It's not often in life you get a second chance

We live in a volatile environment. Currency, stock market and political volatility are all part and parcel of daily life in South Africa. Unfortunately, (and understandably), this volatility contributes to enormous swings in the sentiment of South Africans themselves.

From the heady exuberance of our New Democracy in the mid-nineties to one of the most pessimistic nations on the planet by the late nineties as the inevitable hangover followed, to once again almost blind euphoria by 2003/04 as the Rand strengthened and house prices rocketed. Three years later, house prices are no longer rocketing, the Rand is weakening and with it, national depression set in.

I wrote during August/September about how suddenly the proverbial glass had gone half empty. This was attributed to a variety of factors which included a spike in crime levels, presidential succession (the Zuma factor), a significantly weaker currency, some shocking sport and the fact that it was winter! A lot of additional factors were depressing people, such as seemingly widespread corruption, a perceived lack of any plan relating to AIDS, Zimbabwe and even 2010. These, of course were not new problems and hence the sudden pessimism was largely unfounded.

Stock markets are generally a fairly good barometer of real issues, and interestingly, our market has largely ignored all of the above. The prevailing switch in sentiment seems to have had precious little impact on asset prices, aside from the currency, which was, after years of meteoric strength, due to retreat to current levels anyway.

Interestingly, the depression of the third quarter in 2006 appears to some extent to be lifting; the national psyche seems to be improving, and this can be attributed to a combination of the following factors:

A Strategy on HIV/Aids- We have had years of confusion in terms of policy, which resulted in poor handling of one of the biggest challenges facing our New Democracy, not to mention international embarrassment and damnation. Since the issue was deputised (to the Deputy President and Deputy Health Minster), there has been a refreshing change in attitude and direction.

A Strategy on crime- The one (and only) silver lining to the recent spike in crime levels is that solving crime is now firmly on government's agenda. Although it shouldn't be up to business to solve crime, the involvement of some of the country's top CEOs, with Government, will go a long way to at least pointing us in the right direction. Trevor Manuals increased allocation to extra policing in the mid-term budget will also help.

A Strategy on 2010 - Extra funds made available, combined with a serious strategy from stadium construction to infrastructure development, together with endorsement from Sepp Blatter, means we can now finally visualise a successful hosting of this tournament. Don't worry, it's not going to the Australians!

Presidential succession- fortunately, at least for the moment, the furious debate has settled down. Wait for the fallout from the Shaik sentencing and wait for several other candidates to emerge who are said to be waiting in the wings, some less silently than others.

The fact that senior government intervention (albeit under a fair amount of pressure) led to a successful resolution of the conflict between the ANC and the DA led coalition was a good sign for democracy going forward.

In addition, we've started winning some sport, its summer again and money looks set to start pouring into the country again, as foreign private equity firms identify value which stock market investors seem to have missed as a result of an obsession with commodities.

All of the above, coupled with renewed foreign appetite for emerging markets has seen the market up 32% for the year so far, and the Rand retracing some of its losses.

So what should investors be doing?

Firstly, from a currency perspective, its not often in life you get a second chance. After falling to R7.98 to the US$, the Rand has strengthened back to far more palatable levels. While it may strengthen further, remember the importance of offshore diversification.

Secondly, the JSE All Share Index is on a forward PE of roughly 15x. While this is neither expensive nor cheap, opportunities certainly remain for good stock pickers. Most of our equity funds are trading at significant discounts to the market. Once again, expect a more pedestrian effort from equities than the massive returns of the past three years, but barring any abnormal events, we're not in dangerous territory yet!

Jeremy Gardiner, director, Investec Asset Management