JOHANNESBURG – The JSE All Share Index could reach 55,000 points by 2017, but investors should not expect the same stellar returns that have almost become the norm in the local equity market over the last decade.
Sanlam Private Investments (SPI) expects that the All Share Index could deliver an average total return of 9.4% per annum over the next three years – 6.6% capital growth and a 2.8% dividend yield.
Speaking at SPI’s quarterly briefing, Alwyn van der Merwe, director of investments, said while the projected return over the next three years is significantly lower than those experienced over the past ten years, it is still not a bad return in an inflationary environment of 5.5% or 6%. He believes it will be very tough for any other asset class to outperform equities.
SPI’s forecast is based on the Bloomberg consensus earnings forecast for Alsi companies over the next three years and an expectation that the market rating would adjust from the current price-earnings multiple of just over 18 to slightly above 14, based on historic trends.
The consensus earnings forecast for the next three years can be seen in the graph below.
Van der Merwe explains that while the earnings growth of 36% forecasted for next year, might seem unrealistic, a big portion of locally listed companies earn profits offshore. The rand has weakened significantly since the prior reporting period and the surge is therefore off a low base.
The graph below shows the expected derating in the price-earnings multiple (blue line).
Alternative asset classes
Van der Merwe says it is unlikely that other asset class will be able to outperform equities.
Cash may be a convenient investment alternative for those who are scared of capital losses, but it only provides a short-term solution.
He says given the dual mandate of the Reserve Bank, it is unlikely that there will be a significant increase in interest rates soon.
The prospects for long bonds and international bonds are also unfavourable and while the local listed property sector has had a stellar performance over the past few years, its prospects are expected to be more muted going forward. There is a risk that bond yields could spike and that property yields would follow suit.
“I don’t think the prospects for the (listed) property market is as rosy as it used to be three, four years ago.”
He says while there is nothing wrong in the sector, the valuations aren’t cheap.
Traditionally there has been a high correlation between South African share price movements and international share price movements.
Van der Merwe says it is therefore also important to look at the rating of international shares. Although some commentators have warned about a “bubble” in the US equity market, the current rating of the S&P500 is just marginally above its long-term mean of roughly 16.
“Unlike the South African market, in terms of its own history it is certainly not that expensive.”
This could provide some support to the local market.
Van der Merwe says it is difficult to predict what 2014 will hold in store.
However, it is the opportune time for investors to revisit the risk in their portfolios and to make adjustments if they are exposed to too much risk.
He believes there will be a lot of critical comments by policy-makers and politicians next year and there is a likelihood that shares that are trading at expensive levels will respond. Volatility will however create opportunity to reduce exposure to expensive assets and to buy cheaper ones.
Van der Merwe says the market rating is more elevated than during the past two years which suggest that the prospects are less rosy than it was at the end of 2010.
In recent times the earnings reported by many local companies – even industrials – have generally been good, although it may have been slightly lower than anticipated. However, the macro environment is now tougher than most people expected.
South African-only companies and consumers shares therefore face a tougher environment than it did over the past few years.
However, if the world muddles through with globally economic growth of around 2.5% and some economies perform slightly better, some of the overseas earnings locally listed companies would generate, could convert nicely into decent earnings in a weaker rand environment, he says.