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A cautious view for the next two years

30 April 2007 Gareth Stokes

Ashburton Investment Management held their Annual Investment Conference for 2007 at various locations throughout South Africa in April. Their presentation focussed on the impact of globalisation on the economy and the outlook for various emerging market e

Speakers at the presentation included Ashburton Director, Ian Ling and Ashburton Investment Director, Nick Lee. In this article, we will concentrate on some of the views of world renowned economic commentator, Anatole Kaletsky. His presentation focussed on the short-term outlook for global markets and economies.

Kaletsky noted that most world markets have been rising consistently over the past four years. In fact, a number of world markets were at, or close to, their all time highs. The rest of his presentation focussed on answering the following question:
"Can this bull market really continue much longer?"

Three great secular trends demonstrate economic strength

Kaletsky believes that the answer to this question is a definite "yes". He believes that the cyclical threats present in the market at this time will be brushed aside by the longer term trends visible in the global economy. This means that international markets are nearing another sizeable economic upswing.

"To see why I am so confident about this economic upswing we've got to go back briefly to the fundamentals," said Kaletsky.

"The first as I've mentioned already is globalisation and economic stability. The second, less widely recognised, is that the financial revolution around the world has expanded access to leveraged credit and borrowing in a way that has never been seen before and third, obviously, is that the developments in emerging markets have brought in three billion new producers and consumers into the global system."

These trends have a number of years to run and contribute to Kaletsky's belief that we are not at risk of another global recession by the end of the decade. This is good news for South Africa, which will be able to focus on infrastructure growth as it prepares for the 2010 soccer world cup. The lack of any international economic downturns will assist South Africa in maintaining its 5% per annum GDP growth - and hopefully boost employment.

A different view on debt

Many analysts express concern about rising levels of consumer debt. This concern is international, and does not only apply to South Africa. Kaletsky believes part of this debt can be ascribed to the sound economic conditions which currently prevail.

He says, "Taking on more debt is a perfectly rational response to the reduction in economic volatility. Moreover, this debt is now much more readily available than ever before because of financial deregulation."

Innovative financial products also mean that individuals are able to use financing techniques that were previously only available to large companies.
Specific risks to continued growth

Kaletsky mentioned and discounted three obstacles to continued growth. The major concern going forward is whether or not the current growth in global equity markets is sustainable. A growth collapse would be triggered by a serious dent in corporate earnings. Most companies continue to post strong or consistent earnings, and this problem should not be of too much concern in the near term.

Another concern, of particular relevance to South Africa is that of rising inflation and interest rates. This threat cannot be totally discounted. We have, however, noted that the South African consumer is fairly resistant to interest rate changes at present. The big hikes we saw toward the end of 2006 seem to have had a minimal impact on consumer spending - and have done little to slow down economic growth either.

Finally, Kaletsky talked about the possibility that equity valuations were becoming unreasonable expensive. Again, this fear was discounted - as a large part of higher valuation was warranted by continued or sustained corporate earnings. On this matter, Kaletsky concludes, "equities are certainly not expensive today, in the way that they were in 1999."

It appears all systems go for the current bull market in equities. Investors and investment can remain confident in maintaining high equity allocations in their portfolios in the near future.

Editor's thoughts:
It seems that the view for domestic and international markets remain good. Do you agree with the analysts that we will not see another global recession until after 2010? Send your comments to



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