Global Markets – 4th quarter 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