The roller coaster ride continued through the second
quarter of 2001, with few surprises for investors, as
we had anticipated. Investor sentiment was given a much
needed boost with the 6 interest rate cuts in the USA,
for the year to date, and one in the European Union.
We still believe that short-term volatility is here
to stay - so keep your seat belt fastened.
In the
USA the Dow Jones Industrial
Index has lost 2.57% for the year to date, while the
Nasdaq has shed 12.48% over the same period. Alan Greenspan
has continued to cut interest rates over the past quarter,
bringing USA rates down to 3.75% - the lowest level
since April 1994. The last cut of 0.25% disappointed
some investors who were anticipating another 50 basis
point cut (the previous 5 interest rate cuts each being
0.50%) - some analysts were pleased with the lower cut,
being of the opinion that the Federal Reserve are taking
potential inflationary concerns into account. The first
quarter growth rate, which was anticipated at 2%, came
in at 1.3%. As mentioned in our last report, the outlook
for corporate profits and the economy still remains
unclear and we are of the opinion that the current levels
of volatility in USA equity markets will continue until
the outlook becomes clearer. The positive lag effects
of the quick and aggressive interest rate cuts by the
Federal Reserve, together with the tax cuts recently
implemented by the Bush administration, should start
becoming evident during the second half of the year.
Higher oil and import prices, together with slowing
growth, have been the main contributory factors to the
interest rate policy dilemma currently prevalent in
Europe. In a surprise move,
the European Central Bank (ECB) cut interest rates by
25 basis points in May, bringing interest rates down
to 4.5%. Key interest rates were left unchanged at the
June meeting of the ECB. At present, inflation is above
the current target level of 2%. These inflationary pressures
are preventing the ECB from cutting interest rates further,
in an attempt to stimulate growth in this region. Stock
market volatility has continued in Europe over the past
three months - investors have been influenced largely
by earnings forecasts and results in the USA. The Euro
still appears to be out of favour, however many analysts
still remain optimistic about seeing the Euro ending
the year at parity to the US Dollar. Our expectation
for a stronger Euro is more optimistic from next year,
once the actual currency comes into circulation. There
has also been much speculation in the market recently
about Britain joining the EU - if this were to happen,
we anticipate that it would happen sooner rather than
later, as Mr Blair has less than 5 years in which to
make this transition. Such a move would prove to be
positive for the Euro.
Deteriorating business confidence, falling factory
production and rising unemployment are some of the
factors fuelling current 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 May, Japan's trade surplus declined for
the 11th consecutive month - falling over 86% for
the year. The appointment of the new Prime Minister
was well received, mainly because of the positive
outlook for restructuring, but many are of the opinion
that this may not be enough for the Japanese economy
to overcome the prevailing negative pressures in order
to bring about economic recovery over the longer term.
We continue to believe that, economic growth over
the long term will only be possible if consumer confidence
returns and corporate restructuring takes place to
make companies more profitable. We expect market volatility
to continue in Japan for at least as long as volatility
remains a feature of equity markets in the USA.
markets have not escaped
the negative impact brought about by the slowdown is
the USA, Europe and Japan. Political instability in
certain countries and sharp volatility have served to
dampen investor sentiment. Signs of an economic slowdown
in this region are prevalent, while many countries are
in the process of easing monetary policy in order to
stimulate growth. Asian companies appear, on the whole,
to be attractively valued, although an abundance of
supply may impact negatively on this region's markets
over the short term. Corporate restructuring remains
key for the long term outlook of this region.
As alluded to in our last quarterly report, the SA
Reserve Bank cut the Repo Rate (the rate at which
commercial banks borrow from the Reserve Bank) by
1% on 15 June 2001. The major banks followed suit
by cutting their lending rates by 0.75% encouraged
by, amongst other things, the sharp drop in the net
open forward position and the positive effect this
should have on future domestic economic growth. Tito
Mboweni, SARB Governor, is quoted as saying that the
interest rate cut was made possible by clear indications
that inflation is slowing (headline inflation declined
to 6.4% year on year in May, compared to 6.5% in April).
The potential for another interest rate cut in the
coming months is good, although prudence is required
when considering the short term stability of our currency
- other than external macro-economic factors, one
factor that could have a negative effect in the short
term is the potential volatility of oil prices. Consumer
and business confidence remain low - an increase in
spending may possibly only become evident once the
recent reduction in lending rates appears to be sustainable.
The JSE has performed reasonably during the first
half of this year, while the general outlook for the
domestic market over the short term is fair. It is
important to remember that South Africa is an emerging
market and, as such, the risks associated with investing
domestically are higher than those associated with
a globally diversified portfolio.
In conclusion
The first half of 2001 has certainly proved to be
a roller coaster ride for global investors. This highlights,
once again, the importance of portfolio diversification.
Of particular interest are Alternative Investment
Strategies that have been introduced as a fourth asset
class - known to many as hedge funds. Hedge funds
target consistent and positive returns to enhance
long term capital growth regardless of whether the
underlying markets are rising or falling.
Alternative Investment Strategies (hedge funds) have
finally become available to the individual investor
(due to the initial investment amount being reduced
to an acceptable level through the multi-manager system)
and in light of the current volatility in global markets,
they are an extremely attractive compliment for the
three traditional asset classes, being cash, bonds
and equities. For your interest, the Olympia Star
Hedge Fund has a 10 year track record, with an annualised
net return after costs, of 13.94% - this is a low
risk fund (of particular interest, is the fact that
it achieved 18.79% in US Dollars in 2000, while worldwide
equities lost approximately 25%). This product is
currently available through us at reduced costs via
Investec Assurance.
"Not all hedge funds are the high risk, volatile
investment vehicles that many believe they are. These
funds are, in fact, rapidly gaining acceptance within
the portfolios of endowments and pension funds, typically
some of the most risk averse players in the investment
world."
Some of the key benefits of hedge funds are: lower
volatility, lower risk and higher risk adjusted returns
and have little or no correlation to equity bond markets.
Many hedge funds are available in the market, but
few of these funds have been approved by the Financial
Services Board, and as such cannot be actively marketed
in South Africa. This has been done to protect the
investor from potentially unscrupulous investment
offerings.
Should you wish to know more about the FSB approved
hedge funds, please do not hesitate to contact us.
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.
