JSE unemotional to global woes

As the global economy struggles to digest subprime carnage, falling US housing markets, a perpetually weak dollar, a slowing US consumer and record oil price highs, the JSE continues to power ahead, up 22.8% year to date*.  (Not to mention a massive 37.4% over the past twelve months!)
 
The subprime saga looks set to continue for some time to come.  Expect another six months of corporate admissions regarding subprime exposure and losses, all of which will keep global equity markets jittery.  While jittery however, we remain comfortable that the US Federal Reserve will "do what it takes" to avert any crisis that appears.  The US housing market should continue to bleed while the excesses unwind, which means you will probably see further rate cuts in the US, which will further upset an already very depressed US dollar. The potential of a further cut in rates has not gone unnoticed by US and global equity markets, which see not only relief for the consumer, but a potential boost in economic growth.
 
Despite all of the above, the JSE has powered ahead.  While the consumption party that has raged in SA over the past four years is slowing, the growth baton has been passed on to the corporate sector, which is finally spending, and to government, whose massive infrastructure programme over the next three years will underpin economic growth and earnings going forward, and which has to an extent been underestimated by equity markets.  In addition, on a forward PE of 13.2, the SA equity market remains reasonably priced.
 
What is also interesting about equity markets this year is that developed world economic problems have thus far not contaminated emerging economies as is traditionally the case. The MSCI Developed World Index is up only 9% in US$ this year, while for the same period, the MSCI Emerging Markets Index is up nearly 30%.
 
Obviously emerging markets are still subject to contagion; however, the fact that they haven't been affected yet illustrates the strength of their respective economies, reasonably priced equity markets and a confidence in the US Fed's ability to respond to problems.
 
Given that the outlook remains uncertain, there are numerous balanced/managed funds with varying levels of equity exposure available for cautious/conservative investors. Dont avoid equities although the equity outlook is bumpy, from a pricing perspective they remain reasonably priced and exposure should be based on each particular investors risk profile.
 
* as at 30 September 2007

Jeremy Gardiner, director, Investec Asset Management