Market uncertainties continue to play out
The sovereign-debt-and-growth crisis has been plaguing the world economy since early 2010. Over this time, it has focused investors’ attention on, amongst other things, the clear insolvency of Greece, the liquidity challenges facing Italy and Spain (although both are still solvent), the massive debt burden (and recent rating downgrade) of the USA and concerns about slowing economic growth rates across the developed world, in China and elsewhere. But the black hole at the centre of the economic universe is the indebtedness of European governments.
The possibility of a default on Greek government bonds has raised concerns about other European governments’ abilities to make good on their commitments to lenders. This has in turn led commercial banks to stock-pile cash at the European Central Bank, rather than risk lending it to each other. When this happened in 2008, governments pledged to help their banks. But this time governments are themselves the primary cause for concern.
We can see the impacts of this uncertainty when we look back on recent currency movements and asset class performances.
Over the 12 months ending on 30 September 2011, the Rand weakened by -14.10% against the US Dollar, a move which increased offshore dollar-denominated returns by 16.31% when converted back into Rands. However, this overlooks the drama of the last quarter, during which the Rand fell by -16.60%, giving a 19.70% kicker to Rand-denominated offshore investment performance.
But perhaps the most startling development over the quarter was the leap in prices of world government bonds. As investors fled into these perceived safer havens, yields fell and the Citigroup World Government Bond Index rose 3.17% in USD (23.49% in rand terms).
The following chart of the prices of this and other key financial market indices (all in Rands) illustrates the drama of the last few months:
The weaker Rand means that South Africans will pay higher prices for imported goods and services, which will in turn see the consumer price index of inflation continue to head towards the upper end of the Reserve Bank’s 3% to 6% target range. The latest StatisticsSA figure for year-on-year consumer price inflation is now 5.34%. Any ongoing tendency of foreign investors to repatriate their capital, selling Rands in the process, will reinforce this trend.
Finally gold, whose rising price is a useful gauge of sentiment in times of uncertainty, ended the quarter at 1,624 dollars per ounce, an increase of 24.06% in USD on a year before.
Bu it’s far more important to focus on the valuations available in the various major asset classes from time to time, as opposed to forecasts for the future of their associated economies. The chart below is therefore not a graph of prices. Instead it usefully summarises and updates our view of what’s expensive and what’s cheap based on prevailing asset class dividend or income yields.
While the relative standings of the various asset classes depicted here has hardly changed over the past quarter, it’s interesting to see the three categories of equities (local, global developed markets, and global emerging markets) appearing more and more attractively priced. On the other hand, most fixed interest assets and local listed property have become more expensive – a clear polarisation of valuation cases.
One must remain mindful, however, that current valuations reflect deep economic uncertainties that are still playing out. Current market developments should therefore continue to be closely monitored in analysing the valuation opportunities they generate and in assessing the implications for one’s investment approach.
