Despite the recent and overdue correction in the rand bull market, the strength of emerging market currencies and resource-based economies in general has given rise to scenarios that are perfect for South African investors. Really, the world is our oyster.
On our domestic market, we have world-class resource stocks and Afrocentric quality counters that are offering reliable and growing dividend streams. And recent research has shown that, partly because of under-performing markets, dividends are the most important component of total share market returns when reviewing data from 1950.
The relentless fall in the dollar means that South Africans can now affordably apply their investment criteria to overseas opportunities. This situation will persist at least for the medium term. US policy makers have not even raised the possibility of stabilising the dollar. It is not in their interests and there is no downside for them. They cannot afford a strong dollar. They need a debased one to help repay debt, and as the Bush camp prepares for an election, this is a blessing. US manufacturers are not so vociferous about cheap Asian imports and it is a boon to exporters providing further stimulus to the US economy.
So, although opportunities abound, it is still without question a stock-pickers market. By this I mean that many overseas markets are still overpriced and, as such, one would not want to buy an index fund or a greatly diversified market portfolio. These investments will have a high price-earnings multiple as compared to their probable and expected future growth rates, and so are bound to turn out a bad investment choice.
Investors still need to be very fussy about their selection of both South African and overseas shares this year. This is the only hope of an above-average return. Eighteen months ago, many shares were clearly undervalued. This is no longer the case and as theses "value gaps" disappear, investors will have to be that much more careful.
The other point is that the strength of the rand, still at a relatively healthy level, offers investors an additional choice spectrum, but many overseas stocks are still overpriced. Here again, look for stable, dividend-paying companies with good management and profit records that are reasonably priced.
In a bull market, stable, dividend-paying companies may not perform as well as new and racy high-flying counters, but they do provide a margin of safety that is important to the serious-minded investor.
Now that markets seem to have turned, it is apt to consider some New Year's resolutions.
The potential for above-average returns this year is good. The markets are awash with liquidity and stimulus packages. Governments are generally working hand in hand, the glaring exception being the rapid debasement of the American Eagle.
In all this euphoria, it is important not to get carried away. Run your portfolio like a business because it is a business, so have business rules.
Don't over-extend yourself. Don't borrow to invest and don't invest money that you cannot afford to lose.
Make sure you have strict investment criteria and apply them diligently. Never change these criteria and risk parameters because your portfolio is doing well. Remind yourself that the markets can and often do change overnight.
Make sure your asset allocation is correct. That is, that you are properly diversified across the various asset classes. Stick to quality and don't buy on rumours and tips.
When you have set up your initial portfolio for 2004, ask yourself if various markets break down and suffer a decline, will you still be able to sleep at night?
Work hard and good luck!