WITH the local stock market already having fallen nearly 10% from its peaks set on May 11, investors may be wondering whether it’s time to bank profits after the three-year bull run.

But several investment professionals said the sell-off since last Friday on stock exchanges around the world was merely the start of a long-awaited correction, not a big crash.

They warn, however, that investors could take some pain for quite some time — most likely for the next five months.

Peter Lucas, global investment strategist at Jersey-based fund managers Ashburton, said at an investment conference this week: “I think we will see the largest correction in share prices since 2003.”

This seems to jar with the generally bullish outlook of local investment managers on domestic equities, and comes after the past week’s falls in the Japanese and UK stock markets that wiped off all their gains in the year to date. The Dow Jones is barely positive for the year so far.

In a research note on Friday, JP Morgan technical analyst Murray Morrison wrote: “In dollar terms, South Africa is down 12% this week, making it the fifth-worst performing equity market after Turkey (-16%), Indonesia
(-15%), Brazil (-14%) and Argentina (-12%),” although he was expecting the All Share index to bounce back from the 20000-point level.

At the Ashburton conference, economic commentator Anatole Kaletsky said he expected markets around the world would remain soft until October, with lows expected mid-year.

However, his economic views did tally with the bullishness of local asset managers who punt equities as the best long-term place to invest.

“The opportunities for long-term investment look as good as they’ve ever been,” he said.

But when it came to the short term, Kaletsky said that markets always hit their peaks and started to fall “precisely when everything looks perfect: when there isn’t a cloud in the sky”.

He did highlight bad news — that valuations were looking stretched in many assets after three years of bull markets, and crucially, that central banks were raising interest rates — notably in Japan, which had thus far provided the world with the biggest pool of money, “and this has already sent ripples around the world”.

The investment outlook was rosy in the long term, “but experience shows that long-term trends can be overwhelmed by the economy for a year”.

Kaletsky said that for true long-term investors, the factors driving growth would continue until the end of the decade. “Most people like to think they are long-term investors, but how many people were relaxed in 1987 when stock markets fell 30% in a single day?”

Much has been written about US consumers’ link with economic growth — which feeds company profits and thus helps share prices — and US house prices.

Interest rates usually operate with a lag of up to 18 months, so even if the Federal Reserve is close to the end of its tightening cycle, the effects are only now starting to be felt. The long-held fear of a slowdown caused by falling US house prices might be starting to become reality.

Kaletsky pointed out that US house-price growth started to fall in November 2005 and is now in full-scale rout.

“It’s time for a mid-cycle slowdown,” he said, warning that markets have not yet discounted the knock-on effects of a slowdown.

While it’s been plain sailing for investors for many months, Lucas emphasised that “this year it has all changed — rates are higher, oil is at record highs and US property is looking vulnerable. And as the risks change, so must [investors’] strategies.”

Whether now is the time to snap up bargain stocks, “all I can say is proceed with caution”.

Victor Hugo, CEO of Vega Asset Management, said he was expecting a setback of up to 16% from the local stock market’s peaks of May 11.

That would theoretically take the JSE overall index down to 18660 points or a further 7% from its Friday close, providing that selling does not accelerate.

Hugo said in a serious sell-off scenario there was a lot of support for the overall market 18% below current levels, though some shares might drop further than the index would.

He said South Africans could expect falls in stock prices for the next three or four months, “with financials and property falling the least. Resources would recover the quickest” because of institutional buying.

“In inflation-adjusted terms and relative to the oil price, gold has much more upside,” he said, targeting a range of $850-$1000 an ounce this year.

Hugo said that if people were fully invested in the equity market, they should consider taking some money off the table. This was not just due to the risk of losing money in further falls, but because “it will be extremely handy to have some cash to be buying stocks later this year. There could be a nice buying opportunity in the third quarter of this year.”

Kobus Human, chief investment officer of Insinger de Beaufort Asset Management, said this week that though rates were rising, inflation remained under control and macroeconomic factors were favourable.

“We are not in the same situation as [the tech meltdown] in 2000 — the world has been a lot more cautious this time, and though markets do tend to repeat themselves, there doesn’t have to be a meltdown.

“The wobbly phase is likely to last a few months. But don’t take all the money off the table or you’ll miss the next up-leg after this mid-cycle correction.”