Global markets to remain choppy through 2009

Last year the market reminded us that it’s not a one-way-bet higher. After five years of consistent inflation-beating returns the JSE All Share Index ended 2008 a sobering 26% lower – 47% if you measure your wealth in dollar terms. A quick look at the cou

The local market performance reflects the gloomy economic conditions that played out in the US and Europe through the course of 2008. And the latest news from the Western world dashes any hopes of a swift recovery! Despite the euphoria generated by the election of Barack Obama, the first African-American to preside over the United States, the world’s largest economy is in serious trouble. The financial contagion has morphed from the ‘technical’ arena of sub-prime and liquidity crunch to the ordinary man-in-the-street. After almost four decades of spending the US economy higher, the consumer is tapped out. December sales were the worst on record since 1992 – slipping for the sixth consecutive month. It’s hard to predict a short-term recovery for retailers given the country shed more than two million jobs last year.

Europe is unsteady too

Things aren’t much better in Europe. Love them or hate them, the ratings agencies have been hard at work in recent weeks. They’ve warned a number of European Union members of pending ratings downgrades. Ireland, Greece and Spain are suffering with deteriorating public debt as the credit crisis extends its reach This news hasn’t escaped international organisations like the World Bank and IMF. They have repeatedly downgraded expectations for global economic growth for 2009 and beyond. The World Bank has warned that global production could contract for the first time since World War II. And here’s where South Africa’s misery starts.

Although our domestic economy remains fairly robust we’re at the mercy of the world economy for a number of reasons. Plummeting demand for our exports is one. But what’s really hurting the country is the massive drop in commodity prices. How bad is it? To get a feeling for the problem, consider platinum. Trading at more than $2 000 an ounce in the first quarter of 2008 the price of the precious metal has since slipped to well below $1 000. Slower economic growth has stunted the motor vehicle industry which accounts for most of the demand for platinum and its group metals. It’s a pattern that repeats for all base metals.

Demand for finished steel products is slipping too as major construction projects are put on hold. South Africa’s steel giants are already cutting production and jobs in an effort to maintain profitability. And until the global economy picks up they’re going to struggle. Over the next 12-months we’re going to learn how big a role resources play in our economy. As mines shelve their capital expansion projects many other sectors of the economy will feel the pinch. Construction companies will see their order books shrink. And any gains to consumer-dependent shares due to interest rate cuts and lower fuel prices will probably be offset by soaring unemployment.

Should investors dive for cover?

We’ve painted a rather gloomy scenario in the preceding paragraphs; but there’s reason behind our madness. Investors must appreciate that the ‘recovery’ predicted by so many analysts for 2009 might take some time to play out. And we think there’s a real possibility that the market will trend softer before reversing its losses late in the last quarter. We might even see negative real returns from equities for the full year!

What should investors do to weather this storm? Adrian Saville, Chief Investment Officer of Cannon Asset Managers believes local equities offer “highly attractive returns.” And that means that those who are brave enough to invest through the current market downturn will be handsomely rewarded over the next few years. He bases this assessment on a study of the “Graham and Dodds Price-Earnings Ratio” for South Africa for the last 20-years. The current reading of 13.2 times is approximately 20% below the long term average. According to Saville this means that “South African equities are in bargain basement territory and represent compelling value for investors who have the temerity to push aside the gloomy forecasts for 2009!”

Editor’s thoughts:
It’s difficult to motivate investors to consider equities after last year’s 26% bath. Of course if you follow the age-old investment adage to “buy low and sell high” then the best time to buy is when sentiment is at its worst! Do you have the resolve to buy South African equities during the current economic downturn? Add your comments below, or send them to gareth@fanews.co.za