Are we are sinking or were you just thinking?

The state of the nation, according to Richard Simpson- chief strategist at RMB Asset Management, is that there has been volatility in the emerging financial markets this year, and it increased meaningfully, although its effect on the South African market has been shielded by the weak rand to some extent.

Simpson was speaking at the Momentum Wealth investment conference in the North West province last week.

Interest rates may well continue to increase, although this is all happening for the right reasons, which was not the case in the past. These hikes reflect a vibrant economy, says Simpson.

Commodities
The commodity cycle is confusing a lot of investors and the talk of the super cycle is starting to do the rounds. Simpson says that we have in fact been in the super cycle for the past seven years.

Turning to the USA he says that reflation has fuelled the commodity cycle, and added to which there will be pressure from rising interest rates, and these will eventually cause the cycle to abort.

Back in SA Simpson says that we are a country running on shortages at the moment- witness the PPC shortage announced recently, followed closely by an announcement from Lefarge, one of the other suppliers, who said that they were also importing.

Interestingly enough on matters cement, 40% of all cement poured is poured in China, due to urbanisation.

Over time the developments in China will support commodity prices, and the potential is huge, when one considers that at the moment the USA consumption of oil is eight times more than that consumed by their Chinese compatriots.

Simpson predicts that there should be a 300 bps interest rate hike- from bottom to top, and we have seen 150bps. He expects one more hike before year-end, and a relatively muted view going forward.

Equities will remain a positive and buoyant equity class, and equities generally perform well in a rising interest rate environment. The relative attractiveness of the other asset classes has diminished somewhat, when compared to the 60s and 70s, although the returns will be single digits, and not the double digits seen previously.

The only blight is the current account deficit. The issue is that we are not in a unique position. We were there in the 60s and 70s. The same is the case in Australia. The cycle must remain supported and there should be an appetite for emerging markets.

The valuations for emerging markets are not as compelling as they were. The gap of South Africa compared to developed markets is not as attractive as it was in the early 90s.

The global investor has a problem- due to risk issues and the risk discounts- could lead to a re-rating, as investors look for less risky investment decisions.

The rand
The rand is under-valued relative to purchasing power parity for the first time in four and half years. The rand never stays on the rend line, either overshooting as it did in the 80s, or under-shooting, as it currently is doing.

Global investors are starting to see SA as a high beta country, and there may be a sent in the air that its time to sell off, although it is unlikely that the rand will continue to weaken. The rand will stay in the fair value range going into 2008

Editor's thoughts:
* Nothing like a strategist to put the economy into perspective. The information is valuable when considering investment options, but remember to consult a specialist when you clients are looking for specific investment opportunities