Global volatility, local impact

After the excellent growth of the past five years stock markets worldwide are once again volatile, reacting to each snippet of US economic data and the latest bank exposure to sub-prime mortgages.

The bad news is that stock market volatility is likely to continue for some time until the sub prime issue and the resulting strain on offshore bank liquidity has worked through the system. Time estimates vary from six months to a year or more, but further offshore bank sub-prime disclosures seem likely.

The US reacted swiftly to the crisis with the Fed rescue of Bear Stearns to protect their financial system and prevent a domino effect. This was supported by ongoing cuts in interest rates. On the other side of the Atlantic the Bank of England too has been ensuring stability in the UK banking system.

Market shocks

There has been a slew of market shocks not least being US growth slowing to recession like levels, house repossessions soaring, mounting job losses and a general contraction in US consumer spending. Economists are divided as to whether the US is already in recession or teetering on the edge.

Local woes

Locally, we are grappling with power outages, double digit inflation which seems set to go much higher, record oil prices and steadily rising interest rates as the Reserve Bank attempts to rein in CPIX. Our market has been partially protected from events offshore by the resources boom while financial stocks in line with offshore trends have been considerably lower.

Impact on local investors

For financial advisers and their clients, it is a new scenario after the heady resources boom of the past few years. Investors have had very good returns. The average collective investments Resource fund showed 34,2% growth per annum over the past five years, General Equity 32,7% and Small Cap Equity 39,1%. The top fund in these sectors delivered 43,3%, 38,2% and 44,8% growth respectively. But markets move in cycles reacting to economic data. Long term investors will be seeing a pull back in equity prices as an opportunity to eventually pick up stock in sectors which have fallen back to cheaper levels.

Sage investors will be maintaining their debit orders – continuing to make regular monthly investments so as to take advantage of rand cost averaging to boost their returns. They know it is difficult to time the market when world markets once again resume their growth trend.

Protected

Most local investors in collective investments have not felt the brunt of global equity volatility due to a conservative investment policy which has seen the equity content of portfolios generally way below levels offshore. This has meant, of course, that they did not profit fully from the past stock market boom.

Domestic Equities in the quarter just ended accounted for 27% of assets - down from 31% a year ago. If one looks at the figures for 2002, one sees equity content has fallen from 37% to 27% in the March 2007 quarter.

Diversify!

One cardinal principal - which applies whatever the market cycle - is diversification. Portfolios should be well diversified across all the asset classes as well as countries.
The South African Collective Investments industry offers investors more than 1000 funds. These range from low risk money market and income funds to the higher risk equity unit trusts – all of which can be matched to the client’s risk profile.