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HILTON TARRANT:

Equity markets have had a relatively rough start to the year. Some would call it a bad start, some would call it a very rough start, some would call it a bumpy start. Alwyn van der Merwe is director of investments at Sanlam Private Investments. Alwyn, the million-dollar question – we are getting asked this here quite a lot here at Moneyweb –is it time for investors to panic?

ALWYN vd MERWE:

I think it's not, as you say, an uncommon view to start to become concerned about the market. I think if you look back to equity performance in the South African market from a global perspective last year was an exceptionally strong year, and we saw very good performance from equities. The bulk of that came from higher ratings in the market. It wasn’t so…with a fair amount of earnings upgrades, earnings performance as well.

But the rating of the market certainly looks on the expensive side. If you look at the South African market, we are trading at a multiple of at about 18 times, which in terms of its own history appears to be high. And then you always find statisticians who look at history and try to draw some conclusions from history.

We just did a little exercise where we looked at the performance of the US market over the last 63 years, and the stats would indicate that 24 years out of the 63 when the market started on the back foot, the average return of the year was minus 4%. So for the statisticians that would also be a concern.

But I think, though, it's one month, and I'm not one of those who would say if a particular month is negative one should start to panic. I would much rather pay attention to the fundamentals, and I think it is fair to say that from a valuation perspective for the market as a whole there might be some reasons for concern.

HILTON TARRANT:

Investors really have four options here, If you look at them simplistically. They could add more money to the market; they could change positions in the market, and maybe switch from a certain sector to another; they could see some or all of their exposure to equities; or they could do nothing. Which of those would you have a slight bias to at this point?

ALWYN vd MERWE:

I would normally say that if your portfolio is positioned for your risk profile and your return expectations, if the market is not in bubble territory, to sit on your hands is not a bad strategy. Just from a retail perspective.

Of course, if you allocate your money to fund managers to run the different asset classes, I think it is fair to say that if we look at our own market you can clearly see that industrial shares in general are those shares that are quite expensive, and the mining shares are certainly cheaper – and even on the financial side. But in both those sectors I think it is also fair to say that there might be uncertainty in terms of the earnings outlook.

But I think what you will probably find or what we certainly try to advocate is that you scan the market and reduce the exposure to shares and sectors that are expensive, and try to look for selective opportunities in sectors and shares which look more attractive. That is certainly the one action that I would take.

I think another action that one can take is to consider your exposure to offshore assets. I know that the rand has weakened significantly and perhaps from a rand perspective it's not a good time to look at it, but I still believe that it is easier to find value in global equities than in South African equities.

And then, Hilton, maybe just a last one – and it certainly applies to those who were brave enough to have a full exposure to the equity market, for those who were serviced with wonderful returns from the equity market, perhaps in these times to build up a bit of cash is not such a bad idea because, although cash doesn’t give you a decent long-term performance prospect, what it does do is it provides some optionalities. So, should the market pull back, it does give you the opportunity to get back into the market at better prices.

Thanks to Alwyn van der Merwe.

HILTON TARRANT:

David, your thoughts? You’ve got four options. You are either adding, or you are switching, or you are selling or you are doing nothing.

DAVID SHAPIRO:

I'm looking.

HILTON TARRANT:

Looking is one, so there are five things.

DAVID SHAPIRO:

I'm looking for dividend payers. I'm going back to that, both here and offshore. For example, a Vodacom or an MTN, where you know they are going to generate a lot of cash, where their stated policy is to pay dividends. I would look for companies like that. I’ll look at even a Sasol, where it's at a 9 PE or something, giving it a 3.5, 4, 5% – close to a 5% dividend yield. So I think we are going back into that kind of market.

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