STANLIB's Weekly Focus 22 Spetember 2008

EXECUTIVE SUMMARY OF STANLIB’s WEEKLY FOCUS

AMIDST THE GLOOM, SOME SUNSHINE?

• Americans have caused the massive financial mayhem we’ve witnessed this past year, so it makes eminent sense that they fix the problem.
• Their potential $700bn US bank bailout, whereby they aim to remove the “toxic” or sick mortgages from bank balance sheets and hold them in a separate company, sounds good.
• The key is to remove panic which was threatening to destroy the US financial system.
• Are we seeing the end of the bear market in global shares? Impossible to say as yet, but bear markets do frequently end amidst huge volatility and maximum fear, both highly visible last week.

INVESTORS WERE PRICING IN MASSIVE RISK

• BCA Research note that by Wednesday last week (with the MSCI Emerging Markets Index down 42% in dollar terms), investors were pricing in massive risk and maximum pessimism. Share valuations were similar to the 1998 Asian crisis and the 2002 US corporate scandals.
• Past evidence shows that such extreme levels of risk aversion (as seen last week) seldom last long. Put another way, the future may show that shares were darn good buys last week before the big rallies.
• The single biggest influence on PE ratios in emerging markets is inflation. As inflation rises (and interest rates), so do PE ratios fall (along with the shares). With inflation peaking in most countries, the scene is set for interest rates to decline and PE ratios to rise over the next 18 months, allowing shares to recover too.
• A recovery in resource shares would of course help too.

A REMINDER OF THE PAST 48 YEARS IN SA

• Equities have been the best performing asset class over most time periods longer than 5 years.
• The chance of a negative return in the equity market over any 4-year period has, historically, been zero.

ECONOMIC REVIEW

• US consumer inflation fell to 5.4% in August, while core inflation remained at 2.5%.
• The US leading indicator fell for the third time in the past four months. It has a good track record of forecasting economic growth and is telling a bleak story for the next twelve months.
• While the US Fed left the Fed Funds rate unchanged at 2%, China lowered its rate by 27 basis points for the first time in six years, indicating a desire to maintain economic growth.
• SA investment spending growth slowed to 9.1% in Q2 from 16.9%. However, fixed investment activity reached 22.4% of GDP, the highest in 24 years.
  
  

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