RSS Feeds RSS | Views on ITInews | contact | terms of use | privacy 

Editorial Categories:


Forthcoming Events:

No Upcoming Events

Available Recruitment:

No Vacancies Listed...

Save by getting insurance quotes

Your Editor, Brent WilsonInforming Consumers and Financial Advisors since 1988 | Click Here to Advertise
Seriously growing your money
Press Offices > Asset Managers

Foord Asset Management
Press Office Feature : What determines the short-term direction of equity markets?

Company: Foord Asset Management
Author:Catherine Pate
Email:[email protected]
Posted:06 Nov 2014

 Email this article Comment on this Article  Print this article

Until very recently, global equity markets have been on a steady upward trajectory

Market indices, from America’s S&P 500 to the local FTSE/JSE All Share Index, reached all-time highs.

Correlations between equity markets globally, as well as correlations between different asset classes like equities and bonds or commodities, have been high and rising in recent years.

Such high correlations are not normal and, as William Fraser, Portfolio Manager for Foord Asset Management explains, have occurred despite significant deviations in the economic growth path of countries.

“Economic growth is important when analysing potential asset class returns. Company earnings are geared to positive economic activity."

"Over the long term, growth in earnings should translate into growth in the fair value of shares. But shorter-term market moves are usually the result of factors other than longer-term earnings growth,” says Fraser.

Since reaching a peak of over 52 000 in August, the SA market has declined below 50 000 in a short space of time. Fraser identifies four factors that explain the market’s recent reversal.


After the global financial crisis, central banks have been quick to use non-traditional tools, like quantitative easing, to support economic activity.

The abundance of cheap money, ultimately intended for businesses and consumers, has provided an almost permanent source of capital for financial markets.

However, the US Federal Reserve will probably conclude its bond purchase program this quarter.

As those bonds mature in the coming months and years, the additional liquidity will be stripped from the financial system.

Buyers of shares outstripped sellers for some time, but the tide is turning.

Continuing European Central Bank and Bank of Japan stimulus may delay the process, but not indefinitely.

Interest rates

Many years of ultra-low interest rates have caused market participants to allocate capital to relatively high dividend yielding shares.

Federal Reserve guidance shows that US interest rates may rise earlier originally anticipated.

Rising interest rates will be negative for share markets, especially those that benefitted most from the preceding period of low and falling rates.

This group includes many emerging markets, as well as the JSE.

Investor confidence

In the past five years, equity markets (including the JSE) have risen faster than the earnings of their constituent companies.

This is known as price-earnings (PE) expansion or a market re-rating.

Higher PE multiples dilute future return prospects. Therefore, the decision to invest in equities at higher PE’s is riskier.

Investors with short investment horizons may sell to take profits.

These factors may compound the negative market momentum if investors lose confidence in future return prospects.

Earnings expectations

Changing earnings growth expectations is an important short-term driver of share prices.

Upward earnings revisions are positive for prices, while the contrary holds for negative reversion cycles.

Valuations on the JSE exhibit elevated expectations for earnings growth for the market as a whole.

In our view, this is largely attributable to overly-optimistic earnings forecasts for the resource sector, which has a high risk of negative earnings surprises.

This would be negative for the share prices of these commodity companies and thus the resource-heavy market index.

“In summary, the four indicators analysed above point to a more circumspect period ahead for equity market investors."

"As long-term, value-oriented investors, we are particularly excited – market drawdowns give us a rare opportunity to buy quality assets for our investors at significantly reduced prices,” concludes Fraser.

There are no comments at this stage. Be the first to comment!
Please Login To Comment On an Article - Click here To Login

ITInews invites comments at the foot of each of its articles in which readers can respond freely - anonymously if they wish - to various topical issues and industry debates. However, comments submitted by readers that are defamatory or deemed, by the editors, to be racist or obscene will be deleted from the database. Furthermore, ITInews's editor would like to caution potential posters on its websites that while it welcomes robust debate, it will not hesitate to make the IP addresses of the authors of such defamatory statements available to the authorities, in the event of a court order compelling them to do so.

Get car, home, life and business insurance quotes in 3 easy steps

Foord Asset Management

Join us today

More from Foord Asset Management
The role of cash in your investment portfolio
Market recoveries often deliver the best investment returns
Stewardship – Substance Over Form
Professional fund managers should possess an ethic that informs every investment decision
Investment management and performance fees
What constitutes “good value for money”?
Don't chop and change your investments
Make a well-considered decision at the inception of the investment and persist with that decision
Crystal ball investing – Speculation leads to investment loss
A successful long-term investment philosophy eschews trends
Why we don’t save enough
Consider making saving for retirement a default option rather than an active choice.
Are fees incentive enough?
The value and importance of co-investment
Why we blow our Christmas bonuses (and why we need to save ourselves from ourselves)
Investment is all about building a platform for later consumption
Improving global economies no panacea for South Africa
Foreign equities remain our preferred asset class
A three decade track record that speaks for itself
Outstanding long-term investment performance

Archived Articles featuring this company ...

Insurance Quotes

Car Insurance Quotes
Household Insurance Quotes
Business Insurance Quotes
Funeral Insurance Quotes
Life Insurance Quotes

Read the InsuranceQuotes Blog
ITM Website Design Cape Town
Copyright © 2005 - 2015 ITInews Online Publications (Pty) Ltd. All rights reserved Insurance Times & Investments Online and ITInews. ..::ISSN 1995-1256::.. No part of the materials including graphics or logos, available in this Web site may be copied, photocopied, reproduced, translated or reduced to any electronic medium or machine-readable form, in whole or in part, without specific permission from ITInews Online Publications (Pty) Ltd. Distribution for commercial purposes is prohibited.