WOW!! What a quarter this has been!! It seems that all the gains in global and local markets made in the last quarter ending February 2011 have been eroded by the tragic earthquake and subsequent tsunami in Japan and the potential threat of nuclear meltdown. Global markets dipped sharply when the news broke but just seemed to be recovering when a certain dictator of a North African oil-producing country “dug his heels in” in defiance of his people’s and the international community’s pressures to step down. And then there’s Greece….
There is a now famous quote : “Every morning in Africa, a gazelle wakes up. It knows it must run faster than the fastest lion or it will be killed. Every morning a lion wakes up. It knows it must outrun the slowest gazelle or it will starve to death. So, it doesn’t matter whether you are a lion or a gazelle… when the sun comes up, you’d better be running.” Perhaps these days we could paraphrase this quote, replacing the gazelle with a PIG (as in the likes of a Portugal, Italy or Greece), and the lion with a BEAR, as in a bond vigilante. What we are witnessing going on in the European hunting-grounds is fascinating to say the least, and despite all the twists and turns that those PIGS may take, there is no escape from the Bears. Someone IS going to get hurt, badly. When will this happen? Who knows, and with the likes of these PIGS, there is probably still some lying, er…, running to be done.
The Greek contribution to European GDP is small. So why are global markets wobbling? The answer is contagion, or the fear of the Eurozone’s first sovereign default spreading out and eroding credibility in the broader European financial system. Greece is manageable, Portugal and Ireland also. But Spain isn’t. If one goes, they all will go – that’s the nature of the beast.
To make matters worse, the “rescue party” is in disorder. Germany wanted investors to share the burden. ‘Not likely’ said the European Central Bank, preferring a voluntary resolution, whereby Greek bond holders re-invest (agree to re-profiling the debt). Meanwhile the IMF threatened to withhold further support until it gets assurances on further austerity measures. These measures, which judging from the rocks flying in central Athens and the deep partition in Greek parliament, are mighty unpopular. In the fight of its life, how Greece must wish the Spartans were still around.
To quote from the 70’s hit movie: “Grease is the word – it’s got mood, it’s got meaning!”
There were obvious highs too. The Royal Wedding of the (11 year-old) Century lifted the spirits in the UK and retail sales soared during April – and interest rates were raised by 0.25%. Germany continued to power on – exports up, GDP growth above expectation in the first quarter and the jobless rate the lowest it has been in 19 years. Japan has started to rebuild with construction orders up 45% and China’s inflation is over the 5% mark – a sign of a growing economy. US economic figures remain depressing – particularly housing numbers. What will happen when QE2 stops at the end of June? South Africa came through the local elections relatively “unscathed”, contributing to a “rosier picture” in the international investor’s eyes and keeping our currency strong (and potential rampant inflation at bay for a while longer)!
In summary, this past quarter, both local and global markets have experienced tremendous volatility. Up one day, down the next! Most experts expect this trend to continue for the short-term while the global economy grinds out growth amid chaos. So, what do you as a South African investor do then?
There is no doubt in a lot of financial circles that South African investors should be taking advantage of the Rand’s strong position in global currencies by buying into global markets at a time when most offshore assets are still at depressed prices – a “buy low, sell high” strategy. Finlaw has been advocating this philosophy too for quite some time now. The markets are cyclical and there will come a time when the Rand does go back to fair value again and then we can re-look at offshore investments and the future prospects thereof. The Rand will be “stronger for longer” so a patient waiting game is needed to extract GOOD value from offshore investments.
In terms of local investments, interest rates are poised to go up and our JSE appears over-valued, but still providing some opportunities. Guaranteed financial products with guaranteed interest rates seem to be flooding the market to try and tap into the “fear of the unknown” factor (which is not always the wisiest option considering that all forecasts are pointing to a rise in interest rates going forward). So, again, patience is the key to unlocking value from local investments. There is also one underlying lesson that should have been learnt from the 2008 global financial crisis and which should dictate any investment strategy:
Get investment advice from reputable professionals and DIVERSIFY! DIVERSIFY! DIVERSIFY!
Time in the market – not “timing the market” – is a sensible strategy for good investment returns.
In conclusion: a table that highlights the above and to hopefully put all equity investors at ease:
What can be gleaned from this table of 51 years of data? Well, returns from equity have historically been between 12% and 15% – so don’t expect more from this asset class into the future. Most importantly, though, is that the longer you stay invested, the less likely you will suffer a capital loss and the more likely that you will achieve your return expectations.
If you have any concerns or questions regarding your portfolios, please call us.
Kind regards
pp: Rowan Allpass – June 2011 (Sources: Atlantic Asset Management, Ashburton Asset Management, Mayfields)
