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Looking at entry points into equities as volatility subsides

20 October 2011 Plexus Asset Management

With the end of the year nearing at a stiff rate of knots, it seems the troika (European Central Bank (ECB), International Monetary Fund (IMF) and European Commission (EC)) also wants to go on early leave and put the Eurozone financial crisis to bed sooner rather than later.

“German Chancellor Angela Merkel and French President Nicolas Sarkozy recently pledged to recapitalise troubled European banks. They also promised to formulate a rigorous plan to solve the European debt crisis before the end of October,” says Paul Stewart, managing director of Plexus Asset Management.

According to Stewart, this last statement surprised many market analysts and investors, as the market feels it is unlikely that a proper solution could be reached so soon.

“Although the troika has been pressing hard to establish some kind of emergency stability fund to prevent the crisis from spreading and to try to calm the markets, volatility has been rampant due to the uncertainty regarding the outcome of the financial crisis in Europe,” says Stewart.

In the meantime, politicians across the globe have been doing their best to kick-start the bigger economies once again with various incentives. “In an effort to boost job creation, President Obama is unveiling a scheme to attract $1 trillion in foreign direct investment to the US over the next five years,” he elaborates.

The South African equity market has not escaped the recent market turmoil. As the accompanying Graph A shows, the South African Volatility Index (SAVI) has shot up since July 2011 as the FTSE/JSE All Share Index was sold down on the back of global uncertainty.

“The SAVI tends to increase significantly during times of uncertainty and normally goes hand in hand with sell-offs in the equity market. The ‘fear’ level, as portrayed by the SAVI, has retreated slightly on the back of the troika’s recent comments,” says Stewart.

“We have also started to see foreign capital returning to our shores in the past week or two after foreigners were big sellers of both South African bonds and equities during September (see Graph B),” he says. “Foreigners have started taking on a little more risk again in their portfolios as they add exposure to emerging markets such as South Africa.”

The latest bout of buying has helped push the local FTSE/JSE All Share Index up strongly over the past week to show a gain of 3%.

Has the bottom in the market been seen and what should investors to do? Stewart believes that while uncertainties still prevail, markets have over the past few months discounted a pretty sombre picture.

“Conservative investors could stay on the sidelines for now in the safety of cash or short-duration fixed-interest securities until the higher levels of volatility diminish. However, this could take a number of weeks, as history has shown,” he says.

“The less conservative investor could begin to follow a more adventurous strategy by averaging in on market declines over the next few months, or when spikes in the SAVI occur.”

Graph A

 

 

Graph B

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