To say that 2001 was an eventful year would be an
understatement. It was a year in which we bore witness
to no less than 11 interest rate cuts by the USA
Federal Reserve, bringing short-term interest rates
in the USA down to 1.75% - their lowest level in
over 40 years.
Tuesday, September 11th is a day that is firmly
imprinted in our minds - the day that the world
watched in horror as the most gruesome terrorist
attacks in history unfolded, with over 5 000 people
in the USA losing their lives in the three attacks
that took place within minutes of each other.
These factors all had a significant impact on
world markets. Of interest is the rebound of the
major indices in the wake of the September 11th
terrorist attacks and more particularly since
September 21st 2001. It is interesting to note
that, although the Nasdaq was coming off a very
low base, since September 21st this index has
rallied by more than 40%.
Could this rally signal the end of the bear market
that has battered equity markets since March 2000
and the possible commencement of a bull phase?
It is impossible to say with certainty at this
stage, however, the improvement in the indices
since September 21st has provided much needed
comfort to wounded investors and has given them
renewed optimism that the markets may well stage
a recovery in 2002.
We now take a look at some of the economic regions
around the world.
UNITED STATES OF AMERICA
2001 was a challenging year for the USA, with
eleven interest rate cuts (declining from 6,50%
to 1,75%) and numerous tax reforms being implemented
in an attempt to stimulate economic growth. The
25 basis point interest rate cut in December was
the lowest to date (previously either 1% or 50
basis points) - this could be an indication that
world interest rates are reaching the bottom of
the current cycle.
The events of September 11th took their toll
on the economy, but at the same time, this tragedy
forced policymakers to work even harder at preventing
the economy from sliding into a recession and,
at the same time, to boost consumer confidence
levels. While the quarter on quarter GDP figures
to 31 December 2001 have not yet been released,
it is likely that we will see a second consecutive
quarter of negative growth - this being a technical
recession. The good news, however, is that a technical
recession had already been anticipated by the
markets.
According to some analysts, the current low interest
rate environment, together with greater Government
spending (particularly in the wake of September
11th) and the recent tax reforms, should serve
as the catalysts for boosting the economy in the
USA in 2002. This is despite the small rise in
unemployment (5,8% in December 2001) - however,
there is a sign that the labour market may be
stabilising, as the number of jobs cut have declined.
Ultimately returns during 2002 will be determined
by company profits - the current low interest
rate environment (lower borrowing/debt costs)
and increased cost cutting measures should be
supportive of increased company profits. Energy
prices, which have remained at surprisingly contained
levels in the past few months, should also contribute
positively to better corporate profits in 2002.
The other good news is that the Institute for
Supply Management (previously called the National
Association of Purchasing Managers) recently released
their December figures - these indicate a sharp
increase in the index for December - an indication
that inventories are being increased once again.
EUROPE
It is likely that there will be further interest
rate cuts in Europe which should serve to stimulate
money supply over the coming months - this, as
a result of acceptable inflation numbers. It is
anticipated that, in the present declining interest
rate environment, corporate restructuring should
increase - particularly in Germany, where reforms
to tax laws should prove to be a stimulus.
While the European equity markets were some of
the best performing markets in December, it is
believed that the European economy is still trailing
the American markets by some 3 to 6 months. The
strong performance exhibited by some of the European
corporates in December emphasises this lagging
effect, as the USA market appeared to have commenced
its rally on September 21st. As a result, the
2002 growth forecasts for the Eurozone, have been
reduced by the ECB to 0,70%.
January 1st 2002 signals the official launch
of Euro notes and coins in the Eurozone. This
should provide a much-needed boost to confidence
in the Euro, which is a currency that in the past
has not been credited with the recognition that
it deserves.
JAPAN
Japan continued to disappoint investors throughout
2001. A view has been expressed, however, that
the structural reforms initiated by the Prime
Minister during the second half of 2001 may begin
to pay dividends in 2002 - the good news is that
it appears as if more structural reforms were
initiated than was first anticipated. Equity prices
are currently at the inexpensive levels last seen
in 1998 - and 1999 proved to be a good year for
equities.
While it has been said by some analysts that
Japan may well surprise investors in 2002, we
continue to believe that economic growth over
the long term will only be possible if consumer
confidence returns and corporate restructuring
continues to take place to make companies more
profitable.
UNITED KINGDOM
The United Kingdom is the one major economy where
consumer spending has continued to boost the economy
and stimulate economic growth.
It is interesting to note that the OECD (Organisation
for Economic Co-operation and Development) have
indicated that the United Kingdom is the most
likely of the G7 economies to have the strongest
growth in 2001 / 2002.
SOUTH AFRICA
2001 is a year that will be remembered by South
Africans as a year in which the Rand behaved especially
badly - particularly after the events of September
11th. On December 21st the Rand reached its weakest
levels ever against the US Dollar, British Pound
and the Euro, declining to lows of R13.55, R19.67
and R12.21 respectively.
US Dollar appreciation against
the SA Rand - 60 months to 28 December 2001
Numerous factors have been cited for the recent
downward spiral of the Rand. Some of the more significant
reasons being: the prevailing debt crisis in Argentina
and the economic crisis in Turkey, the lack of foreign
investment (mainly as a result of the growing threat
of HIV AIDS and the high crime rate), offshore listings,
the promise of privatisation that was slow to materialise
in 2001, our high unemployment rate and the lack
of confidence by South Africans in our own economy.
The ever-prevalent land reform debacle in Zimbabwe,
and South Africa's virtual silence on the matter
has not helped to improve the perceptions of foreign
investors. James Cross, who was the Deputy Governor
of the Reserve Bank and a member of the Monetary
Policy Committee, left office at the end of December,
citing ill health as the reason - this announcement
had not been expected by the market. The far reaching
effects of the September 11th terrorist attacks
on the USA also punished the Rand - resulting
in a flight to hard currencies at the expense
of softer currencies such as the Rand.
When taking a closer look at the current reasons
for the sharp depreciation of the Rand in recent
weeks, it becomes apparent that there are no short-term
remedies on offer. The prevailing opinion is that
at current levels the Rand is oversold and that
it should retrace some lost ground over the short
term. However, amidst the current volatility it
becomes an almost impossible task to predict what
realistic levels for the currency will be.
The question most often being asked now is what
will happen to our short-term interest rates? Before
the sudden decline of the Rand (specifically following
the events of September 11th), the market was anticipating
anything from a 50 to 75 basis point cut in interest
rates, however, the recent behaviour of the Rand
now points more towards a possible increase in real
interest rates - the current market sentiment is
an increase of between 50 to 100 basis points during
2002. Conversely, some analysts are of the opinion
that our short-term interest rates are likely to
remain the same over the short term. (Note: on 15th
January 2002 the Reserve Bank increased the Repo
Rate by 1% - an announcement regarding the increase
in the prime lending rate is currently expected
from the major banks.)
