In the Walt Disney classic film Snow White, the wicked Queen would daily gaze into a mirror and ask: "Mirror, mirror on the wall, who is the fairest of them all?" The mirror always had the correct answer - "The Queen" - until one fateful day it named her stepdaughter, Snow White. That pronouncement unleashed a dramatic sequence of events that held potentially dire consequences for Snow White!
Fortunately, gazing into the stock market crystal ball is not nearly as hazardous, because even if you are wrong in the short term, there is a very good chance that you will be spot-on in the long run - particularly if you have done some homework.
So what does this year hold in store for equity markets? It seems clear that global growth will decline in the wake of the subprime credit crunch, but we should escape a full-blown recession in the United States. Any potential blow to global growth should be ameliorated by healthy, if slower, growth in the corporate sector.
Added to this is the fact that emerging economies have, to a large extent, been insulated from the subprime turmoil by the unusually strong cyclical position in which these economies find themselves. Emerging markets are also benefiting from hard-won structural improvements to their economies.
In South Africa, inflation is set to keep interest rates high. Evidence points to slowing consumer spending, but I expect sustained growth in gross domestic product, underpinned by continued investment in infrastructure.
Predicting the currency is always tempting fate, but I anticipate that rand strength is likely to be capped by the tendency of the South African Reserve Bank to accumulate reserves at levels below R7 to the US dollar, together with government rhetoric on the need for a "competitive" exchange rate as part of its "go-for-growth" policy drive.
The dependence of South Africa's current account deficit-financing on portfolio inflows means the rand will remain vulnerable to shifts in risk appetite.
Nevertheless, the interest rate hikes of last year have made the rand's carry trade more appealing and this should provide support throughout the year. South Africa is still an attractive location for investment, so it seems probable that the current account deficit will be adequately financed by capital inflows.
The only cloud on the investment horizon is uncertainty about monetary policy and the risks to the growth outlook, which increase the possibility of exchange rate vulnerability.
For really conservative investors with large sums on call or in fixed deposit accounts attracting taxable interest income, the banking preference shares listed on the JSE are an attractive alternative, offering an enticing tax-free dividend of about 10 percent. It must be remembered that because they are listed they are always subject to the vagaries of the market, but I believe this market is strongly underpinned.
As a result of the subprime issue, investment markets are likely to start 2008 on a volatile note, and the return for the year is unlikely to be as robust as we have become accustomed to for the past four or five years. Nevertheless, bouts of weakness will provide lovely opportunities for long-term investors to accumulate shares.
I have painted a fairly rosy picture for listed investments in 2008, but the subprime crunch is the big swing factor that could scupper the entire deal. Its full impact should become clear by the middle of the year, and if it is worse than expected, the second half of this year could hold some unpleasant consequences for the markets, from which they will take a while to recover.
So when I asked: "Mirror, mirror on the wall, what are the cheapest shares of all?", it answered: "Um". Not very helpful, so I will return to the crystal ball. The problem with a crystal ball is that you often see what you expect to, based on your view of the markets and socio-economic developments.
Here is my selection of shares that I think should perform well this year: Anglo American Platinum, Aspen Healthcare, BHP Billiton, Investec plc, Liberty International plc, Pretoria Portland Cement, Richemont, Santam Insurance, Standard Bank and Telkom. This selection of 10 shares covers most sectors of the economy and has a strong rand-hedge underpin. Do not buy blind; these are some ideas, but the onus is on you to do the homework before making any investment decisions.
- David Sylvester is the chairman of the Shareholders' Association, telephone 021 686 7567.
This article was first published in Personal Finance magazine, 1st Quarter 2008. See what's in our latest issue