Global stock markets experienced a precipitous, nerve-racking fall during the first few days of August. “This decline was fuelled by a number of poor economic reports, especially the non-farm payrolls data out of the US and global GDP data that are starting to soften,” says Paul Stewart, managing director of Plexus Asset Management.
“Added to this, speculation levels surrounding the outcome of the European debt crisis shot up amidst the seemingly unending ripples that this evolving story has been sending through the world’s equity bourses.”
After a decline of 8,9% during the first week of the month, the FTSE/JSE All Share Index made an attempt at a bottom. However, according to Stewart, the damage overseas was far more severe, with the MSCI World Index and the MSCI Emerging Markets Index both declining by nearly 14%.
“European markets suffered the worst declines, with the French CAC losing 18,2% and the German DAX 21,6%. This all happened in the space of only eight trading days,” says Stewart.
According to Stewart, investors are currently extremely jittery. “At the slightest hint of negative news, equity markets take the punch as risk-off trades dominate the market.
“The latest sell-off left investors a bit shell-shocked to say the least, as some blue chips were among the hardest hit, especially banking stocks. Investors would be hoping that this was indeed the bottom of the fall, but if history is anything to go by, even lower values might still be in the pipeline in a very volatile trading range in the medium term,” he continues.
Stewart says that historically these severe sell-offs do not normally correct overnight. Rather, some time is required for market players to digest the avalanche of bad news and the possible outcomes.
“In fact, quite a bit of time might be needed as the Greek default issue is being drawn out by some big European players, especially the European Central Bank. Whilst a Greek default would not be desirable (if not probable), a default in Spain or Italy would have a much more severe effect on the markets.”
Stewart believes a ”calmer” trading environment after the big falls recently may still be some way off. “Unfortunately, for those wanting to get back into the market, the message of the South African Volatility Index is that the market has yet to calm down from August’s extraordinary volatility and may not yet be safe for investors to jump back in,” he says.
“While the South African Volatility Index is a relatively new technical consideration, it is already evident that once it starts hitting higher levels, the equity market is in danger of falling.”
The barrage of negative economic data emerging globally and domestically has also put the South African Reserve Bank in two minds about rates going forward. Despite the fact that inflation is edging higher, the market is now starting to price in a possible rate cut at more than a 50% chance.
“Lower interest rates should act as a boost for equities as cash is more freely available for transactions and purchases, effectively boosting the economy, company earnings and share prices. Hopefully this will act as a buffer against possible further downside for the domestic equity market,” says Stewart.
So what are investors to do? “Conservative investors should stay on the sidelines for now in favour of the safety of cash or fixed-interest assets until the high levels of volatility begin to diminish,” says Stewart.
“As history has shown, this could take several weeks. Investors who can tolerate risk could follow a more aggressive strategy by averaging their available cash in on any big price declines over this period.”
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