The all share index has now spent two full months in record territory, above the levels of 2008. The biggest drivers of the recovery have been industrials and financials. Resources, which propelled the 2008 high, are still about 30% from their peak. Companies such as Absa, Bidvest, Naspers, Remgro, SA Breweries and Sanlam hit record highs this month, while the likes of Anglo and BHP Billiton still have much catching up to do.

That tells you something about the nature of the economic recovery that investors are expecting. Overall, equities are back in favour as investors forsake bonds and cash in droves. Bond markets look set for a long bear market. Equity valuations suggest that the real economy is set to enter a healthy period of growth which will eventually lead interest rates upwards, decimating bond returns.

Within equities, though, there are clear messages. The recovery will be led by the services end of the economy as consumers take advantage of low interest rates and companies boost profit margins. Margins will fly because every cost possible has been wrung out of companies’ operations during the recession.

Resource companies are not so well off, though it is difficult to see how resource prices will not rally sharply if the broader economy recovers. The weakness of South African resource shares reflects higher costs more than poor sales prospects, thanks to the major spike in energy and labour costs since 2008.

Of course, the market may be wrong. It is hard to believe that prospects are as rosy as investors (wrongly) believed they were in 2008.There is a great deal of froth in the current share prices, driven by excess liquidity in the rest of the world looking for somewhere that has the slightest chance of providing some yield.

Interestingly, US markets have rallied in 2012 even more sharply than ours, although they are still about 10% off their 2008 levels. Cash that had stayed out of the markets is coming back in, but many commentators think there’s more that could follow it.

With resolution to Europe’s woes gradually gaining market acceptance, the one major risk on the table is looking less threatening. Some may feel it is already too late to ride the equities bandwagon, though I doubt it. There are many reluctant investors who still need to be convinced. But staying on the sidelines now looks to be the most expensive option.

March 28 – April 24 2012 | IM | 3

Investor’s Monthly is a Free Insert in Business Day. It is published on the last Wednesday of every month.