Is the storm over?
Dr Prieur du Plessis (pictured), executive chairman of Plexus group, gives his insights into this all-important question: Is the storm over?
The US and European governments’ decision to acquire interests in banks to prevent a total collapse of financial markets resulted in global bourses (MSCI World) gaining nearly 10% yesterday, with the Japanese bourse rising by more than 14%. Even after this improvement in bourses, equities offer excellent value.
From a valuation perspective as measured by the price-to-book ratio, equity markets as measured by the S&P 500 Composite Index are at the lows of 1987 and 1990 – far below the average of the past 30 years.
The storm might be over as the governments of the major powers address the root of the problem, but the debt crisis hurricane has left its trail of destruction with the dykes of the global financial system burst. Nothing in financial markets will ever be the same again.
Global trade has largely come to a standstill since the middle of September. Huge inventories have built up at manufacturers, especially in Asia, as the cost of credit skyrocketed due to banks no longer wanting to lend to one another. Similarly, large inventories have built up at mines and processing plants as shipping has come to a halt.
On the financial front the days of quasi-money created by exotic derivatives are over and ‘risk’ has become a dirty word. This raises doubt about property markets, in developed countries in particular, where there is already a large oversupply of mainly residential dwellings.
The most significant negative impact is on emerging economies and in particular on the investment front. Much of the quasi-money has found its way to financial markets in these economies in search of higher yields, but risk aversion will probably result in the sharp increase in the risk premium on debt in emerging markets being maintained for some time, until the large banks become eager to lend again.
The major fall-out of the debt crisis is that the world is in recession, which will probably deepen as the path of destruction widens. Unemployment, budget deficits, the impact of the collapse of equity prices on personal wealth, and the effect thereof on spending over the next year or two, await us in the coming quarters.
Developing countries are likely to be hardest hit. Commodity prices will in all likelihood return to levels that prevailed before the general collapse in the second half of September. The underlying economic conditions and outlook have deteriorated to such an extent that the oversupply of commodities and subsequent decline in demand will result in further downward pressure on commodity prices.
This, together with considerable pressure on balances of payments, and high risk premium requirements in respect of debt financed by foreign institutions, could result in the currencies of developing countries remaining under pressure. Interest rates in developing countries are likely to remain high for longer, compared to developed countries, due to a lack of capital. This will deepen the coming recession.
Although the storm may be over and equities in general offer good value across the globe, it may take a while before optimism returns to the markets and the bull again has the upper hand. The past three weeks have been a trying time for portfolio managers and the next 12 months will test the mettle and adaptability of portfolio managers and investors. Although some measure of caution may be prudent, we believe this is a good time to get your toes back in the water.
The table below shows yesterday’s strong movements on several global stock markets:
(Click on image to enlarge)
Source: Plexus Asset Management (based on data from I-Net Bridge)
