Category Investments

Keep a long-term view in the current fragile global conditions: OMIGSA

19 August 2011 Old Mutual Investment Group (SA) (OMIGSA)
Peter Brooke, head of the Macro Strategy Investments boutique

Peter Brooke, head of the Macro Strategy Investments boutique

Rian le Roux, OMIGSA chief economist

Rian le Roux, OMIGSA chief economist

SA growth still seen over 3% in 2011 – recession not likely

“Despite the current difficult market conditions, investors should keep a long-term view when it comes to their investments and stick with the solutions they’ve chosen in line with their long-term goals. It’s important not to panic and sell now, when markets are weak or volatile, as this will simply lock in losses in a portfolio.” This is the advice of Peter Brooke, head of the Macro Strategy Investments boutique at Old Mutual Investment Group (SA) (OMIGSA), who manages a range of multi-asset class portfolios for both retail and institutional investors.

“Stock markets around the world, including the JSE, are under pressure from the high level of uncertainty in global economic conditions, and investor sentiment is particularly fragile,” explained Rian le Roux, OMIGSA chief economist. “Renewed concerns over slowing US and global growth, plus the European debt crisis, continue to knock the market, and every new piece of negative data is sparking a sell-off.

“The biggest risk to the global economy right now is that sustained market panic could itself trigger a recession as falling asset values seriously dent consumer and business sentiment. This, in turn, could cause cutbacks in household and corporate spending, exactly the stuff recessions are made of. The risk to the global economy has clearly increased sharply, although we remain of the opinion that the risk of another deep global slump, such as the one that followed the 2007/8 sub-prime crisis, is small.”

In South Africa, le Roux says, we will not be able to escape the negative impact of the slowdown, but the economy is still likely to maintain growth of a little over 3% in 2011. “This represents a continuation of the recovery seen over the past two years. Although our exports will be impacted, there is still strength in consumer and government spending which will help bolster the pace of growth. We do not expect to see a ‘double-dip’ recession here.”

With risk aversion high among investors, the rand (like other emerging market currencies) is likely to remain under some pressure while global market panic persists, after having been strong for an unexpectedly long period, cautions le Roux. However, with SA’s fiscal metrics relatively healthy, local interest rates still relatively high in a global context, and precious metal prices benefiting from the global panic, an outright slump of the rand, as occurred in the 2008 crisis, seems relatively unlikely. Indeed, assuming no rand slump, local interest rates are likely to remain at current levels for longer than previously expected. The start of the up-cycle in local rates seems likely to be postponed into 2012.

For investors, Brooke remains confident that equities – particularly offshore - offer the best real returns over the long-term. “We’re in for more volatility ahead in the equity markets, until investors can see some resolution over US growth and European debt issues. Until then, investors should ignore the short-term dips and stay focused on having well-diversified portfolios that meet their own risk and return requirements. Historically equities have proved to provide the strongest returns over the long term, despite experiencing occasional serious downturns, and they remain attractive.

“We have been adding equity exposure in several of the portfolios we manage in response to the recent downturn,” he adds. “However, as I’ve said previously, it’s also not the time to start taking on big bets. The recession risks are rising, so diversification remains key. Investors should consult their financial advisers to ensure they are positioned appropriately to meet their long-term goals.”

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