The old adage "It ain't over 'till the fat
lady sings" is perhaps appropriate when
looking at the current state of global markets
and the world is beginning to wonder when
she is likely to take a bow and move off
centre stage. In the last six years there
have been five crises that investors have
had to contend with. The first was the South
East Asian crisis in 1997, followed closely
by the Russian Debt Default in 1998. In
1999 investors were given a temporary respite
and were able to breathe a sigh of relief.
This was to be short-lived, however, as
in April 2000, the TMT bubble burst. In
2001 the world watched in horror as the
events of September 11th unfolded in the
United States. The United States have remained
in the spotlight with corporate and accounting
scandals being the centre of attention during
the first three quarters of 2002.
Historically investors have always taken
comfort in the fact that, in the United
States of America, the standards of corporate
governance have been amongst the highest
in the world. However, the recent spate
of companies whose corporate governance
have been called into question have tested
the levels of investor trust worldwide.
Enron was the first to make headlines with
an accounting scandal, followed more recently
by WorldCom.
Other companies currently under investigation
include Tyco, ImClone, Qwest, Martha Stewart,
Global Crossing, Dynergy, Halliburton and
CMS Energy. Sam Waksal (former ImClone CEO),
John Rigas (former Adelphia CEO) and Dennis
Kozlowski (former Tyco CEO) are all currently
under investigation.
Two former top executives of WorldCom were
arrested and charged with fraud by the FBI
in front of journalists and television cameras
on 1 August 2002, making headline news.
John Ashcroft, US Attorney General has said
that, if convicted each of the men will
face up to 65 years imprisonment. These
Wall Street scandals have served to further
unnerve already fragile investors and undermine
the US Dollar and shares in US companies,
impacting severely on global sentiment.
In the words of John Ashcroft "Corporate
executives who cheat investors, steal savings
and squander pensions will meet the judgement
they fear and the punishment they deserve."
The high-profile arrests that have followed
those of the WorldCom executives have all
occurred in front of news cameras, sending
a clear and unequivocal message to all Americans,
and in fact to the rest of the world, that
the US Government is actively and aggressively
pursuing corporate offenders
CEO's of companies that reflected revenue
greater than $1.2 billion in the latest
fiscal year throughout America were given
to the 14th August 2002 to attest to the
correctness of all financial statements.
In addition, all these CEO's were required
to each personally attest to the correctness
of these financial documents, being threatened
with imprisonment if any of the information
was subsequently found to be incorrect.
These measures should help enormously in
addressing investor fears and perhaps put
a stop to any more unpleasant "creative
accounting surprises". These measures having
now been put firmly in place, perhaps more
relevant issues like economic numbers and
corporate earnings will be allowed to once
again take centre stage.
We now take a look at some of the major
economic regions around the world.
UNITED STATES OF AMERICA
The Federal Reserve kept interest rates
on hold during the quarter and repositioned
their policy stance to "easing" from "neutral"
at their meeting held on 13th August 2002.
This "easing" stance enables them to ease
rates before their scheduled September 24th
meeting, if necessary. The initial reaction
to rates being kept on hold at the August
13th meeting took the markets into negative
territory after seeing strong gains during
the four days preceding the Fed meeting.
These gains were fuelled mainly by market
expectations that the Fed would once again
cut rates at their August 13th meeting.
However, it appeared as if investors and
analysts alike were quick to review their
initial dissatisfaction at the Fed's decision,
taking comfort from Alan Greenspan's view
that the US economy is currently robust
enough to make a rate cut unnecessary at
this stage. In addition they took comfort
from the easing bias taken by the Fed, together
with their willingness to reduce rates if
necessary.
In
addition, inflation is currently benign
- with low inflation giving the Fed further
scope to ease rates. The current view is
that inflation is expected to average 1.6%
for 2002 and 2.4% in 2003. Avoiding deflation
is a lesson that the USA has learnt well
from Japan. A weaker US dollar combined
with increasing capacity utilisation should
help inflation stabilize rather than turn
negative.
In July 2002, the revised GDP figures for
2001 were announced reflecting three quarters
of negative growth - confirming that the
economy had in fact undergone a recession
last year. Mark Vitner, senior economist
at Wachovia Securities commented as follows:
"
It confirms that this recession in 2001
was not particularly mild or as short as
some folks had thought. We were expecting
at least two negative quarters, and the
fact we had three is a little bit of a surprise.
That helps explain why we're having so much
difficulty generating some positive momentum
right now. The economy was weaker than we
thought."
Lower
than expected second quarter GDP numbers
came in at a 1.1% quarter-on quarter growth
rate. In addition, the first quarter growth
rate of 6.1% was revised down to 5%. Despite
all the bad news, the economy has grown
for three quarters in a row.
It is interesting to note that private businesses
increased inventories by $1 billion in
the second quarter, after having decreased
inventories by $28.9 billion and $98.4 billion
during the first quarter of 2002 and last
quarter of 2001, respectively.
EUROPE
During July 2002 the Euro reached parity
to the US Dollar - for the first time since
February 2000. While this achievement held
a measure of technical importance, it was
significant from a psychological point of
view. This Euro strength was the main factor
contributing to the ECB holding refinancing
rates at current levels. The Euro has risen
by more than 12% against the US Dollar since
the beginning of the year - this has served
to stifle any fears of a rise in inflation,
while on the other hand giving exporters
some cause for concern and prompting them
to consider a shift in productivity. The
benefit from this shift is that it will
force European producers to address one
of the main areas that have resulted in
the Eurozone traditionally trading at a
discount to the United States for so long.
For the tenth month in a row the European
Central Bank kept interest rates on hold
at 3.25%, with the chief economist of the
bank confirming that the bank is following
a "wait and see" policy. With equity markets
having continued their volatile trend, it
is expected that rate hikes are likely to
be off the agenda for the remainder of the
year. This is despite the fact that the
Eurozone PMI (Purchasing Managers Index)
figures continue to point towards economic
expansion. ECB projections for 2002 GDP
growth are currently between 0.90% and 1.5%
- expectations are that GDP will strengthen
further to a range of between 2.1% and 3.15%
in 2003. The ECB is quick to add, "
despite
this rather positive outlook, the assessment
of the short-term dynamics of real economic
activity is still surrounded by uncertainty."
The clean up operations after the recent
floods in Europe are likely to cost hundreds
of millions of Euros. In addition, Germany
has stated that the much awaited tax cuts
are to be postponed due to the funding required
for the flood damage mop up operations -
this is likely to run into figures in excess
15 billion Euro's.
JAPAN
Despite having been one of the better performing
regions this year, the economy in Japan
remains weak. Further reforms are needed,
with existing reforms still being slow to
materialise. In addition, no meaningful
restructuring has actually taken place.
After the closure of Japan's latest parliament
session, Prime Minister Koizumi stated that
the country's stagnant economy might well
force him to relax key reforms. Domestic
spending is extremely weak and consequently,
government spending may be the catalyst
to either return the economy to the 11-year
decline or support the current fragile recovery.
Following the recent performance of Japanese
stocks analysts are becoming more upbeat
about the region. This can also be attributed
to low share valuations in certain sectors,
combined with the increasing excess money
supply. In addition, early evidence suggests
that the longstanding deflationary pressures
that have troubled Japan's economy and financial
system may be diminishing. However, this
news has been overshadowed to a large degree
by the negative sentiment currently afflicting
global markets.
UNITED KINGDOM
The Bank of England, like the European Central
Bank, left interest rates on hold during
the second quarter of 2002 (currently at
4%, and having remained at these levels
since November 2001). Current equity market
weakness, together with recent Euro strength,
were two of the main factors motivating
this decision. The BOE have indicated that
consumer spending is likely to slow due
to "slowing growth in disposable incomes
and the recent sharp falls in equity wealth."
Analysts are of the opinion that the cost
of borrowing is likely to remain on hold
until the BOE have a clear sign that the
economic recovery is firmly on track. In
addition, it is likely that inflation in
the UK (currently at 1.5%) will remain below
the 2.5% target levels for some time.
SOUTH AFRICA
It came as no surprise when the Monetary
Policy Committee increased domestic interest
rates by a further 1% at their meeting in
June 2002, bringing the total rate increase
for the year to 3%. Tito Mboweni cited several
factors that posed a threat to inflation,
including public sector wage increases,
the Rand exchange rate and the high growth
in money supply and credit extension.
The inflation numbers indicate that the
Reserve Bank's 2002 inflation target of
between 3% and 6% will not be met and it
is possible that, despite having had rate
hikes totalling 3% this year, these inflation
targets may well not be achieved in 2003.
There are currently divided views in the
market place about whether or not South
Africans can expect a further interest rate
hike this year - most analysts are of the
opinion that with inflation expecting to
peak in October and then decline moving
into 2003, it is unlikely that SARB will
find it necessary to raise rates again.
However, with the recent volatility exhibited
by the Rand due largely to emerging market
jitters and the effect of the new Minerals
Bill on foreign investor sentiment, this
may not be the case. Another disappointment
was the annual increase in CPIX to 9.9%
in July - up from 9.8% in June - well above
the July consensus forecast of 9.6%. This
was the ninth successive month that this
index remained outside the target range
of between 3% and 6%. The next meeting of
the Monetary Policy Committee is set for
11th and 12th September 2002 and the outcome
regarding interest rate movements is bound
to be interesting.
The much-awaited Myburgh Report on the rapid
decline of the Rand at the end of last year
(some 39%) was released in early August.
The report failed to find any specific reason
for the massive plunge by the Rand in 2001.
In the words of Justice Minister, Penuell
Maduna, "In the main both reports have been
unable to single out clearly the reason
behind the slide in the Rand." However,
Christine Qunta who compiled the minority
report proposed legal action against Nampak
and Deutsche Bank for supposed contravention
of exchange control regulations. Both companies
have denied any misconduct in this regard.
GDP figures for the second quarter of 2002
were released on 27th August 2002. These
figures came in at an annualised 3.1% (above
forecast of 2.7%) from 2.2% in the first
quarter.
The Rand depreciated by 9.84%, 15.26% and
15.99% against the US Dollar, Euro and Sterling,
respectively during the last quarter (1
June 2002 to 30 August 2002).
CONCLUSION
In our last report we stated that two wildcards
in the economy were the price of gold and
oil. At the end of May 2002 the gold price
was 326.55 $ per ounce and ended this quarter
at an unexciting 313.90 $ per ounce, retracing
some 3.87% over the period. This can be
attributed mainly to the US Dollar retracing
some lost ground during the quarter under
review.
The oil price recorded an 18 month high
on 20th August 2002, moving above $30 per
barrel (from 23.75$ per barrel at the end
of last quarter) on the back of increased
concerns that a war in Iraq would impact
on the oil supply. Fuelling these fears
is the fact that the United States of America
has been considering an attack on Iraq for
some time now as this Middle Eastern country
is thought to be harbouring "weapons of
mass destruction". The oil price ended the
quarter at 27.47 $ per barrel (a rise of
some 15.66% over the quarter).
Chief Investment Officer of Matrix Asset
Advisors, David Katz, perhaps best sums
up the prevailing mood in global markets
"Three years ago, you had irrational exuberance.
Currently you've got irrational despondency".
With continuing conflict in the Middle East,
corporate accounting scandals and bankruptcies,
ongoing tensions in Pakistan and fears of
more terrorist attacks in the United States,
there is little wonder that investor sentiment
is currently at record lows. However, the
news is not all bad - below is a list of
projected regional GDP numbers for 2002
and 2003. While the "recovery" is fragile
and not as robust as analysts had first
anticipated, based on current GDP forecasts,
the forecast numbers do not look as bad
as current sentiment perceives them to be.
QUARTERLY QUOTE
"
An economic forecaster is like a cross-eyed
javelin thrower - they don't win many accuracy
contests, but they keep the crowd's attention."
-
Unknown
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.
