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Investors navigating troubled economic times

Finding value and safe bets in financial markets is trickier than ever, as investors weigh their options.

The trail of uncertainty left by the great financial market collapse of 2008 has triggered many investors to either hold their heads in disbelief or to seek short profit opportunities. How can one interpret such parabolic swings and keep one’s head above water? One can only really consider a lesson learnt when those hopeful bets have returned enduring benefits.

Few of us persevere safe with the hope that recurring salaries, pension contributions and the time value of money will eventually make us financially secure. For the rest of us, only time spent playing in the investment field and understanding the economic environment can really yield that bumper crop.

Consider the impact that influential countries have on the global economy. The data emanating from the economies of the USA and China, what I refer to as the ‘swinging states’, sends ripples through world markets. World Bank economic data suggests that the BRICS (Brazil, Russia, India, China and South Africa) group of emerging nations weathered the 2008 storm better than most. Africa, the so-called ‘commodity dugout’ of the West, is now currently emerging on investment radars for those seeking growth prospects for the next decade.

In 2013 we have seen the market pendulum swinging from reaching new lows and recently to exuberant all-time highs. These polar movements should raise red flags concerning the health of the world’s economy. If we consider the above broad categorisations, we could analyse and perhaps make calculated and enduring investment decisions. The waning US economy began showing signs of growth in the latter half of 2012 and early 2013, creating hope for world markets. By current estimates, as reported by the BBC economic desk, growth in the US economy is said to be 2.5%.

What then is causing every meaningful stock market index to rocket? Surely not overeager investors? Can this signal the start of confidence and jumpstart the fragile, frayed world markets we find ourselves in? Or have we come too far too fast? History suggests that an exit from recessionary markets is not rapid, but rather following stages of sporadic anaemic growth. This precipitates interest rate cuts by central banks to stimulate economic growth. The safe haven of bond yields loses its lustre in favour of a now cheaper equity stock, with a headroom capacity for growth, driving up markets, in some instances artificially so. In a laissez-faire economy, what goes up must come down.

We turn our eyes to the UK and European markets to assess if there are any reasons to celebrate. Growth in the UK as reported by the BBC economic desk is said to be at 1.2% and it suggests a similar outcome to the US, although it has a burden weighing it down (the Eurozone debt woes). Germany is called upon to keep providing austerity packages for smaller nations who are battling to install meaningful industrial growth and curb rampant unemployment. The single currency Eurozone, developed as an economic and financial union, is now seemingly unattractive, and the situation is further exacerbated by political instability. Recent events included a mass exodus of cash from the banking systems of Cyprus, prompting investor anxieties. A hasty recovery does seem a tad optimistic.

Further east, market commentators are heavily reliant upon the juggernaut Chinese economy to steer the world back to normality. The World Bank data suggests that China’s GDP grew on average 9.6% p.a. from 2008 to 2011, by far the most stable and well-maintained economy. This attracts every market commentator watching for any movement in China’s GDP and manufacturing data, published quarterly. Any deviation below the acknowledged 8% benchmark expectation is treated with dismay, and propels shockwaves through to large-cap equities and resource companies.

For the past few decades China consumed commodities available from almost every country they could trade with – gold, steel, iron ore and beans, to mention but a few. High demand leads to high prices and therefore commodity prices in Africa have risen to unparalleled heights, which was great if you were an investor in the commodities sector buying low and selling high, but, sadly, the consumer suffered, paying for a higher cost of living. If we consider the free market economy paradigm, a correction must arise. In 2012/2013 we witnessed a noticeable decline in the commodity sector within South Africa, specifically represented by a poor resource index on the JSE, perhaps suggesting an oversupply.

Have we placed China on a pedestal, perhaps even higher up, with our imperial dinnerware? We are left with the remaining BRICS nations, Brazil, Russia, India and South Africa, the smallest “bric”. The recent BRICS 2013 summit suggested that the emerging nations account for 21% of world GDP, and forecast 5% growth for 2013. These economies have weathered the global storms better than their former colonial superpowers, and they have well-regulated banking systems. They have skills and commodities to offer in return for infrastructure and investment. Analysts keep embracing historic data and the sovereign states, but it does seem that perceptions need to change in favour of potential.

Where does that place South Africa? In a rather peculiar spot, I should say. A country with 3% GDP growth forecast in 2013 as per the World Bank data is marginally lower than their sibling BRICS nations, but significantly better than most. It is plagued by wildcat strike action, rampant unemployment and negative perceptions in the sectors that are significant drivers of South African GDP, which have hampered or stagnated any sign of recovery. Investor confidence dropped as a result, and a sell-off of equities in the commodities sector ensued. This was followed by a downgrade of SA’s sovereign rating, as well as that of its banks by ratings agency Fitch, citing a weakened operating environment.

It seems that a kick-start to the economy is needed, because sustained negativity will relegate us from being considered an emerging nation. Global economies have called for rate cuts, and that remains a possibility for South Africa. Upside factors do however suggest that it’s not all doom in our domestic economy. Growth catalysts include political stability, leadership, robust macroeconomic policy, strong banking systems, high investment in infrastructure, health care and education, and open but regulated trade policy. South Africa is positioned as a gateway to a continent which is rich in resources, and as a strong partner to other emerging nations. One must ignore the overreacting negative sentiment in the short term. In comparison to a growing African continent and a fragile West, it does seem as though SA can emerge victorious, provided we address the above matters. ❐

Author: Premal Ranchod CA(SA), MPhil (Environmental Management), MAcc (Computer Auditing), is Investment Banking Product Controller, Standard bank.