I don't think that any of us will ever forget the
events that took place in the United States of America
on 11 September 2001. The unprecedented terrorist
attacks on the World Trade Centre and on the Pentagon
sent shock waves around the world, highlighting that
no country is invincible, even the USA. These events,
and their ramifications, will not be swept under the
carpets of history. As I write this newsletter, the
extent of the retaliation by the United States and
its allies is still unknown and is yet to unfold.
However, it appears as if a measured response as apposed
to an open declaration of war may be evolving - many
attribute this to the presence of Colin Powell, who
will try to lend a measure of restraint in these unenviable
times.
The terrorist attacks on the USA
could not have come at a worse time. As at 11 September
2001 the economy in the USA was slowly starting
to show signs of an improvement and consumer confidence,
having so recently been at sensitive levels, had
been bolstered by the Federal Reserve's 7th interest
rate cut. Many economists were becoming cautiously
optimistic about an improvement in economic growth
figures commencing toward the end of the 4th quarter
of 2001 and during the 1st quarter of 2002. These
sentiments were fuelled by the fact that the USA
had avoided plunging into a recession during the
last 18 months (a recession being two consecutive
quarters of negative growth), as had earlier been
feared, and the dollar had finally started to move
off its unsustainable highs of recent months.
On Monday, 17th September 2001 the Federal Reserve
in the USA cut short interest rates by 50 basis
points to 3%. This was the eighth rate cut this
year, bringing short term rates down to their lowest
level since September 1992 - this was done primarily
to make money more accessible to consumers and to
help ward off a potential recession caused by panic
selling. The rate cut was announced an hour before
Wall Street opened, after having been closed for
4 days - the longest closure since the Great Depression.
It has been speculated that the reason for this
timing was a deliberate move by the Fed to boost
consumer confidence - it was important that it should
not be seen by investors as simply being a means
of bolstering the markets during the first day of
trade on Wall Street following the tragedy. This
move by the Fed was a clear sign that they are prepared
to do whatever is necessary to maintain consumer
confidence.
The
European Central Bank
(ECB) followed the lead of the US Federal Reserve
by announcing a 50 basis point cut in key interest
rates, bringing rates down to 3.75% from 4.25%. Although
this announcement was also made on the 17th September
2001, it followed three hours after the US Federal
Reserve announcement - allowing the positive impact
of this good news to be maximised.
As mentioned in the previous newsletter, higher
oil and import prices, together with slowing growth,
continued to be the main contributory factors to
the interest rate policy dilemma that had been prevalent
in Europe. The ECB were reluctant to cut rates in
the recent past due to inflationary pressures brought
about primarily by the "knock-on" effects
of a higher oil price experienced over the past
year. The oil price has moved off its previous highs
and inflation in the EU is currently closer to target
than before, thus supporting the move to cut interest
rates.
The oil price moved to $31 per barrel on the news
of the terrorist attacks, but dropped to $23 per
barrel on Monday 24th September 2001 fuelled by
concerns of a global economic slowdown. OPEC met
during the last week of September to discuss reducing
output in view of the fact that the price per barrel
was within the acceptable band of $22 - $28. OPEC
stated at the meeting that they would maintain current
levels of output for the time being - the next meeting
is scheduled for November 2001. The price per barrel
ended the quarter at $21.88.
The GDP figures for
Japan
declined, as expected, during the second quarter
of 2001. As has been noted in past newsletters,
the convalescence of consumer confidence and the
restructuring of companies to make them more profitable,
still remain the key catalyst factors for achieving
sustainable growth in the long term. Deteriorating
business confidence, falling factory production
and rising unemployment are some of the factors
fuelling fears that the Japanese economy may slide
back into a recession. Exports from Japan have
continued to decline and are another cause for
concern.
In line with expectations, the Bank of
England
announced a 25 basis point cut in its key interest
rate on Tuesday 18th September 2001, bringing
rates from 4.75% down to 4.50% - a 40 year low.
Although inflation is below the Bank of England's
current target of 2.50%, forecasts for inflation
have moved higher.
The South African
Reserve Bank's Monetary Policy Committee cut the
Repo Rate by 50 basis points during the second last
week of September, as anticipated, with the large
commercial banks consequently reducing their mortgage
rates. The Rand has been under pressure recently,
with the exchange rates ending the quarter at £13.25
/ R1, $9.01 / R1 and Euro 8.20 / R1. The Rand has
tested new lows against all the major currencies
and on a trade-weighted basis in the last two weeks
of this quarter. The weak rand, which makes our
exports competitive, has helped to boost local GDP
growth, thereby reducing the direct negative impact
of the global slowdown on the South African economy.
The weak rand is not good news for potential inflationary
pressures, however, which if they do materialise,
will not bode well for the much hoped for interest
rate cut later this year.
How did the markets end the third quarter (30 September
2001)?
While it is not our policy to encourage investors
to focus on short term market performance, it is
natural to want to know exactly what the impact
has been on the markets since 11 September 2001.
The above graph illustrates the performance of the
MSCI Index for the period 10 September 2001 to 28
September 2001 - the index came off 4.35%. In comparison,
the FTSE moved down by 3.22%, the S&P 500 lost
5.11% and the Nikkei retreated by 4.64% over the same
period. In Europe, the CAC 40 lost 7.62%, while the
DAX moved down by 9.28%.
In conclusion
World markets are likely to remain volatile until
the full extent of the retaliation by the United
States is known. It is encouraging to note that
the USA presently enjoys unprecedented support from
the global community. The channels of communication
between many countries have been opened following
the recent terrorist attacks and this should go
a long way in extending global free trade.
The following graph emphasises two important points:
firstly, the markets have endured many world crises
and crises are likely to continue to present themselves
in the years to come. Secondly, the markets have
historically shown resilience. It may be difficult
to take comfort from these words during these troubled
times, especially since it is difficult to find
an analogy in the history books for this current
event, but history has proven that over time a recovery
follows.
Crises and the markets
The above graph echoes our sentiments that it is the
time spent in the markets and not the timing of the
markets that makes the difference. It is important,
in challenging times like these, to remember the original
reason for being invested in the markets.
All eyes will continue to remain focused on the
USA - perhaps the current situation is best summed
up by Abraham Lincoln, who was quoted as having
said the following, during the civil war: "The
dogmas of the quiet past are inadequate to the stormy
present. The occasion is piled high with difficulty
and we must rise with the occasion. As our case
is new, so we must think anew and act anew. We must
disenthrall ourselves and then we shall save our
country."
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.
