Market volatility to persist
“The first half of 2012 has clearly shown that global economies, especially in the developed world, are still facing serious headwinds,” says Paul Stewart, Head of Grindrod Asset Management. “While growth has been positive and the US housing market is sh
“However, there is little chance of the Eurozone escaping an unpleasant recession as fears about the soundness of the banking system and austerity measures begin to bite into growth,” says Stewart. “The key question for European policy makers looking forward is whether or not they can contain the European debt crisis in the peripheral countries of Greece, Portugal and Ireland, or whether the virus will spread into the relatively healthy core of Germany, France and the Netherlands.
“South Africa will not be immune to a European recession since this is our country’s largest single trading block,” says Stewart. “This could not have come at a worse time for South Africa as internally we are struggling with deteriorating business confidence, labour conditions and policy confusion – especially regarding the issues of mine and bank nationalisation.
“Economic uncertainty and global economic deterioration led the SA Reserve Bank to cut the repo rate by 0,5% to 5% in July − its lowest level in over three decades. Given that global short-term interest rates are likely to remain at very low levels for some time to come, it is likely that South African rates will also remain at these levels and we may even observe another cut before year end if some improvement in data does not materialise,” says Stewart.
“Financial markets are really struggling to interpret the way forward, given the environment in which they operate has little historical context,” says Stewart. “Seldom in our modern economic history have we experienced such aggressive fiscal and monetary policy operating simultaneously with such muted effect. However, without ignoring the obvious economic risks, it does appear that based on valuations good opportunities exist in selected global and South African shares as dividend yields increase and corporate balance sheets are strengthened.
“Global bonds look very expensive and declining developed-world yields have dragged the yields of South African bonds down to historically low levels. Clearly the process of normalising yield curves around the world will require significant upward adjustments in yields, which will lead to capital destruction, but until the deflation risk that is front of investor’s minds subsides, there appears to be almost insatiable investor demand for high-quality bonds, even at breakeven or negative real yields,” says Stewart.
“In summary, we expect the current trend of volatile markets in all risky assets to continue for the rest of the year and into 2013. Some finality on how Europe intends − and is able − to deal with its debt and banking crisis will provide some clues about where we are heading. We believe a new and focused Europe will emerge and the problems will be dealt with in time. We should expect a few nasty potholes along the road, and philosophically we therefore identify assets with good-quality yield as the primary driver of return, combined with compelling valuations when buying assets for our clients,” says Stewart.
