JSE: buckle up and trust your instruments

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By Adrian Clayton

Like an inbred obsession, pilots never stop watching, listening and touching. Great pilots draw on all their God-given sensory and cognitive abilities to master an activity they love. As we all know from the number of flying incidents dominating press headlines currently, a lack of awareness in the air is very dangerous, but so too is acute sensory overload. Overload occurs due to an over-receptiveness to airplane noise and movement as well as being too responsive to cockpit and external environmental dynamics. This can lead to over-flying the plane with potentially devastating consequences.

Considering the current ‘noise’ levels in markets, the flying analogy takes on a very real meaning. The risk of sensory overload and the danger of making life-changing (in this case financial) decisions have been heightened. On the one hand, akin to an aircraft’s stall warning system warning of imminent danger that requires immediate corrective action, the bears are forthcoming with highly persuasive arguments creating doubt in even steady investors’ minds. On the other hand, as is the case with an aircraft’s speed, altitude and attitude instrumentation that can normally be relied upon, the bulls continue to offer logical investment arguments that call for non-emotive responses to the dissonance. Sadly, in the heightened confusion, the reliability of these instruments is usually brought into question. The confluence of negative factors very often steers the unnerved investor into the realms of sensory overload where emotion and fear supersede learned behaviour and clear judgement. This tends to be a time when you fly on the seat of your pants and not according to what you have been taught.

At present the degree of negative newsflow seems unfettered. The media is awash with sub-prime blues, staggering oil prices, a local electricity shortage, genocide in Kenya and Iraq, the resurgence of the Taliban in Afghanistan, a global recession, the falling dollar, collapsing profits of local companies, the rise of communism in South Africa the list goes on and on. This, quite ironically, is in stark contrast to the waves of press euphoria that gushed only six months ago. What was then newsworthy was synchronized global growth, the de-coupling of the emerging world from the few financial troubles emanating from America at that time, the strength of the rand, an untouchable Asia and so on and so on. The question that must be asked is whether the world could have changed so radically in merely six months?

One can never arrogantly dismiss the possibility that right now the globe faces a serious economic challenge that possibly even rivals the frightening historic events of yesteryear such as the collapse of the Roman Empire, or more recently, the Great Depression or the collapse of the Gold Standard. If this is your view, then selling every share you own is both justifiable and sensible.

However, we do not subscribe to this doomsday scenario and believe rather that the collaborative and concerted efforts of central banks around the world and their accompanying government fiscal labours will revive and re-energize the global economy. This will prove no smooth ride, but calls for brave and opportunistic investing. Many South African companies are being priced as if they are operating during the dark old days in South Africa and to us this is simply unwarranted. In addition to low ratings, there is the real chance that in the year ahead, the SARB will be forced to respond to the weakening domestic economy by starting to lower interest rates. If history is anything to go by, the efficient JSE with its many interest-rate-sensitive stocks will rebound before the Central Bank moves. This is not a time to be out of the market!

In conclusion, we would suggest that this is a time to remain fully committed and strapped-in, to ignore the noise and trust your instruments. A bumpy flight is inevitable, but the spoils are likely to be well worth the fear of boarding.

Source: Adrian Clayton, Alphen Angle, February 1, 2008.

OverSeas Radio Network

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