Is the bull here to stay or not?

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Investment professionals remain sceptical about the current market recovery.

Just over a year has passed since the FTSE/JSE All Share Index hit a low of 18 120 on 3 March 2009. Since then we have seen a recovery of 56,4% up to this year's high of January 11, and despite a pull-back of 8,8%% over the subsequent four weeks, the market as at the time of writing is still 55,0% above its March 2009 low.

"It is interesting to note that over the year ended 28 February 2010, only 15 of the 79 domestic general equity unit trust funds managed to outperform the FTSE/JSE All Share Index," notes Dr Prieur du Plessis, chairman of the Plexus Group. "While in the South African scenario this is usually blamed on superior performance from mining and resources shares, this time round it is not the case," says du Plessis. "The financial and industrial sectors out-performed the mining and resources sectors by a solid margin."

According to du Plessis, the underperformance of the general equity funds can in all probability be ascribed to the fact that many managers were not confident enough about prospects for the equity market to take their portfo-lios up to a fully-invested position. "Equity funds are allowed to hold a maxi-mum of 25% of their portfolios in cash," says du Plessis.

"Many investment professionals across the globe remain sceptical about the current market recovery and stubbornly refuse to call it a fully-fledged new bull market," says du Plessis. "A recent study of first-year bull markets by US investment group Bespoke Investment Group, going back as far as 1935, shows the past year's recovery in the S&P 500 is the second strong-est both in terms of performance and breadth."

How does the local market compare? A similar study by Plexus Asset Management, based on monthly data from 1961, shows the first year of the cur-rent bull market is below average. "There have been eight bull markets since 1961," says du Plessis. "The performance of the FTSE/JSE All Share Index for the first year of the current bull market has come in at 45,0%, compared to the average of 52,5% (see accompanying table). It is also in-teresting to note no bull market in South Africa has lasted less than two years," he adds. "And, in the period subsequent to the first year of all the bull markets the All Share has continued to rise significantly, with the low-est additional growth coming in at no less than 48,6%."

Going by history, it looks as if it may not be too late to increase equity ex-posure if you have missed out on the first year's growth. However, dr Du Plessis cautions that there are still significant risks out there. "It is hard to see the domestic market putting on another 50% plus any time soon," he says. "While I am not negative on the longer-term prospects for equities, we will have to see significant earnings surprises on the upside for this to happen. However, until consumers start spending again it may be a while before we see more of the same, and investors should either phase money into the market at this stage or only top up on short-term weakness."