Equity: Is it too late to get in, or too early to get out?

BY LUIGI MARINUS Portfolio Manager, PPS Investments

The unsettled world as a result of COVID-19 and the whipsaw in markets provided opportunities for certain sectors to thrive sooner than previously expected, and has changed the investment landscape. From a South African investor perspective, one of the key questions is around equity – is it too late to get in, or too early to get out?

There are many ways to assess the relative attractiveness of equities as an asset class. At PPS, we focus on three factors: valuation, macroeconomic framework and momentum, with the ranking of importance of these factors varying as market conditions change.

In the local context, the macroeconomic framework contributes most to informing the neutral domestic equity allocation across the PPS funds. Uncertainties with regard to the roll-out of vaccines, and the impact a third wave may have on the economy, tempers the more aggressive allocation, should only valuation and momentum be considered. In addition, GDP growth has disappointed when compared to global GDP growth and emerging market GDP growth expectations.

From a global context, the macroeconomic framework appears more favourable to equities, resulting in the maximum overweight allocation to global equities. Cash yields have remained close to zero in developed markets, while quantitative easing and stimulus packages in the US, as well as Europe, have had a positive effect on equity prices. GDP growth expectations have been upwardly adjusted as vaccine roll-outs have consistently improved in developed markets. Valuations have become more expensive in the sectors that have benefitted from lockdowns, but there are areas of the market that remain better priced.

Trying to time the entry and exit points with equities should not be a question of whether an investor should have high exposure or no exposure. In the same way, asking whether it is too late to get into equities or too early to sell out of equities assumes a significant change to the allocation. The performance of equities is only one aspect that is considered when deciding on the allocation to the asset class. Being too late or exiting too early is not the important consideration, as the assessment of current conditions and what that implies going forward provides the framework of whether or not to adjust the exposure to equities.

There are many ways to assess the relative attractiveness of equities as an asset class

Even in an unsettled world, two things are clear: all investment decisions are relative and maintaining an investment process makes investing through difficult periods manageable. A decision to reduce exposure cannot be done in isolation. Following a process reduces the effect of emotion and bias and inevitably leads to a more thorough and considered outcome. Therefore, making sense of an unsettled world is possible. At PPS Investments, we aim to construct sensibly diversified portfolios where components are poised to perform well through different market cycles.