 below reflects market returns for periods between significant market corrections, when the market is in recovery and creating new highs. It is worth noting that the annualised return, tabled below do not include dividends reinvested and would otherwise be 2% to 5% higher.

a2b.jpg

Table 2. Market rallies over the last 50 years

Source: I-Net Alphen Asset Management

It seems superfluous to point out the obvious, but the average investor is in a state of high anxiety about their current equity exposure to the All Share Index. As of Friday the All Share Index was down nearly 45% from its highs, and the economic news remains unrelentingly bad. Given this, it is worth dissecting the state of market returns through the cycle and seeing where we currently stand.

During a sharp market correction, the price falls from a high-point (draw-down) and eventually reaches a trough (See Table 1). Next, the market recovers whereby the price rises above the low-point and eventually reaches the high-water mark (price of the previous high). Third, the market rallies above the high water-mark creating a new high.

a3.jpg

At present we are well entrenched in the draw-down phase, however valuations are supportive of a turn-around sometime, at which point the market will enter the recovery phase.

We acknowledge that the timing of the recovery is impossible to calculate and would therefore, recommend a gradual and focussed strategy of accumulating equity exposure back to benchmark or strategic levels.

Source: Mark Seymour, Alphen Asset Management, October 27, 2008.

 

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