Investment perspectives for fourth quarter 2009
The global economy has bottomed, says Dr Prieur du Plessis, Plexus group chairman. There is definite evidence of expansion in both the manufacturing and non-manufacturing sectors and all indications are that this is likely to continue, at least for the next few months.
The recession in the US has officially ended with positive quarter-on-quarter growth being reported in the third quarter. However, the outlook for the US economy remains rather subdued as the US consumer remains under siege. Unemployment continues to rise but indications are that the shedding of jobs has slowed significantly. Although consumer sentiment remains weak, the significant rise in equity prices is expected to lead to a gradual improvement in the coming months if equity prices hold onto their gains since bottoming early this year.
With the US CPI inflation rate expected to return to positive levels by December and with the Fed’s stated policy not to hike interest rates in the foreseeable future, the real federal funds rate is likely to turn negative despite positive economic growth. The change from a restrictive to a stimulatory monetary policy is likely to spur consumer spending, especially in the light of rising inflation expectations. This is expected to be the second leg of the upturn in the US economy. However, business investment, the third pillar of sustained economic growth, will remain absent for years to come and is likely to lead to a sub-par economic recovery.
In Japan deflation continues to be a major concern for the economy as consumers are more inclined to save than to spend. In the short term, however, GDP growth in Japan may surprise on the upside as positive year-on-year growth could emerge in the first quarter of next year.
Europe and the UK have also turned the corner, but the economic situation remains fragile. On the positive side, China’s stimulus package to pull the economy out of a severe slump has had a major impact as the economy shifted gear in the third quarter, resulting in a V-shaped recovery. The prospects for next year have improved as the mild recoveries in the US and Eurozone are likely to increase the external demand for China’s goods.
Given their dependence on the export of commodities the outlook for emerging economies in general continues to be more dependent on the development of especially the Chinese and the US economies than on internal fiscal and monetary policies. The significant recovery in commodity prices has alleviated the pressure on the commodity-exporting emerging economies. Current indications are that the upward trend in metal prices is likely to continue through end 2009.
The near-term outlook for gold remains positive as current indications are that the global inflation holiday will end as early as the first quarter of next year and the focus will continue to shift to gold as an inflation hedge. With the US economic fundamentals currently weighted against the US dollar, further dollar weakness is likely to support the dollar price of gold in the short term. The expected recovery in the global economy and commodity prices over the medium term renders gold to become somewhat less attractive relative to other commodities.
The new bull market (in a secular bear market) in global equities remains intact. The risks are high, though, as the market remains vulnerable to economic or earnings surprises on the downside. Any disappointment or crisis of some sort is likely to be matched by major sell-offs in the market as the status of the bull market will be questioned. Risks on the upside are equally high. Stronger-than-expected economic circumstances or earnings surprises on the upside may catch the perennial bears and Doubting Thomases unawares.
Emerging-market equities and especially resources-oriented equities are likely to maintain a stronger relative performance towards the end of the year and into next year given the outlook for commodities, but at higher volatilities.
Bond yields in mature markets are currently volatile and influenced by factors such as inflation expectations and government buy-back programmes. With the global economic expansion expected to continue in the coming months, bond yields in mature markets are likely to rise further. Higher yields on mature-market bonds next year are likely to put paid to further declines in emerging-market bond yields.
The South African economy in the third quarter is emerging from the worst recession since 1992/1993. The outlook for the SA economy has improved significantly and the recovery is expected to continue well into 2010 on the back of further expansion in global manufacturing.
SA equities, as in the case of other emerging-market equities and especially resources-oriented equities, are likely to uphold their stronger relative performance in US dollar terms towards the end of the year and into next year given the improved outlook for commodities. In the light of the expected increase in volatility in commodity prices the ride may start to be bumpy, especially for commodity-related equities. Domestic economically cyclical equities that will benefit from improved local currency strength are likely to outperform.
Although South African bonds currently offer excellent defensive value relative to other emerging-market bonds, South Africa’s sovereign risk has been in a rising trend since the start of 2007, probably due to a myriad of factors. The upward trend in sovereign risk may limit a significant re-rating of SA bonds.
In summary, Du Plessis believes equity markets (especially emerging markets) still offer the best long-term return potential. However, the risks in the short term remain high and it is most probably better not to overweight relative to benchmark for now.
