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2009
:
Global Markets – 4th
quarter 2009
“2009 – a year divided”
Many of us, when asked, would probably
immediately respond that 2009 is a year that we would
rather forget. The year started with
extreme pessimism, following the most severe market
correction since the 1930’s. However, since March,
“green shoots” have started to emerge and,
if we look back at the year [to the end of November],
many may be pleasantly surprised.
 The
first two charts reflect the performances of the ALSI
[our domestic equity index] and the MSCI [world index]
in their respective base currencies over the above periods.
It is encouraging
to note the improvement in the markets since early March,
both domestically and abroad. However, one can’t
help but consider that the improvement has been driven,
in part, by the fact that the markets over corrected
on the down side - driven by the extreme levels of pessimism
that prevailed in the markets at the end of last year
and well into 2009. In addition, because many of the
reported company results have been better than expected,
[thereby surprising on the upside] the markets have
reacted favourably to this news.
 There
are some market commentators who caution that the “recovery”
in the markets to date is not yet sufficiently
supported by the basic fundamentals.
If we look at both these indices from
the beginning of last year, it is clear that we are
not out of the woods just yet, and that despite the
improvement to date, there is still a long way to go
before the markets recover the losses that they have
incurred over the last 18 months.
The next graph reflects the MSCI World,
China and Emerging Markets Indices
[in USD] as well as the JSE ALSI [also reflected in
USD]. Emerging markets, in particular, have been surprisingly
resilient so far. An interesting point to note from
the graph is the disappointing performance from China
[relative to the other regions] during the third quarter.
With China being a large importer from many of the emerging
markets, it is important to keep a close eye on developments
in this region.
Our industry is full of buzz words which seem to come
and go - the latest one being “green shoots”.
According to Wikepedia, “green shoots is a term
used colloquially to indicate signs of economic recovery
during an economic downturn.” However, this term
is not new and is not without controversy. It was first
used in an economic context in 1991 by the Chancellor
of the Exchequer of the UK [Norman Lamont] – resulting
in a media uproar and him being criticized for “insensitivity”.
We would all recall early 2009, when the term was used
by Baroness Vadera [former Business Minister] in the
UK. It has again been used by media in the USA this
year and also by Ben Bernanke [Chairman of the Federal
Reserve] on the 15th March, during an interview on CBS’s
60 Minutes.
Of course, the question
now is whether these “green shoots” are
likely to grow or whether they have simply been a mirage.
Not many would be prepared to commit a one word answer
to this question. A recent article by Cadiz Asset Management
summed up the mood of the markets very well –
“the psychology within the equity market has moved
from one of hope to the demand for hard evidence.”
Many are of the opinion that there is now clear evidence
of “green shoots” beginning to emerge. They
do, however, expect the pace of the improvement to slow
and to possibly be more protracted – and have
not ruled out the potential of short term weakness,
volatility or periods of sideways movement.
The basis for this view is that in certain instances
equity prices have now run ahead of future earnings.
This also means that any earnings disappointments will
not be well received by the market. Jeremy Gardiner
of Investec recently set out some of the factors that
support their current view that our domestic equity
market is likely to slow – factors
such as “slow growth, higher unemployment, increased
saving, deleveraging, more sober remuneration and more
prudent spending will all affect earnings...”
These factors also apply to global markets. We must
also remember that the fiscal stimulus packages have
resulted in a significant volume of liquidity being
injected into the developed economies. It is often debated
whether it is the fiscal stimulus that has been the
main driver of these equity markets as opposed to the
actual underlying economic fundamentals. Having said
that, there is an enormous amount of cash sitting on
the sidelines globally waiting to enter the markets
when clearer indications of a global recovery are in
sight.
It appears that, while the improvement
in equity markets may continue [although at a slower
pace], there could come a time [perhaps in the not too
distant future] when evidence of earnings growth will
be required to support equity valuations, failing that,
we expect that the markets will no longer be as forgiving.
At that point, the market won’t simply improve
on the mere hope that the global and domestic economy
should start to grow – “hard evidence”
will be required.
"The art of living
easily as to money is to pitch your scale of living
one degree below your means."
Sir Henry Taylor
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