According to Duncan Artus from Allan Gray, there is neither a significant margin of safety, nor is there significant upside in local equities.

Therefore Allan Gray's managers have continued to reduce their exposure to equities in their asset allocation funds.

In a quarterly commentary circulated on Monday, Artus questions whether the global fiscal and monetary stimulus from governments will improve the real economy sustainably and justify a higher fair value for equities.

He says that a review of recent news, company results and investor comments leaves one with the impression that a significant portion of what is currently assumed in equity prices is based on the expected success of the current global fiscal (government spending) and monetary (low interest rates and quantitative easing) stimulus.

Artus points out: "If more debt and more spending across the globe are what is needed to support current asset prices, it follows that, unless this debt can be re-paid and/or rolled over at current levels, asset prices will have to fall.

"Debt has to be paid back and if it cannot be repaid it is defaulted on. Is excessive spending truly the way to long-term wealth? Is it better to incur debt than to save? I am certainly no economist, but it does not make sense to me.

"Yet this is precisely what governments, central banks and many mainstream economists are advocating and the 'easy money' argument is one of the cornerstones of the bullish argument for equities. The ultimate free lunch, if you will."

Artus concludes: "The question is how much are investors being asked to pay for the assumed success of the stimulus? A lot in my opinion."

He observes that the price/earnings (P/E) multiple of the FTSE/JSE All Share Index (ALSI) at 16.8x is well above its long-term average of 11.5x. The dividend yield of the ALSI at 2.25 percent is half its long-term average of 4.5 percent. The sustainability of the current P/E and dividend yield are reliant on future earnings. The earnings of the market remain above the long-term trend.

"The market could well continue to test our patience, as well as that of some of our clients," he says, "but hopefully we will be well rewarded with an opportunity to buy cheap assets."