Quarterly Comment – September 2009


The Stock Market

The last 3 months have been interesting from a market perspective. The All Share Index (ALSI) has risen from a touch over 22000 to 25000 (a 13% increase). As can be seen from the graph below, it is also interesting to note that 12 months ago the ALSI was sitting at almost the same level as it is now, right before its quick slide down to its lowest level in November last year.

Since its low of 17814 in November last year, the ALSI has risen almost 40%! There is nothing irrational or mysterious about the way the SA equity market has behaved. The equity market is forward-looking and has been pricing in the improving global growth prospects into 2010. In this instance, as in almost every other past recession, the stock market starts to improve rapidly once there is reasonable certainty that the rate of economic decline is starting to slow. The rally in local share prices, bonds and the rand has largely been a function of global investors piling into risk assets in search of higher returns.


The US Dollar and the Strong Rand

The market as a whole has become increasingly neurotic about US government finances. Doubts are starting to emerge as to whether the US is in fact a financial safe-haven, and whether the dollar will continue to be a stable store of value. The Rand has appreciated by 63% against the US dollar since 22 October 2008! Whether or not the Rand can maintain its current strength is up for debate. Our view is that the Rand is overvalued and should weaken over the next 12 months to more sustainable levels.

Since the sub-prime crisis broke in July 2007, the role of gold as a store of value has become increasingly prominent, with its dollar price rising from US$660 to around the US$1040 mark at a time when almost all other commodity prices have declined significantly. Underlying the shift of investor sentiment towards gold is concern about governments generally abandoning fiscal and monetary discipline in an attempt to stabilise global economic conditions, and, in particular, worries about the dollar as the world’s reserve currency. Simply put, the gold price is going up because there is investment demand (a rising gold price attracts more speculators) and a global economic crisis.

 
What does this mean for you?

The ideal situation for a South African investor going forward would be strong US economic growth. Unfortunately, the huge debt burden is likely to stifle growth for a few years to come. This, together with lower company earnings, will place pressure on equity markets. The bottom line is that we expect continued short term volatility, with a possibility of a small downward correction. As your portfolio is diversified across all asset classes (not just equity), it will minimise the impact of a possible correction. We do not recommend making any significant changes to your portfolio at this point, as this would be attempting to time the market which is an impossible task. In conclusion, we have to continue to remain patient (as we have over the last 12 months) as things will get better over time.