US financial turmoil: The return of stability?

As the financial crisis in the United States and Europe deepens and the possibility of recession looms ever larger, investors and even the man in the street are being consumed by an almost irrational fear. However, contends Hannes Boshoff, associate director Transaction Advisory Services, Ernst & Young, those that focus on the fundamental principles of the core business and don’t have to rely on high levels of funding would be in a far better position to weather the current storm.

He also contends that the crisis has a far bigger impact on the United States and Europe than on most other countries. However, there is little question of the influence these countries have around the world in the globalised economy.

Certainly the South African consumers’ pocket has taken a beating in the past months especially where petrol and food prices are concerned; even though the oil price brought some relieve and commodity prices have dropped sharply, the decline in the Rand will require consumers to keep their belts tightened for a little longer.

And, “We are inundated with news from Europe and the US which tends to be strongly influence our perceptions, with little information about other countries to balance our views.” says Boshoff.

The news from the East, he says, is nowhere near as dire as the quagmire into which Western financial services organisations have put themselves. “Recent statements from Singapore indicate that the financial system is robust in the East. Banks have assets which exceed liabilities, capital adequacy is assured and sound risk management policy prevails. Importantly, banks in Singapore are still confident to lend to one another. Reports out of India indicate the same,” says Boshoff.

Worldwide, he therefore contends, the situation is certainly not uniform and on average, it is a far cry from the severity of the situation in the US and Europe.

Continuing, Boshoff says the weak state of the Rand is a concern over the short term, but one which retains an upside. “Where the currency weakness is concerned, one must bear in mind the tendency for international portfolio investors to respond to the global volatility and uncertainty by moving their funds into US treasury bonds, as it is perceived to be the ultimate risk free asset. These investors have to then sell Rands in the spot markets which then results in a weaker currency. This is the same for most of the emerging markets, as they do not have the same swap lines with the US Federal Reserve as is the case with the other G7 countries that can effectively borrow currency from the Fed by providing their currency as security. Given this scenario it is highly likely that once the international portfolio investors have moved their funds the Rand will return to its normal levels.

He says it is perhaps advisable given the carnage on the markets, to watch the real economy rather than the indices. “Watching the real economy shows that the effects of high interest rates, inflation, fuel price hikes and other factors are evident in certain sectors. However, the severity of response which is seen in the markets is absent; the real economy will not and cannot lose, for example, 10% of its value in one day. Business continues to function, people will continue to fulfil basic needs and the real economy continues to go forward.”
Markets, under these conditions, should be viewed as secondary indicators, combining fundamental value principles with supply and demand factors which are susceptible to the vagaries of emotion. “It is difficult to establish if the markets are currently reflecting a clear view of the future. The extreme volatility we currently experience is an indication of the high levels of uncertainty and differences of view. Keeping an eye on the fundamentals of the business may be difficult in such times, but the astute business leaders should not panic,” Boshoff says.

Finally, while market watchers appear to approach the very word ‘recession’ with trepidation, he says this is a practical inevitability – and not necessarily a bad thing. “Excess money supply creates inflation and that creates additional problems. Arguably, the recession has already been delayed for too long and it can’t be put it off forever. Delaying the inevitable with short term solutions is likely to exacerbate the effects,” he says.

“Good companies can survive a recession on the back of good business principles – keeping customers happy, serving them properly and providing the goods and services which continue to be required regardless of whether the economy is bullish or bearish. If anything, now is the time to ignore the noise and focus on the fundamentals. Stability will return but it will take some time,” Boshoff concludes.