The New Year has started in a way that investors will not wish it to continue. After setting an all time record high on the first trading day of the year, a sharp correction in the rest of the week has virtually obliterated the pre-Christmas rally. The obvious question now is whether or not this slide will develop further and whether one should be edging towards the exits.
To provide an answer now that will look clever in a few weeks or months time will require some luck. Most of the portfolios that I get asked to look at are constructed with a considerable emphasis on providing income. I don’t think that there are yet any signs that annual dividend payments from the solid industrial and financial core holdings will decline in 2007 relative to 2006. Indeed, in most cases substantial dividend growth seems still very possible. If you agree with this, then there is really not very much that one should do right now.
Of course, dividend yields are dreadfully thin and PE ratios are way up as well, so it would not surprise me if share prices were to fall this year and return those parameters towards average levels. However, very few risk-free investment alternatives can provide the level of income that flows from most long established share portfolios. Hence, I suggest that investors should not sell just to avoid seeing the market value of the portfolio decline, unless they are prepared to forego or are able to replace the after-tax income stream.
It is of course always necessary to review the portfolio regularly and prune holdings which through their own success have got a bit overweight. Whether to direct the cash that this would raise, or even new cash, back into the market immediately, depends on the shape of the rest of the portfolio and the investor’s own attitude. I expect that there are many readers who share my anxiety about the potential for a vengeful and savage interest rate increase emanating from the Reserve Bank in the next few months. This would likely provide better buying opportunities.
Actively traded portfolios naturally have to take a very different approach and are delighted by the volatility that has appeared as the trees and tinsel come down.
And if the market is not stressful enough, we citizens of Johannesburg have been told to calm down and not worry that the city has announced a review of the rating process. We are not to assume that this will automatically result in higher rates. Sorry. I am worrying. No bureaucrat anywhere has ever pondered the source of his salary and not decided that he deserved a raise. An attack on ratepayer’s wallets is a certainty.
Less certain is whether the two world-cup sporting festivals that are coming this year will make us a happier nation. Not even the departure of numbers of geriatric players from the Aussie cricket team is comforting. There are some awesome replacements coming along, but then too, we have a few as well. I do wonder if the management of SA Rugby has stopped squabbling long enough to notice that the picture on the calendar has changed and that in about 9 months time we need to send a team to France.
I hope your return to work is proceeding gently.
James Greener
5th January 2007
