Quarterly Commentary – June 2009

It’s been an interesting few weeks. The Proteas reached the semi finals of the 20/20 World Cup, Bafana Bafana reached the semi finals of the Confed Cup against all expectations, the Springboks avenged the 1997 series loss against the British and Irish Lions and, since the beginning of March, the JSE All-Share Index gained 24%! All things seem to be going in the right direction. Or is this just the calm before the storm?

There are some that would say the Protea’s lived up to their choker tag, Bafana Bafana were lucky and played the “B” teams, the Boks only won by 5 and 3 points respectively so it was actually anybody’s game, and the JSE has had a short lived bear market rally (where a markets trend is consistently downwards and there is a slight upturn).

Let’s look at the facts:

1. In the 1^st quarter of 2009 the South African economy contracted by 6.4%
2. Inflation, which was 11% last August, is now 8.4%
3. The MSCI World Equity Index looks set for its best quarterly gain since its 1988 launch (up over 22% in the past three months, and up 9% for the year, after suffering its worst quarter on record in the last three months of 2008)
4. Oil is on course for its strongest quarter since 1990
5. The Rand is trading at a new 10 month high against the US Dollar and….
6. The JSE is up 24% since the beginning of March

So what do we have? Is it merely a bear market rally or is it a leap into a new bull market? Unfortunately nobody has that crystal ball. What we can say is that the global equity markets seem to be going through a consolidation phase. Economic fundamentals indicate that the worst could be over. However, this in no way means that we’re on our way to a quick recovery. On the contrary, we’ve got a long way to go and we can expect some setbacks along the way. The credit crunch is still alive and well and the central banks have very little choice but to keep interest rates quite low for some time. That may be one of the major fundamental reasons why equity markets will remain under valued for the short to medium term.

From a South African perspective, we are in a declining interest rate environment (even though the monetary policy committee decided to keep rates unchanged at their last meeting). Historically, equity and property returns are at their highest in a low and declining interest rate environment (outperforming bonds and cash). Therefore, if history repeats itself, the equity asset class should perform better than cash and bonds over the medium term. The asset managers I’ve spoken to (which include Allan Gray, Investec, Coronation and Prudential) agree and are currently increasing their exposure to equity by buying selected shares, albeit with varying degrees of caution. All these asset managers are cautiously optimistic about our economy and share market but warn that it probably will still be a bumpy ride.

One other lesson we can take away from the 2^nd quarter of 2009 is the importance of remaining invested in the market when things take a turn for the worst. Sometimes the hardest thing in the world to do is nothing. Had an investor lost patience and disinvested from the market prior to March, they would have missed the 24% rapid upswing of the JSE over the past 3 months. This upswing has really reduced the impact that the 2^nd worst stock market decline in history has had on clients’ portfolios.