In September the average prudential balanced portfolio returned 1.35% (August: 0.85%). Top performer is Investec (2.26%); while Momentum (0.59%) takes the bottom spot. For the 3 month period, Investec takes top spot, outperforming the ‘average’ by roughly 1.30%. On the other end of the scale Momentum underperformed the ‘average’ by 1.69%.

Do markets have any room to rise further?

The price of equities is a function of earnings and the rating investors attach to the earnings stream, or in short the price: earnings ratio. So let us investigate earnings and the price: earnings ratio to get a better feel for future growth prospects of the equity markets. Since the US equity market has by far the largest market capitalization, representing 40% of global market capitalization, let’s look at the US equity market, more specifically the S&P 500 as its proxy and the SA equity market, as the one closest to home.

The graph above reveals a few facts about the US equity market. Firstly, earnings in real terms over the past 30 years have generally been moving between 500 and 1,000, on average they were around 750. Secondly the graph shows that real earnings moved sideways with some volatility until 2004 to then rise steeply from 500 at the start of that period to just over 1,000 by 2008. Thirdly it shows that earnings have reached a peak of just over 1,000 and have been moving sideways with a slight declining trend since the beginning of 2008 with a brief slump following the global financial crisis. Real earnings on 1,000 are thus currently around 25% above their 30 year average. This indicates that the US equity market is more likely to decline to its average earnings than growing further.

Read part 6 of the Monthly Review of Portfolio Performance to 30 September 2017 to find out what our investment views are.