I recently attended a Women's Day breakfast where an illuminating presentation highlighted four generations, from the Silent generation and the baby boomers, to the Generation X-ers. I gained insight into the future psyche of my three-year-old and understood why I have struggled to manage certain Generation-X people!
I listened to the values and traits of the different generations; I cringed as I realised that I know the Crazy Frog Song by its original Beverly Hills Cop version, but was pleased that I can sms using autotext and my thumbs.
I realised that there was another difference between people born before 1980 and thereafter.
Today's 20-somethings started spending serious money in a low-inflation environment. They have seen electronic goods getting cheaper.
They never had credit cards in 1998 when interest rates soared - they were hitting their late teens. Their spending confidence is intact. They must be the ones buying French cars at 6.5 percent interest, either with their own or their parents' money.
They neither care nor know about "when interest rates were 20 percent".
It is no wonder that old-timers in the market have found it harder to adjust to a lower inflation environment - the last time inflation was this low in South Africa, the baby boomers were teenagers. They grew up spending money in a high inflation, rising interest rate environment, and that has left its mark on their investment thinking.
Last week, I explored the differential between long-dated bonds and the earnings yield on the equity market as one indicator of whether the stock market offers value relative to other asset classes or not. This differential is currently 1.33 percent, which means that the yield on bonds is over one percent higher than the yield on shares.
In the past, this differential was as high as 11 percent (bond yield higher than earnings yield) early in 1998, which should have rung loud warnings bells about the stock market level at the time.
Mostly, the differential ranged between zero and six in the 1970s, averaging three percent. In the 1980s the average was minus three (meaning bond yields were three percent higher than the earnings yield).
If we look at the 1990s, the average was a staggering minus eight. That means that, even with bond yields at eight percent higher than the yield offered by shares, investors still kept buying shares.
There is large range in the yields offered by individual shares, and while you get a useful average using the index, it offers a generalisation at best.The historic earnings yield on Anglogold is a slim two percent, while Grindrod trades at 12 percent. This is just one way of looking at stocks and the market, and is in no way a
conclusive measure in isolation. It has, however, been a useful indicator in highlighting the value anomaly between shares and bonds in the 1990s.
Inflation started hitting double digits in the late 70s. It took 20 years before it was brought back down to single figures again. The differential between the earnings yield on the stock market and the long bond rate during the low inflation period was more or less where it is now.
As I mentioned in last week's column, lower inflation (the absence of inflationary shocks and a rate below 10 percent) and a steadier lower inflation rate are good for the equity market. It took investors a long time to get used to a lower inflation environment. The fact that our overdraft rate declined at a slower rate than inflation would indicate that the authorities, while committed to lower inflation, also took a while longer to believe that lower inflation is a reality.
You need to take into account the economic environment when looking at the valuation of asset classes, or you could come to a rash conclusion that equities are cheap relative to bonds.
There are many factors that are in favour of the South African equity market and the yield gap has returned to a low-inflation level.
However, now is not the time to throw out your overall strategy and forget about the other asset classes - roaring bull market or not.