Global markets were in an upheaval during the first quarter of 2001, and still, the volatility continues. In periods of extreme volatility emotional reactions and perceptions tend to exaggerate the negative impact on the markets. Those who invested during 2000 may well have been experiencing some abdominal stress during the roller coaster’s sharp dip in the tracks. The question foremost on everyone’s mind is when will the markets bottom out and when will this bear trend end. The extent to which the prevailing negative trends will continue will depend on, amongst other factors, investor sentiment.
In the USAthe Dow Jones Industrial Index shed 8% while the Nasdaq lost 26% over the quarter. Federal Reserve Chief Alan Greenspan cut USA interest rates by 1,5% during the quarter bringing USA rates down to 5%. Many investors and analysts were disappointed with the last 0,50% interest rate cut in March, having hoped for a cut of 0,75%. This weighed heavily on USA and global markets. It is important to remember that there is always a lag between an interest rate cut and its impact on the economy. There has been an improvement in consumer sentiment, which if sustained, may indicate that the negative outlook for consumer spending may be past the worst. Other factors such as benign inflation, acceptable world oil prices and scope for further rate cuts, should bolster investor sentiment. We do anticipate that the USA stock market is likely to remain volatile until the outlook for corporate profits and the economy become clearer.
NEWSFLASH: In a surprise move on 18th April 2001, the USA Federal Reserve cut interest rates by a half-percentage point boosting the Dow by 3,91%, the Nasdaq by 8,12% and the S&P500 by 3,91%. This announcement took place just weeks before the next FOMC (Federal Open Market Committee) meeting scheduled for 15th May 2001.
Stock market volatility, as in all the other markets, persisted in Europeduring the quarter. Many economists and analysts share the view that the European economy is in better form than the economy in the USA and should be strong enough to largely withstand the impact of the current USA slowdown. Most affected by the swings in sentiment were the technology, media and telecommunications sectors. There is a view that interest rate easing should begin shortly, but to a lesser extent than in the USA. There are two important factors that the European Central Bank policy makers will need to take into account when considering interest rate cuts – the first being the degree to which euro-zone growth will be affected by the USA slowdown, and the second, by how much inflation risks are declining.
The Bank of England cut interest rates in the United Kingdom during the quarter under review to 5,5%, adopting a more measured stance than the US Federal Reserve. Lower interest rates, controlled inflation, together with a rise in business and export optimism contribute to a more favourable outlook for the economy in the United Kingdom, although this market has not been impervious to global trends.
The stock market in Japan rallied after the Bank of Japan reversed its August interest rate increase back down to zero. This took place in an environment that exhibited clear signs that the economy, once again, appears to be slowing. Many analysts are of the opinion that the prevailing global economic weakness will continue to undermine the equity market in Japan. Economic growth will only be possible over the long term, if consumer confidence returns and corporate restructuring takes place to make companies more profitable and efficient. One school of thought is that Japan presents a major investment opportunity in the year or two ahead and that it is simply a timing issue. This is not the general view on Japan and we remain cautious of this market until positive fundamentals become evident.
On the strength of the rate cuts in the USA, the Asian markets performed better in January. However, political instability in some countries is definitely dampening investor sentiment towards the Asian markets. The general feeling amongst economists is that whilst Asian companies appear attractively valued, there is an ongoing need for new equity to be issued by companies to bolster their finances. The result of this may, in the short term, temper the current improved performance of this region’s markets but continued restructuring should bode well for the longer-term outlook. Given the existing global economic slowdown and the Asian market’s trend to follow the USA, it would appear that any potential in this market may, for the time being, be eclipsed by the possibility of further volatility and uncertainty.
Once again, as in the rest of the world’s markets, the global slowdown is having its impact on the South African economy. However, the impact on South Africa, as an emerging economy, is far reaching in that the performance of the local market in the short term depends largely on the extent to which a soft landing can be orchestrated in the US. The JSE ALSI (all share index) came off significantly during March, but was able to recover some of its losses later in the month, posting a net 2% loss for the quarter.
Returning to the roller coaster ride – it’s interesting to compare the market volatility experienced locally [see below] with that of the USA in the previous graph over the same period.
Regardless of all the monetary and fiscal policies implemented by the budget (which were aimed at, amongst other things, improving international and local investor sentiment), it will be an impossible task to achieve the necessary growth in the domestic economy without supportive global growth. There are those who are of the opinion that a domestic economic recovery will begin as a result of an anticipated interest rate cut later this year in South Africa (possibly in the third quarter) with further cuts expected in Euroland and in the US (South Africa’s major trading partners). Of particular concern, however, are the periods of continued weakness being exhibited by the Rand. Should this weakness prevail, the possibility of local interest rate cuts later this year will be reduced.
It is at times like these, when global market volatility prevails, that it is easy to lose sight of long-term investment goals. Whilst this is understandable, it is important not to panic and to remember the long-term investment strategy. As mentioned in our recent newsletter regarding market volatility, an annualised 5-year rolling investment period in the USA has only produced 7 negative returns (4 of these in the 1930’s; one in each of 1942, 1975 and 1978) – all other 5-year periods producing positive returns. A 10-year rolling investment period in USA equities has only ever produced one negative return (1939). We reiterate that although further periods of volatility are expected in the coming months, the view over the longer term is that global markets and global sentiment should begin to improve. We are of the opinion that it is the time spent in the markets and not the timing of the markets that makes the difference. Investors who panic and sell when the news is dismal will not be in a position to benefit when markets start to improve.
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.