Investments, where to from here?

Go look at the South African All Share index from 1 January 2010 till 7 September 2010. What you will see is a very jagged line but ending at the same level as where it started. What does this mean? Well...., you had some symptoms of bipolar ups and downs emotionally but with no return over the period!

Now look at the same graph for the year to date. What do you see? Exactly the same!! The only difference is that the 2011 base line (value) is at about 32000 points, 15% higher than in 2010.

Why is this important? Perhaps because for the patient investor in 2010 all his/her returns were generated in the last 4 months of the year. The only question now is will it be the same in 2011?

The Bad news:
USA and Europe have sooooo much debt and other problems that there seems to be NO light at the end of the tunnel! Every time the markets receive some good news, it gets up onto one knee just to be flattened again by some bad news.

Good news:
There is a mountain of cash in the system that can be invested, and investing in cash via developed economies like the USA offer almost 0% return. The result is Billions of $ being invested in South African companies and Bonds.

Where to from here?
As always this question is very easy to answer. One of three things will happen:

1. The market will continue its sideways movement.
2. The market will move upwards like at the end of 2010.
3. The market will have a correction downwards.

Before we invest money today we have to consider 2 things:

• Is the investment world in which we now live different from the one 10 years ago and does this imply that the different asset classes in which we can invest our money are also different?
• Which one of the 3 scenarios is the most likely to happen?

On the first point I do believe that we are now living in a different economical climate from the one 10 years ago and that although this new environment will not last for the next 50 years, the next decade will experience its influence. One of the main reasons for believing this is because the American consumer has for a very long time lived beyond its means and spending rather than saving was the national pastime. This was the same for a lot of the European countries.

This spending frenzy caused companies word wide to generate huge returns and they became fat and happy. The paper wealth caused lots of other assets like house prices to follow the "golden" brick road up. So when the bubble burst in 2008 it was like waking up out of a drug induced slumber for the US consumer.

So for the next 10years we might see the US consumer saving and paying back debts rather than spending!

China and the rest of the BRIC countries now have to pick up the slack in spending. They have to first upgrade their infrastructure (giving rise to commodities shooting up, whooo hoooo! for SA!), and lift the overall well being of their consumer base before they will be able to spend the same as the deceased US consumer. I do however believe and trust in the inherent gambling dependency of human nature and coupled with the limitations of long term memory, expect the next bubble to explode within the next decade!

On the second point regarding where the SA stock market will go from here, I am unsure about scenario 1 and 2 but rather confident that scenario 3 is unlikely. The reason why I believe that the market going down some 40% from current levels (i.e. Scenario 3) is unlikely can be explained as follows:

• Drivers of stock market sentiment comes from the US and Europe. Before 2008 most big players in the investment game only considered investments in those areas and allocated only a miniscule amount of money to "developing" economies. When 2008 happened the US share market was at a point where share prices were where they were a decade earlier and dropped another 40% during the crash. This caused big solid US companies to offer very good value. The big investors however discovered that the neglected emerging markets offered great value and started investing. So, where they only invested in the mature markets prior to 2008, they now discovered the emerging markets as well. So even when the valuations in emerging markets become expensive, they can now return to the US and Europe where better value exist.
• A second reason is that the next bubble will take some time to reach the point of no return. The bad news we experience now are only "after shocks" from the 2008 crash. Like any big earthquake the original quake causes the extensive damage and for the markets the damage is in the price already.

Summary:
If you invest in shares today just because it was the best asset class over the last 100 years, you might have to wait a long time before you can smile about the returns and will have to endure a lot of volatility. If you decide to keep your money in cash, you will miss out on those companies that will perform well and with inflation around the corner, returns will be very disappointing.

I believe the middle road will be the best option. After you have determined which part of your money could be invested for the 5, 7 or even 10 years + term, go equities, SA and International. But for the money you will have to spend over the next 3-4 years, stay in cash or capital guarantee investments. For the money you allocate to the longer term, you have to trust the Fund Manager to select those companies worldwide that will be profitable, regardless of the pressure sentiment will put on the share price.

We must remember that trying to determine when the market sentiment will change can only end in tears!