Equities ‘could drop by half’ from top levels

Trying to pick up the best returns in the current volatile equity markets could cost you in the long run, warns Robin Eagar, head of the Stanlib multi-asset franchise.

And he says that worse is still to come in equity markets both here and offshore, with as much as a possible 30 to 50-percent loss in values from the equity markets’ record levels earlier this year.

And when markets do bottom out, you should not expect a rapid recovery, as happened in 2008 when equity markets lost as much as 40 percent of that value.

In 2008, central banks in the developed economies could stimulate their economies and equity markets by reducing interest rates. This time around the central banks do not have this leeway, as interest rates are now close to zero.

Eager was briefing the media on why Stanlib has shifted its multiasset funds into a defensive position, reducing its equity position and increasing its cash holdings.

He says Stanlib accepts that other asset managers who are prepared to take on greater risk may do better in the short term, but he says: “We are looking to the long-term wealth generation of our clients.”

He says that when markets do start recovering after the anticipated “significant correction”, Stanlib will then be in a strong position to buy equities at far lower values.

“Our number-one priority today is to set capital aside to take advantage of a correction, to achieve our clients’ long-term goals”.

He says that equity markets could show some recovery in the short term, but he does not believe this can be sustained and that they must fall back to more historical values.

Equity markets, despite the losses of the past few weeks, are “in a bubble and returns from here are temporary in nature”, he says.

He does not agree with many other market commentators that offshore equities still offer value to South African investors. He believes all equity markets are over-valued and corrections must occur.

Eager says the underlying cause of current equity market overvaluation and volatility lies not so much with the fall-off of growth in China, but with “the massive misallocation of capital” from 2008.

The misallocation of capital was caused by the quantitative easing introduced by central banks in the United States and Europe, with the buying of government securities from the market to lowering interest rates and increasing the money supply, as a solution to the 2008 economic meltdown, in the wake of the sub-prime property lending crisis in the US.

This resulted in markets being flooded with money they did not need. The consequence was that speculation in equity markets became the order of the day, creating the current investment bubble with its potential for losses as great as 30 to 50 percent.

Eager says that even if equity markets do not fall but remain static, investors will lose money in real, after-inflation, terms. This means that a defensive investment strategy will still pay dividends.

His asset class of choice is cash, or more particularly, higher-risk money markets, which are currently returning 8.3 percent.

Eager says vulnerable investors who rely on investments for income, such as those with living annuities, should look to investments such as low-equity asset allocation funds to protect their capital while maintaining income levels.