Sub-prime concerns hammer global markets
Global markets have exhibited extreme volatility over the last few weeks as concerns over the US economy send investors running for the hills. And despite the rosy outlook on the domestic economy South African investors remain at the mercy of waning global sentiment.
While South African equities have benefited from huge foreign capital inflows in recent years; the same funds will quickly disappear as international market concerns escalate and put foreign investors under pressure to lighten their exposure to emerging markets. It appears as if South African investors will have to join the rest of the world on a white-knuckle stock market ride in coming months.
South African equities mirror heavy falls in Europe and Asia
The Johannesburg All Share Index fell by more than 1, 100 points to post a 4.18% decline on Friday. This move was in sympathy with weaker European and Asian markets which included a 3.71% fall on London's FTSE Index on the same day.
Friday's big move is indicative of the volatility on the domestic market at present. A quick look at the last four trading days reveals that share prices on the JSE have been climbing or falling as much as 3% each day. The Index is down 2, 886 points since its recent high of 29, 962 and is exhibiting a sizeable correction in the longer term bull market trend.
Panic selling was prompted by renewed concerns as to the extent of the US sub-prime debacle. European banks were among the stocks hardest hit. "Investors don't know which banks have got exposure (to the credit problems) and the extent to those potential losses," said Henk Potts of Barclays Stockbrokers in London.
Although shares on the US Dow Jones Industrial Average are slightly higher over the last week investors in the US are likely to remain jumpy. Analysts predict that the US economy might face a credit squeeze as a result of the sub-prime fiasco which will be extremely damaging to the global economy.
South Africa cannot turn a blind eye
Apart from concerns over flighty international investors, South Africa also has a number of pressing domestic issues to address. Top of these is the cost of borrowing in the local economy. With interest rates expected to rise again in August we might soon be facing a mini credit squeeze of our own.
The impact of higher interest rates could finally weigh on the domestic economy and place GDP growth under pressure. Some early signs of a slowdown have already exhibited in declining manufacturing and mining production numbers.
Regardless of the many positives in the local economy, South Africa will not be able to side-step the uncertainty in global markets as revealed in recent stock market activities. The knock-on effect of problems in the US will be felt around the globe.
Best to take a longer term view
At the beginning of 2007 most stock market analysts were cautiously optimistic about prospects for the JSE. Many trumpeted a 15% return from equities for the year. Ask them today and they will probably be less sure. "Sit on the fence for a while and see where this mess goes" might be a guarded response.
The volatility reflected in the market over the last month or so reinforces the importance of viewing equity investment as a long-term activity. Di Turpin, CEO of the Association for Collective Investments says: "Historically equities have shown the best performance of any market sector. Local investors need to invest in line with their goals and be less concerned with short-term market cycles." In other words, don't panic about the day to day changes in stock prices.
Turpin's comment follows the release of statistics which reveal that South African investors' exposure to equities remains light in global terms. "Particularly for the longer term investor, the asset allocation figure of some 32 percent for equities is out of line and as a result clients have not benefited from the stock market boom of the past three years," says Turpin. The global average is 42%
Editor's thoughts:
Stock market investors tend to overreact to short-term movements in the prices of shares. This is quite understandable, as no investor likes 'losing' 4% of the value of his equity portfolio in a single trading day. Do you receive more calls from clients when stock markets enter turbulent times? Send your comments to [email protected]
