Executive Summary of Stanlib’s Weekly Focus by Paul Hansen

TOUGH QUARTER FOR EQUITIES & PROPERTY ALMOST OVER

  • Q1 of 2008 thankfully draws to a close today.  The FT reports that $100bn has been sold out of global equities, of which 70% came out of US, European and Japanese shares and 20% out of emerging markets.
  • The JSE has done quite well in rand terms, considering all the negative news of global turmoil, electricity cuts, violence, inflation, high interest rates and general pessimism.  The All Share Index has in fact gained about 3% during the quarter (including dividends).  Sure, Resources are up an amazing 18%, but Fin & Industrials are down just 7%.
  • It is the rand that served as the shock absorber, losing 28.8% vs. the Euro and almost 20% vs. the dollar.  So in Euro terms our shares have fared badly.
  • Listed Property has fared the worst, down almost 11% (including dividends), even worse than the downtrodden banks (down 8%).  Perhaps the best opportunity lies with these two sectors going forward.
  • Massive fear and uncertainty on world markets has driven record inflows into global money markets ($140bn in the quarter), leaving money market balances at record levels of $3,500bn.

IS THE FINANCIAL/INVESTMENT WORLD FALLING APART, OR IS THERE SOME HOPE?

  • Uncertainty and risk are currently very high.  The main culprit is falling US house prices (down 11%) and foreclosures.  Until those turn, conditions could worsen.
  • US banks are trading at price-to-book (share price to net asset value) ratios of 1.1, down from 3 a few years ago and the lowest since the early 1990’s recession when banks were being hammered.  BCA research house has upgraded its holding of US banks to neutral because they look so cheap.  Almost one third of European and UK banks are trading below book value, with share prices down 35% in 2008.

SO IS IT TIME TO ABANDON EQUITIES AND HEAD FOR THE “MONEY MARKET” HILLS?

  • Like Africa, investing is not for sissies!  If you want a nice safe investment, then go into money market, but be aware that over the long term cash is actually the highest risk of all because it cannot withstand the ravages of inflation.
  • Is it not true in life as well as in investing that as uncertainty and fear rise, so does opportunity?  The moment of maximum fear coincides, fascinatingly, with the moment of maximum opportunity. 
  • While there are no guarantees in life (except for death and taxes), some indicators point to levels of pessimism being extremely high currently.
  • The great investor, Sir John M Templeton, said many years ago: “To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.”
  • US, European and British shares are trading 15-20% below where they peaked eight years ago.  Wow, what an opportunity!
  • Similarly, SA financial & industrial shares have taken a pounding and offer great value currently.

ECONOMIC WEEKLY

  • Economic news both in SA (inflation rate of 9.4%, highest in five years) and offshore (weakest US consumer confidence in years) has been decidedly bleak and may get worse before it improves.
  • STANLIB is placing a 60 to 40% probability of no rate hike in SA next week, whilst clearly acknowledging the risks of one.  Our view is that a ninth rate hike will do more damage to the country than the converse.