In my first column of this year, on January 7, I expounded on the political and economic miracle that has taken place in South Africa. I also expressed my view that we were two years into a five-year bull market.
As is customary with a New Year's column, I was brave, or foolish, enough to list some shares that I thought would continue to do well in 2006. Now that we have passed the half-way mark of the year, I think it is an ideal opportunity to pause and reflect on what has happened thus far.
The year got off to a flying start, with the JSE experiencing huge daily volumes - turnovers that often exceeded R8 billion - and investors were greeted with monthly portfolio valuation statements reflecting healthy gains.
In May, the market hit a patch of severe turbulence, and prices fell sharply.
Most investors had not anticipated this, and many panicked and began searching for a parachute and the emergency exit. This is typical of the herd mentality that characterises human frailty, but once you have established your long-term investment objectives, you should not become so easily skittish and ready to change course.
You should ride out the storms and keep focused on the long-term objectives. You should change course only if it seems clear that the underlying principles upon which your investment philosophy are based have changed for the worse.
In the long-term scheme of things, this sell-off appears to have been triggered by concerns surrounding interest rates in the United States, and quickly developed into a purge of emerging markets.
I feel that this was more a case of "sell in May and go away" for the northern hemisphere summer holidays than a fundamental change in the direction of the global economy. We had become a little spoiled by two years of extraordinarily good returns, and there was certainly an expectation that returns would slow down.
The results reported by South African companies continue to be good, and periods of weakness are usually good opportunities to increase your investment.
This table gives the performance of my selections - a fairly credible effort.
The most palpable change that has taken place in the investment environment is an increase in risk - global risk is the prospect of rising US interest rates, and South African risk is predominately the vulnerability to a reversal in capital flows due to a larger current account deficit.
The resources sector has done very well indeed and, with Asian demand still on a roll, it seems this trend is set to continue for some time to come. The surprise hike in local interest rates in June saw to it that the retail and financial sectors fared badly, but, on balance, the overall market did well.
The property sector bore the brunt of investor disenchantment and had the stuffing knocked out of it when the spectre of rising interest rates became a reality.
The drop was exaggerated by the fact that liquidity is relatively tight, and sellers had to dump shares just to get out. The frenzy began to feed on itself as prices dropped - out of proportion to the size of the interest rate hike.
With economic growth in South Africa still intact, rental income is expected to remain in a growth phase. As such, the yields are again attractive and this places the property sector firmly in good-value territory. The big drop in the property sector also had a savage impact on the capital value of unitised wrap funds and unit trust income portfolios. For some years now I have been recommending these funds to income-seeking clients, and for three years the returns - both income and capital - have been outstanding.
In an environment of falling or stable interest rates, receiving good returns from property trusts, income funds and other investments that are sensitive to interest rates is as easy as clubbing seals, but rising rates have sent the whole exercise pear-shaped. For the first time since December 2001, May and June saw capital losses and consternation from investors.
As was the case with property unit trusts, it seems highly likely that the fall was exaggerated and that they should stage a good recovery at this point.
Property shares and income portfolios are now offering tremendous value, especially in view of this week's half-a-percentage point increase and the likelihood of another increase in October.
As far as equity markets are concerned, there is still value to be found, and purchases can be made into weakness. Retail, banking and financial shares can also be reconsidered.
I am also happy with my original list of companies and am inclined to add Telkom to it, and to avoid the MTN Group for the moment due to the Middle East risks.
The recent market turbulence has clearly dented confidence and sowed the seeds of uncertainty. As a result, volumes have dropped off and share prices have become more volatile and skittish.
I think the long-term economic trends are still intact, and that you should use bouts of market weakness to add to your existing portfolios.
- David Sylvester is the chairman of the Shareholders' Association, telephone (021) 686 7567.