Has the bear crawled back into hibernation?
How do you measure investor confidence? You could consider their actions as reflected in share price movements on various bourses around the world. Or you could turn your attention to a set of indicators that reflect the robustness of a given economy. In either case, recent developments would have you wondering whether the worst of the global financial crisis is behind us. The talk from the United States (and the rest of the developed world) has turned from financial contagion to so-called ‘green shoots’ of recovery. But this isn’t a signal to plough back in to risky assets.
Alwyn van der Merwe, director of investments at Sanlam Private Investments (SPI), said the question we should be asking midway through 2009 is whether the drought has broken? “Economists the world over are alluding to ‘green shoots of recovery’. In my opinion, one should be careful not to become unrealistically optimistic, said Van der Merwe at an SPI media presentation held in Rosebank, Johannesburg, on 24 June 2009.
Green shoots or doom and gloom?
A number of economic indicators suggest the recovery is underway. According to Van der Merwe, “local inflation is slowing and interest rates are significantly lower.” This should have a “positive impact on economic activity [and] reduce the attractiveness of cash as an investment.” Local resources companies have responded well to improvements in prices for base metals like copper and iron ore too. “Commodity prices stabilised and appreciated from their lows after a complete collapse in the second half of last year,” said Van der Merwe. However, commodities are still trading well below their highs, and there are suggestions the strength is due to Chinese stockpiling and speculative trading rather than fundamentals.
Share prices have shrugged off concerns over earnings which extend beyond the banking and financial sectors. Van der Merwe notes that S&P 500 firms in the US reported an average 31% decline in earnings in Q1 2009 against the same 2008 period. When you strip bank and financial companies from the mix the average decline is virtually unchanged. This trend is playing out in South Africa too. Shares in the mining and manufacturing sectors are echoing the softer earnings forecast for banks and financials. The reason is consumers are under tremendous pressure. In South Africa we’re struggling with record levels of debt (as a percentage of disposable income), while net household wealth is declining. Tight credit conditions (due to bank fears about bad debt levels and the recent National Credit Act), retrenchments and sticky consumer price inflation make matters worse. In the US – where consumers account for 65% of GDP – the focus has shifted from spending to saving.
Another contradiction to those predicting a strong economic recovery is global growth forecasts. The May 2009 consensus outlook for global growth through 2009 is the worst in some time. The United States’ economy is expected to contract by 3%, the UK and the Euro zone by around 3.5% and Japan by 6%. South Africa will probably contract by between 2% and 2.5% for the full year. The good news is recent upgrades to GDP growth forecasts for China and India.
What should investors do?
Van der Merwe offered some advice for prospective equity investors. The most important message was that equities should only be added if investors had the capacity to do so. He suggested two conditions for equity investments in current market conditions. “Firstly, investors should not storm into the market as volatility is likely to continue, and should rather add on market weakness,” he said. It’s sensible advice in a market where top shares like Anglo American jump by more than 5% per day. The second condition is for investors “not to invest to their maximum capacity” in equities. In other words, investors should remain underweight equities for the time being.
Recent trading updates from South Africa’s banking giants suggest earnings could come under severe pressure through 2009. Add this gloomy prediction to the higher valuations caused by the share price recovery since March this year and you understand Van der Merwe’s concern. He reminded the audience that an asset manager doesn’t radically alter its portfolio holdings overnight. SIM has slowly returned to counters like Anglo American and JD Group over time – an on weakness. “Although defensive shares provide comfort in uncertain times it is important that one should consider shares that have become unloved, but will benefit from an improving macro-economic environment.”
Editor’s thoughts:
Timing markets is always difficult. Unfortunately the majority of private investors tend to be a few steps behind the curve. They sell their shares too early – missing out on months of higher prices – and buy again too late. Have you moved your client’s funs back to equities – or do you prefer a more cautious approach under current market conditions? Add your comments below, or send them to [email protected]
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