Bull markets are often slow to start, but once their engine is up and running they gather astonishing momentum. For the past two years, the local stock market has surged (rising 173 percent from April 2003 to February 2006) and the rand has strengthened - a phenomenon many would say is incongruous as a strong rand is generally regarded as a hindrance to the export, manufacturing, tourist and mining industries. The consumer boom and growing middle class have given the economy a lift few predicted, and it has come without the inflationary pressure that might well have been anticipated.
Interest rates are staying lower for longer, despite fears that they would rise soon. So it seems that conventional wisdom is not always an accurate forecast tool.
It is well known that Alan Greenspan, the previous chairman of the Federal Reserve (central bank) in the United States, described the condition of the market in December 1996 as irrational exuberance, which was his way of saying that share prices were over-valued.
Greenspan may well have been correct, but it was only in March 2000 that the dot.com (dot.bomb) bubble finally burst. The mighty Nasdaq, which doubled in the 12 months to its closing high of 5 048 in March 2000, collapsed to a low of 1 114 in October 2002.
In other words, it took four more years of fantastic money-making opportunities before Greenspan was vindicated. The point is that bull markets run on a lot longer than anticipated.
Brave new world
The world is a different place to that which existed in 2000. The anticipation of the new millennium seemed to have intoxicated investors with a belief that a brave new technological world had arrived in which new economic forces were in place that were fundamentally different from anything seen before. The information technology sector was accorded a rating that could never be sustained by earnings, cash flows or dividend projections, and the bursting of the dot.com bubble was inevitable.
What a relief that it did. It brought everyone back to the harsh reality that there is no easy money or magic way of creating wealth. Fundamental value and good old-fashioned principles were again applied to market valuations and normality returned to world markets.
A lot has changed since 1996 and 2000. The Japanese economy is beginning to show signs of life, the US economy is holding up and there are even some flickering glimmers of hope emanating out of Europe. But more important than all of this is the new dynamic lifeblood that has begun pulsating in India and China, the two most populous nations in the world.
Suddenly and unexpectedly, the Indian and Chinese economies have burst on to the international stage. Indian companies are investing everywhere and investment is pouring into India. India has built its economic wealth on its culture of service excellence, English-language skills and an impressive technological ability.
The Indian Tiger is quickly addressing the stumbling blocks to economic progress and massive infrastructural development is planned.
The Chinese Dragon has also woken up after a 300-year slumber and is again a powerful engine of the international economy. The Chinese have taken a different path to that of India. They can now manufacture anything and everything more cost-effectively than anyone else. They too are in the early stages of democratisation, which should energise growth as it brings international confidence and political stability. The Chinese Dragon is just as keen as the Indian Tiger to identify its areas of weaknesses, to which the dragon is also seeking urgent solutions.
The emergence of India and China has begun a process that will shift the balance of power eastwards, but it will also see that the huge demand for commodities of every kind will continue for a long time while these two economies grow, industrialise and urbanise.
JSE beneficiaries
There are some JSE-listed companies that stand to benefit from these developments. Old Mutual, with the Skandia acquisition behind it, now has operations in both India and China.
SAB Miller is building up a significant presence in the brewing consolidation taking place in China, where the huge population and growing beer-drinking volumes make it a compelling target market. Clearly, all the listed resource companies are included in the long-term beneficiaries - Anglo American, BHP Billiton, Kumba and Mittal.
So one way to benefit from the shift to the East is to invest more of your funds in resource counters. This is a rather remote way of doing it, and perhaps the Satrix team of Mike Brown and his merry men could be encouraged to list an exchange traded fund (ETF) on the JSE that represents the Indian and Chinese composite index. Satrix has recently added some international offerings to its product range, so if it perceived there to be enough market interest in these two economies Satrix might be persuaded to take the plunge.
The other way to invest in India and China is to use your offshore allowance and purchase unit trusts or ETFs.
The markets have done well over the past three years and so investors have to anticipate that returns will probably be lower this year and next, but they should nevertheless be positive. However, markets that have had a good run seldom escape bouts of profit-taking and there could well be a correction and consolidation ahead.
Investors whose retirement funding is heavily exposed to the stock market in the form of living annuities may well consider reducing the equity content and increasing the income portfolio side as the returns are likely to be much the same at a far lower risk. Investors who have an appetite for risk and who are keen to catch the next investment wave should probably be exploring the Eastern opportunities.
- David Sylvester is the chairman of the Shareholders' Association, telephone (021) 686 7567.