Global markets were in an upheaval during the first
quarter of 2001, and still, the volatility continues.
In periods of extreme volatility emotional reactions
and perceptions tend to exaggerate the negative impact
on the markets. Those who invested during 2000 may well
have been experiencing some abdominal stress during
the roller coaster's sharp dip in the tracks. The question
foremost on everyone's mind is when will the markets
bottom out and when will this bear trend end. The extent
to which the prevailing negative trends will continue
will depend on, amongst other factors, investor sentiment.
In the
USA the Dow Jones Industrial
Index shed 8% while the Nasdaq lost 26% over the quarter.
Federal Reserve Chief Alan Greenspan cut USA interest
rates by 1,5% during the quarter bringing USA rates
down to 5%. Many investors and analysts were disappointed
with the last 0,50% interest rate cut in March, having
hoped for a cut of 0,75%. This weighed heavily on USA
and global markets. It is important to remember that
there is always a lag between an interest rate cut and
its impact on the economy. There has been an improvement
in consumer sentiment, which if sustained, may indicate
that the negative outlook for consumer spending may
be past the worst. Other factors such as benign inflation,
acceptable world oil prices and scope for further rate
cuts, should bolster investor sentiment. We do anticipate
that the USA stock market is likely to remain volatile
until the outlook for corporate profits and the economy
become clearer.
NEWSFLASH: In a surprise move on 18th April 2001,
the USA Federal Reserve cut interest rates by a half-percentage
point boosting the Dow by 3,91%, the Nasdaq by 8,12%
and the S&P500 by 3,91%. This announcement took
place just weeks before the next FOMC (Federal Open
Market Committee) meeting scheduled for 15th May 2001.
Stock market volatility, as in all the other markets,
persisted in
Europe during
the quarter. Many economists and analysts share the
view that the European economy is in better form than
the economy in the USA and should be strong enough to
largely withstand the impact of the current USA slowdown.
Most affected by the swings in sentiment were the technology,
media and telecommunications sectors. There is a view
that interest rate easing should begin shortly, but
to a lesser extent than in the USA. There are two important
factors that the European Central Bank policy makers
will need to take into account when considering interest
rate cuts - the first being the degree to which euro-zone
growth will be affected by the USA slowdown, and the
second, by how much inflation risks are declining.
The Bank of England cut interest rates in the United
Kingdom during the quarter under review to
5,5%, adopting a more measured stance than the US
Federal Reserve. Lower interest rates, controlled
inflation, together with a rise in business and export
optimism contribute to a more favourable outlook for
the economy in the United Kingdom, although this market
has not been impervious to global trends.
The stock market in Japan rallied after the Bank
of Japan reversed its August
interest rate increase back down to zero. This took
place in an environment that exhibited clear signs
that the economy, once again, appears to be slowing.
Many analysts are of the opinion that the prevailing
global economic weakness will continue to undermine
the equity market in Japan. Economic growth will only
be possible over the long term, if consumer confidence
returns and corporate restructuring takes place to
make companies more profitable and efficient. One
school of thought is that Japan presents a major investment
opportunity in the year or two ahead and that it is
simply a timing issue. This is not the general view
on Japan and we remain cautious of this market until
positive fundamentals become evident.
On the strength of the rate cuts in the USA, the
Asian markets performed
better in January. However, political instability
in some countries is definitely dampening investor
sentiment towards the Asian markets. The general feeling
amongst economists is that whilst Asian companies
appear attractively valued, there is an ongoing need
for new equity to be issued by companies to bolster
their finances. The result of this may, in the short
term, temper the current improved performance of this
region's markets but continued restructuring should
bode well for the longer-term outlook. Given the existing
global economic slowdown and the Asian market's trend
to follow the USA, it would appear that any potential
in this market may, for the time being, be eclipsed
by the possibility of further volatility and uncertainty.
Once again, as in the rest of the world's markets,
the global slowdown is having its impact on the South
African economy. However, the impact on South
Africa, as an emerging economy, is far reaching in
that the performance of the local market in the short
term depends largely on the extent to which a soft
landing can be orchestrated in the US. The JSE ALSI
(all share index) came off significantly during March,
but was able to recover some of its losses later in
the month, posting a net 2% loss for the quarter.
Returning to the roller coaster ride - it's interesting
to compare the market volatility experienced locally
[see below] with that of the USA in the previous graph
over the same period.
Regardless of all the monetary and fiscal policies implemented
by the budget (which were aimed at, amongst other things,
improving international and local investor sentiment),
it will be an impossible task to achieve the necessary
growth in the domestic economy without supportive global
growth. There are those who are of the opinion that
a domestic economic recovery will begin as a result
of an anticipated interest rate cut later this year
in South Africa (possibly in the third quarter) with
further cuts expected in Euroland and in the US (South
Africa's major trading partners). Of particular concern,
however, are the periods of continued weakness being
exhibited by the Rand. Should this weakness prevail,
the possibility of local interest rate cuts later this
year will be reduced.
"Hang on to your ticket"
It is at times like these, when global market volatility
prevails, that it is easy to lose sight of long-term
investment goals. Whilst this is understandable, it
is important not to panic and to remember the long-term
investment strategy. As mentioned in our recent newsletter
regarding market volatility, an annualised 5-year
rolling investment period in the USA has only produced
7 negative returns (4 of these in the 1930's; one
in each of 1942, 1975 and 1978) - all other 5-year
periods producing positive returns. A 10-year rolling
investment period in USA equities has only ever produced
one negative return (1939). We reiterate that although
further periods of volatility are expected in the
coming months, the view over the longer term is that
global markets and global sentiment should begin to
improve. We are of the opinion that it is the time
spent in the markets and not the timing of the markets
that makes the difference. Investors who panic and
sell when the news is dismal will not be in a position
to benefit when markets start to improve.
This report is based on information sourced from
various institutions, both local and international.
The report reflects a variety of views and is not intended
to convey investment advice. Please consult us to obtain
specific advice relevant to your investment portfolio.
