As an investor, a very important question to always ask is “Am I

being adequately paid for the risk that I am taking on”. All investment

involves taking on an element of risk, and naturally as an investor pushes the

risk envelope, so he expects to be justly rewarded. Poor investment decisions

are made when the investment risk taken on is at prices that are just a tad

too rich.

Executive summary

The cautiously confident and erudite Federal Reserve chairman, Alan Greenspan,

has intensified his concern on the level of asset prices, including the fact

that the lowered risk premiums have propelled asset prices higher. He warns

“Such an increase in market value is too often viewed by market participants

as structural and permanent.”

He argues quite correctly that increased risk immediately translates into lower

prices, which in turn promotes liquidation of the very debts that support the

higher prices. Concluding: “This is the reason that history

has not dealt kindly with the aftermath of protracted periods of low risk premiums.”

Investec Strategist, Michael Power, observed in a recent piece in the Financial

Mail, that the low rates are primary due to surplus Asian foreign exchange invested

back into the US, and continues, “As we are dealing with the benchmark

possibility of assets being overpriced.”

It does appear then that first world bonds and shares are not cheap. However

emerging markets, especially Korea, Japan and yes even South African shares

are relatively attractive. This is premised on current and forecasted yields

relative to longer term real yields on these assets. In other words investors

are being reasonably compensated for the risk, as opposed to an investment into

bonds where it does not appears investors are being adequately compensated.

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Conclusion:

Risk free yields remain at the low end, helping boost investor confidence,

which in turn has helped sustain higher levels of asset pricing. While the pricing

of global risk is probably too low, given massive doses of liquidity, it can

also persist longer than prudently acceptable. Investors must therefore remain

vigilant and seek out quality assets that offer attractive reward opportunities

for the risk.

Investors should continue to hold South African equities. Given the recent

strong gains, over the short term we could see a pullback, which could extend

if global markets come under pressure, but the given the resilience of investors

to global shocks and ongoing risk appetite, the trend in asset prices remains

up for the time being.

If you are looking for a trusted investment advisor, please don’t hesitate

to ian@exsequor.co.za and I will mail you a copy of my Value Proposition.

Sincerely

Ian de Lange CA (SA)

021 700 4800

Posted: 2005/09/13 09:11 View Archive

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