Jan 28

Something has got to give

When people expect returns in excess of 25% per annum, whether they be in property or shares, you have a clear case of unrealistic expectations and therefore a potential collision of expectations waiting to happen.

When you read, too often, that the way to achieve this scale of return is simply to switch between the two aforementioned Investment Classes as each slows, then you have potentially the blind leading the blind.

There is no such thing, in my humble opinion, as a paradigm shift in basic investment rules so when property simply becomes too expensive for the general population’s disposable income to support, it should stop rising.

The same applies to shares. If the share prices rise too quickly then at some point there will be a correction or at least a pause. As the companies profits grow we then see the PE ratios returning to levels that the market is again happy with.

Personally, I am not convinced that South African residential property is growing as much as our press tends to inform us, after all, many of the publications where you read such information would not hit the streets if it were not for the Estate Agent and Property Developer adverts they contain.

It would be stupid for such publications to bite the hand that feeds them, so the advertiser has the ability to tell us their position with little prospect of opposition. The truth, I believe, hit the market a while ago and it is that despite the low interest rates, there is only so much bond debt you can secure and service from your after-tax income, the boom is over and it is not coming back in a hurry.

The strangest thing, however, happened to me only last week and it is a funny, if not ironic, tale. An estate agent said to me that although the real by which I took him to mean the non-marketing and PR property market was slow, he was still optimistic.

The reason, he said, was thus: when housewives and divorced women (his words not mine!) start giving advice on stocks and shares, then that investment has run its course. This is now happening, he proffered, so the money will soon be leaving the share portfolios and unit trusts, and rushing back into residential property! Where, we can only assume, a battalion of housewives and divorced ladies will be waiting, each Sunday, to advise us on the correct property investment?

Less of this banter, however, these are in truth very difficult times for us all, the advised and the advisor. After all, if Mr Bush can convince Mr Blair and it would seem the majority of primary school children (mine included), that a secular dictator, namely one Mr Hussein of Iraq, was responsible for the attacks of 09/11. Also that the same Mr Hussein was the owner of stockpiles of weapons of mass destruction, then perhaps he, Mr Bush, could now convince others that now Iran also needs a jolly good seeing to.

That scenario could see oil costing anything around $150 a barrel and with it inflict a cruel blow on the world economy. It is believed that such an oil price, conjoined with high commodity prices, would make it likely that we would see no less than a 5-10% increase in inflation, over the medium term. Such an increase in inflation would naturally lead to higher interest rates and would crush those who are over-exposed to debt, regardless of where they live and how the debt was incurred.

Anyway, enough of the doomsday scenario planning, but it just shows that these are strange days and we need to be realistic and professional when talking with our clients. How soon everyone forgets the days of 25% interest rates, flagging economies and a sense of normality in our reality. It is our duty to show our clients a realistic and risk adverse return, against the prevailing inflation rate. It is our obligation to do our best for the client at all times and that includes reminding them of the inherent market risks and staying within their agreed risk profile.

Finally, I have quite openly pursued the cause of the private client and the service levels they receive, ever since I started writing for Blue Chip in 2004. My opinion is that everyone can improve in this area, me included, ensuring that the quality of the service and its frequency improves. I think that the FPI membership and its executive in particular, share this cause, as it will show the local and international market place that we are serious about the position of the private client and serious about bettering our offering across Southern Africa.

The positive point, I have personally observed, is that in general service, as an element of financial services, seems to be improving all the time and the FPI membership are not surprisingly at the front of that cause.

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