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2009
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Global Markets – 2nd
quarter 2009
“Bull markets are born on pessimism..”
The late Sir John Templeton once said
- “bull markets are born on pessimism, grow on
scepticism, mature on optimism and die on euphoria”.
According to Wikipedia, pessimism is “…
a painful state of mind which negatively colors the
perception of life, especially with regard to future
events. Value judgements may vary dramatically between
individuals, even when judgements of fact are disputed…”
Evidence shows that pessimism amongst
investors remains understandably high. Certain market
commentators, while recognising the vast amount of negative
market data still around, are beginning to view the
future with a little less trepidation [knowing that
history tells us that markets, which are forward looking,
tend to start recovering about 70% of the way through
a recession]. They are choosing to rather turn their
attention to the “green shoots” [the latest
buzz word in our industry] that have started to present
themselves in certain areas of the global economy.
 Having
said that, there is another school of thought that believes
that these “green shoots” are simply a short
term phenomenon and that we are more likely to have
a “W” shaped recovery. Their view is that
we are likely to test lows once again [taking us from
the middle of the “W” to the second “low”],
before seeing more sustainable signs of a recovery coming
through.
Unfortunately, confirmation of a market bottom can
only present itself after the fact and is therefore
impossible to call at the time. A recent article by
Cees Bruggemans [FNB Chief Economist] touches on this
very point. He suggests that one also needs to consider
a range of other factors, including factors such as
leading indicators. An example of a leading indicator
often used is the stock market, which “has quite
a good history of turning up well in advance of the
general economy”. One complication of this, Bruggemans
points out, is that our local stock market moves “in
union with foreign markets, mostly walking to the drumbeat
of New York. But then our economies today are also more
interrelated than ever, to a point where global events
dominate local ones.”
In the past, our economy had a lag time of about 18
months, but this gap has narrowed quite considerably,
with the lag time often now being more like 6 to 9 months.
Bruggemans states that the “US leading indicator
turned up as of December, with the US GDP expected to
start rising again from 3Q2009 [if not 2Q2009].”
He goes on to report that our domestic Reserve Bank
leading indicator “falling since March 2007, turned
up this February, only two months after its US equivalent.
Add six to nine months [4Q2009] and we could see the
broader economy turning up as well.”
If we step back from the “green shoots”
for a moment, it is sobering to note that GDP in the
US declined by an annualised 6.3% in the fourth quarter
of 2008 [4Q2008] and by an annualised 6.1% in 1Q2009.
However, Bruggemans points out that “US businesses
cut inventories and capex heavily [largest such cuts
in 30 years], explaining 80% of the GDP quarterly decline.”
In contrast, consumer spending in the region increased
by 2.2% in 1Q2009, after declining sharply in the second
half of 2008 [2H2008]. Bruggemans is heartened by both
sets of data and is currently of the view that the “US
economy appears on course for GDP recovery in 2H2009”.
However, he warns that there are a number of headwinds
to look out for, which include “a secondary wave
of weakness, induced by increased unemployment... Credit
tightness could be a near term impediment, possibly
delaying things somewhat. Another imponderable is Mexican
flu, although already appearing less of a threat….”
Interest rates in developed economies have been slashed
aggressively in response to the global market turmoil,
with policymakers in the US being the most aggressive.
The current view is that the US is likely to lead the
global recovery. Both the United Kingdom and Europe,
on the other hand, were slower to cut rates, with the
Eurozone even raising rates before following the downward
rate trend. As a result of not taking their “medicine”
sooner, the Eurozone could well take longer to turn
the corner. On the domestic front, our rates have been
reduced by 4.5%, with the expectation of a further 0.5%
to 1% reduction before year-end. The Reserve Bank Governor
has recently appealed to private banks to reconsider
the margin between our Prime rate [rate used by banks]
and the Repo rate [rate at which the Reserve Bank lends
to the domestic banks in the private sector], saying,
“there is nothing automatic that says the spread
must be 3.5%”.
At home retail sectors still don’t appear to
have reached a bottom, but the benefits of a sharp decline
in domestic interest rates should become evident in
coming months. Retail sales for March came in at a disappointing
5.3% year-on-year, compared to 4.4% in February. According
to Bruggemans, “85% of our retailers have enjoyed
remarkably benign conditions in what remain severe circumstances
globally [though motor trade furniture retailers and
building merchants suffering severely]".
When asked about the market in October last year, Warren
Buffett said “I haven’t the faintest idea
as to whether stocks will be higher or lower next month
– or a year from now. What is likely, however,
is that the market will move higher, perhaps substantially
so, well before either sentiment or the economy turns
up. So if you wait for the robins, spring will be over”.
While Warren Buffett makes an extremely good point,
it is clear that many investors [both domestically and
abroad] are still rather nervous of moving back into
the market at this stage. This is evidenced by the latest
statistics released by the Association for Collective
Investment Schemes [unit trusts] in South Africa [as
at 31 March 2009] which indicate that slightly more
than one third of funds invested in unit trust funds
are currently held in money market funds. This excludes
funds held in bank deposits / investments. While this
may seem high, these statistics are in fact very much
in line with investors abroad.
Many investors will be asking themselves, “where
to from here?” While this may seem like a fairly
simple question, the answer is a little more complicated.
Truth be told, even the most seasoned market commentators
don’t know when the markets are likely to bottom,
or whether they have in fact bottomed in this current
cycle.
 Our
view is that, while it seems that the worst may be over,
there is still too much uncertainty about to believe
that we are totally out of the woods just yet. We need
to remember that, “green shoots” or not,
most economies are still in recession, including our
own. As such, we wouldn’t be surprised if the
markets retraced some ground. However, it is interesting
to note that, since the lows in early March the S&P
500 Index [USA] and the JSE ALSI [RSA] have returned
more than 30% and 20%, respectively, in their respective
base currencies.
Returning to our opening quote from Sir John Templeton,
we believe that right now we may just be seeing the
investor mood shifting from pessimism towards scepticism
– a good sign for those with long-term investment
time horizons who can afford to take advantage of the
low equity prices even if the "W" shaped recovery
does show its form.
"Many an optimist has
become rich by buying
out a pessimist."
Robert G. Allen
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