Commentary on quarterly ACI statistics

The past quarter saw the arrival of a much predicted market correction. Sparked by weaker US housing prices leading to problems in the subprime sector of the US loans market, global equity markets were heavily punished.
 
What is interesting about this correction is that the impact on stock markets was reasonably short-lived. In particular, emerging markets seemed to have shrugged it off, with the MSCI Emerging Markets index up 29% to the end of September, versus the gains in developed markets of only 9%.
 
The reason for this, which is well illustrated by the strength in domestic flows over the last quarter, is that globally, markets are reasonably priced. Investors are clearly wary of sitting on the sidelines for too long.
 
Once again it was interesting to see the majority of flows going into domestic funds, despite recent strength in the Rand, which has seen the currency extend its gains to the same levels at which it was trading in 1997.
 
Given that the subprime carnage will continue to wreak havoc in global markets for some time to come, investors need to analyse how they felt during the recent correction. If they felt a measure of discomfort, that is absolutely normal. For no matter how much a correction is predicted, one is always going to suffer a level of discomfort when markets are going down. If, however, investors panicked during the recent correction, they need to seriously re-examine their investment portfolio.  Investors should also never act during a correction. In order to sleep better at night, make sure of two things:

1)   that you have correctly identified your risk profile, just how aggressive or conservative should you be with your portfolio. This is based less on how much you want to make than how much you are prepared to lose. Often a third party, such as a good financial adviser, can help you identify your risk profile without your emotions getting in the way.

2)  Once you have correctly established your risk profile, create a portfolio of investments appropriate to your risk profile and use that portfolio to sail through any volatility the market may throw at you.
 
Going forward, although the consumer party is slowing, growth and earnings will be driven by both corporate and government infrastructural spend. This, combined with 2010, should see reasonable growth and market strength over the next three years. Dont expect the 40% + returns from equities that we have seen over the past three years, but the new growth wave should certainly see the SA equity market continue to deliver solid inflation-beating returns.

Jeremy Gardiner, director, Investec Asset Management