Asset Classes that Count

According to investment analysis company Acsis, various asset classes perform in correlation with the cycle of interest rates.

Acsis’ research shows that historically:

• Equity returns outperform bonds, cash and property in the low (27,40%) and declining (25,52%) phases of the interest rate cycle
• Bond returns are at their best in the high (16,40%) and declining (15,57%) stages
• Cash returns are at their best in the rising (11,83%) and high (12,39%) phases of the interest rate cycle
• Property returns are at their highest in the low (25,64%) and declining (21,76%) phases of the cycle

Equities Offer Value

Growth asset classes of equity and property are the most favourable asset classes in the low and declining phases of the cycle: equities at 27,40% and 25,52%, and property at 25,64% and 21,76% respectively. As we are currently in the declining phase of the interest rate cycle, historical evidence suggests that investors could start increasing their exposure to growth asset classes such as equities and property. Most asset managers agree, and are currently buying equities, albeit with varying degrees of caution.

At the more enthusiastic end of the spectrum is Prudential Portfolio Managers. Its head of institutional business, Bernard Fick, says several asset classes are underpriced.

“Equities currently offer value. We’re arguably early in this viewpoint, because there is still a lot of bad news to come from company earnings. However, we believe this is already discounted into the price, and there’s a handsome margin of safety to compensate for the risk,” he says.

He lists other attractive asset classes as property and corporate bonds; neutral ones as SA government and inflation bonds; and unattractive ones as cash and foreign sovereign bonds.

More cautious is Investment Solutions and Sanlam Investment Management. Both say investors should be increasing their exposure to equities, but warn it may still be a bumpy ride, as the bad news from corporates is far from over.

All urge potential investors not to time the market, but to either buy value or growth and defensive stocks in sectors likely to be least affected by the economic downturn, such as basic goods retailers and pharmaceuticals.

Mark Lindhiem, Investment Solutions head of manager research, says markets recovered by about 20% during the second half of March, but there is no certainty that this is the start of the recovery or a short-term bear market rally. For this reason, he urges investors to select a diversified portfolio, though tending towards being underweight in equities and beginning to increase that weighting.

Armien Tyer, MD of Sanlam Investment Management, says: “Our research shows that whenever price/earnings (P/E) ratios are below 10, investors never make a loss over a five-year period. And right now most companies have P/Es of 7-10. The odds are in your favour,” he says. He sees the clearest investment opportunity as lying in offshore investments. “Anyone taking the risk now will most likely be well rewarded. Our policy is that when we see value, we buy, and we are buying equities at the moment. As an investor, I wouldn’t be in cash at the moment, unless about to retire. Government bonds are also expensive, and neither are rewarding you unless it is safety you’re after.”

In equities, Tyer recommends Industrials as “very cheap”, and Financials as also cheap. On a 24-month view, he says investors could make 30%-50%, and over the medium three to five year period could double their money at a compound return of 20%-25%.

Jan van Niekerk, Citadel’s chief investment officer, says their preference for long-term investors (three to five years) is offshore investments, “as you are able to buy good companies with sound

balance sheets”.