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This is no disaster, no collapse its part of the cycle

12 June 2006 Angelo Coppola

Wayne McCurrie deputy CEO at Advantage Asset Managers looks at the main topical issue is the commodity cycle what happens in this cycle will ultimately affect the markets. Locally the good news continues, and the country has broken out of the trend band.

Although markets are not driven in a vacuum, every now and again they do go mad. In terms of the local markets McCurrie says that investors shouldnt stay for the last dance, as the harshness of the light at the end of the last song shows that your partner and yourself as not as pretty as you initially thought.

The current market levels are essentially a one in 20 year phenomenon. The massive bull market locally has come to an end, although the market is not structurally over-valued, and is exactly at fair value levels.

And while there is a solid underpin of value in our domestic shares the banking sector, the minister of finance is worried about debt levels, as its now at its highest levels ever.

The last collapse was precipitated by an interest rate hike, although times are very different, and despite the fact that credit creation is running at very high levels, the interest rates are at low levels. It is highly unlikely that the market will collapse by 30% to 40%.

A 10% to 15% correction is more likely, he predicts. Fair value markets can fall, but its unlikely that they will collapse.

He does say that the next interest rate movement is upwards by between 2% and 3% in the foreseeable future between two and four years.

Turning to the housing prices, he says that we have seen the best in our housing market. We wont see a collapse, and interestingly enough it took the country 25 years to recover from the last collapse. It is unlikely that there will be another collapse.

Keep in mind that housing prices must increase by 7% per annum for the investor to break even, due to transaction costs.

Turning to commodities, McCurrie says that gold is and always will be a commodity, although its very emotive. Commodities go up and down, its a cycle. Its really a demand and supply issue. The question is also whether the cycle will continue to go up. The point is that there is always a reason for any movement up or down.

The point is will that continue. In a bull market there is always good news and the inverse is true in a bear market.

Remember this comment: This time its different. When in fact nothing has changed. Although this should be seen as a warning sign because the comments come at the peaks or troughs.

The copper price is an example of a potential bubble it has climbed in price from $4000 to $9000 in the space of 90 days symptomatic of irrational behaviour, and bubble ready to burst.

This is one difference this time round, in terms of the upward movement. Individuals are investing directly into the commodities. There is no pent up demand, they are not using the commodities.

Its a fact that eventually prices will fall, due mainly to an increase in inflation, locally and globally. There is no unmitigated disaster on the horizon.

McCurrie says that long cycle proponents are wasting investors time. In fact investors should be looking at two year cycles and analysis. The short term cycle of two to three years is what drives the markets not 20 years.

Turning back to the rand, the behaviour of the local currency has changed and this is due to a structural change, because the local finance ministry has broken the back of inflation.

The old days of high inflation rates are long gone. And simply looking at the charts, there is a close correlation between the rand and commodity prices, and a typical cyclical process.

Turning to the real drivers of the local economy McCurrie says that the biggest issue is credit creation. No number of Gautrains or Football World Cups will help if credit creation drops.

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