A lost decade? This means buy when equities are cheap

Philipp Wörz of Alphen Asset Management compares the "once in a lifetime" bull market to a mirage. He writes that the month of October saw the Johannesburg All Share Index (ALSI) shed 23% to an intra-month low of 17812 points, a 46% loss since May 2008, and recover thereafter to end the month 9% in the red at 20991 points.

The 5 year bull market gains that investors would have enjoyed from being invested in the ALSI have been significantly trimmed from a gain of 350% in May 2008, to a still relatively healthy 172%  on Friday.

The current level of the Index at 20030 puts it back to levels last seen in July 2006. Even though the velocity and magnitude of the drop that has been experienced on the JSE of late has been frightening, it is no different and even relatively benign when compared to some select counterparts in other emerging and developed markets.

As seen in the table sourced from Bloomberg above, the recent collapse in stock markets around the world, especially Emerging Markets, paints the bleak picture that the "once in a lifetime" bull market ended up being anything but. On many stock markets the bull market appears to have been a mirage, an oasis in the middle of the desert, that evaporated into hot air.

As seen in the last column, Emerging Market share prices are at levels last seen two to three years ago. For developed markets which did not capture as much of the upside, the picture appears even bleaker. The FTSE 100, Dax and S&P 500 are still 37%, 50% and 37% below their 2000 highs, respectively.

It is interesting to note that China, the flag bearer of the bull market in Emerging Markets, has seen its stock market effectively registering zero return over the past decade (refer to chart of the Shanghai Composite (1998 - 2008) from Bloomberg below).

Even though equities tend to outperform the other major asset classes over the long term, as the last decade illustrates, it is important to buy stocks when valuations are cheap and sell when expensive. Right now we would argue is a time for the former.