It’s different this time
“It’s different this time!” 4 words that should make any serious investor very nervous. But either markets are seriously over-heated or perhaps, it is different and maybe the markets are telling us that a whole lot of other stuff, like inflation in particular, is not as low as government would have us believe.
Officially, inflation is 5.4% (Jan 2013 www.resbank.co.za). Now we know that over long periods of time, the different asset classes give us different real returns with the long term average for equities being around 7-9% per annum. So based on an inflation figure of 5.4% we should expect the equity market to be returning around 14.4% pa max (5.4%+9%). The 30 year return figures support this number.
However, the 10 year figures do not. In fact, 10 year equity market nominal returns are just under 19% pa* and this should put the CPI number at around 10%. Officially, CPI over this period has been 5.3% which means that the markets have then given real returns of just under 14% pa. If this is the case then we are due for a period of pay-back or mean reversion.
However, in a the recent “Bull and Bear” report released by Glacier, almost 60% of the fund managers surveyed thought that the market was fairly valued (40% think that it is over-valued) but they all expect it to deliver returns of between 9-13% in 2014 (nominal).
We know that fund managers can and do get it wrong, but if they are correct and the market is not hugely over-valued, perhaps it is telling us something else? Perhaps it is telling us that the CPI number is not correct? If we know that equities should give real returns of around 7-9% pa then perhaps the market is telling us that inflation is closer to 10-12% pa and not the 5.4% the government wants us to believe? The recent round of wage negotiations and salary increases support this and suggest that most of our working population don’t believe the 5.4% figure. Petrol and electricity increases also seem to support a different number too and I know that 10% is certainly far closer to my reality.
Either the equity (and property) market is over-valued or CPI is much higher than we are being told – it’s not different this time.
*Source: Prudential Asset Management 10 year returns to Dec 2012