2009 :

Looking back …

Six months have past since I wrote the Finlaw News article about “Plunging down South to the Big Freezer” [end Feb 2009]. The message then was …“bailing out of your investments, turning back on your long-term investment strategies will only deprive you of the benefits of staying the course” – and how true that has been. Sure, we are not back at the giddy heights of the share markets before the crash and no doubt it will take a long time to get back there – but we have enjoyed the biggest market rebound [both locally and abroad] since the “Great Depression” of the 1930’s.

Just three months ago, Sandy quoted Sir John Templeton saying that - “bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria”. We felt then that global investors had moved from pessimism to scepticism and that there were then clear signs of a return to bull market conditions. There was much talk at the time of “green shoots” with a mixture of positive and negative views being expressed by the World’s economists [a sure sign of scepticism].

Today – scepticism still abounds with several commentators talking to a “W” shape in the recovery graphs, suggesting we could see another dip before we return to solid long-term growth. Clearly we have not yet reached the stage of pure “optimism” – and thankfully are a long way short of “euphoria”. The international press of course likes to focus on as much negative news as they can muster – feeding the “dark side” of human nature and so increasing the stress levels so many folk seem to thrive on [how often we wish folk would switch to watching “family” movies instead of the financial news on TV!]. The latest press hype is on the first anniversary of the failure of Lehman Brothers – the trigger that precipitated the Global Market Crisis. They seem desperate to find another big bank that could crash and cause another crunch in the global financial markets. Hopefully their attempts to do so will fail.

Eight years have passed since that fateful day when two aircraft tore apart the World Trade Centre in New York and changed the course of the world. At the time markets had come off the peaks seen in April 2000 and they declined for 2 more years until March 2003. In the five years that followed March 2003, we witnessed one of the strongest bull markets ever. As we all now know – greed got completely out of control in the latter stages of that Bull Run and so we passed through euphoria and suffered a most unpleasant plummet [see graph below].

Hindsight is a useful weapon in the investor’s arsenal – but one that must be used with caution. Past performance is never a guarantee of future performance – but hindsight remains an important reminder that market cycles come and go. This graph shows the three major inter-national indices over the past 15 years. The strong up-tick in the past 6 months is clearly evident across all of these markets. We have seen a few folk who "jumped ship" into cash 6 months or more ago with the idea of "timing" their re-entry into the markets – sadly they have forever missed the surge that has already taken place.

When it comes to our local currency and its interaction with the three major currencies – a good look back in time is also important if we are to make sense of the "noise" created by daily / weekly / monthly swings in the quoted prices. When I wrote the February 2009 article we were at above R10 to the US$. At the end of August we were at R7,60 with signs of strengthening even further. In fact the country has had massive in-flows of short-term foreign currency investments into our share and bond markets – and that seems likely to continue for some months ahead. What we forget though, is that in April 1994 following our first democratic elections, it cost R3,30 to buy a US$ and R5,20 to buy a Pound Sterling. Five years ago, in December 2004 the rate was R5,60 to the US$ and R10,50 to the GBP. With all the short-term volatility to contend with we need to view the big picture that is so clearly illustrated in the above graph. The long-term trend will inevitably follow inflation differentials between our country and our trading partners.

Back to the future … and the key lesson to be learned from the past is to maintain a balanced view within a steady head. Short-term vagaries are not our game, we are investors - not traders, so to build and conserve wealth over time we must adopt long-term strategies with the correct mix of asset classes [shares, bonds, property, cash & alternatives] and currencies to create overall stability.
John Wallace – Sep 2009.