Sanlam Private Investment gives its outlook.
(Investment insight from moneyweb - David Carte)
JOHANNESBURG - Company earnings need to recover to justify the 48% bounce in share prices since March, says Sanlam (JSE:SLM) Private Investment manager Alwyn van der Merwe. The big bounce has lifted the average PE of the Alsi from eight to 15. Meantime earnings growth on average is expected to decline by 20% this year. Van der Merwe says current share prices are not sustainable without a recovery in earnings. But on balance, Van der Merwe thinks a big earnings bounce is likely next year.
SPI surveyed the major stock brokers, who foresee earnings on average rising 30% in the year ahead. "The Alsi usually runs ahead of company earnings, by up to a year", Van der Merwe said on Wednesday. Van der Merwe's faith in SA equities rests on the market's current average PE of only eight, inflation and interest rate trends downwards, the prospect of earnings growth in the next two years, the huge cash holdings outside the stock market and the pattern of recovery of previous bear markets.
The amount of money outside the stock market exceeds stock market capitalisations - "and these days you get no return on cash". In the year to October, SA equities gave a return of 25.7%, prefs 12.9%, listed property 11.9%, cash 7.6% and bonds minus 2.3%. Emerging markets have risen by 65% in dollars and developed markets on average were 23% stronger. Shares have had a very good run.
SPI made some calculations that make equities the preferred asset class, even after the recent rise in the stock market. Its reasoning is that the long term average PE of the Alsi is ten-12. Should the market return to that norm and earnings grow simultaneously, five-year returns should be reasonable.
If earnings grow 30% in 2010 and 20% in 2011 and the average PE is ten, SPI foresees a return of 17.1% pa. If the PE rises to 12, the return will be 20.5% pa.
"That gives us enough comfort to make equities the preferred asset class."
Van der Merwe said SPI had done well with early investments in Standard Bank (JSE:SBK), Old Mutual (JSE:OML), British American Tobacco (JSE:BTI) and Tiger Brands (JSE:TBS).