2009: Pitfalls, Possibilities (and a little) Perspective

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By Shaun le Roux

This will be my last Angle for the year, and looking back I must reflect on what a year it has been!

For a long time, Alphen had been warning that the (excessively) good times on equity markets were not sustainable and that clients should start factoring in much lower future return expectations from their share portfolios. Things were looking good for the JSE up to just before mid-year, but boy have the wheels come off. Even the most ardent bears out there did not predict the speed and extent of the collapse, first in the credit markets, then the stock market, and now global growth.

Asset managers around the world are feeling particularly battered, bruised and tired right now – bear markets are never fun.

Putting 2008 behind us now, what could we look for in 2009.


If you don’t like gloomy newspaper headlines, particularly in the financial press, don’t buy a newspaper in 2009. It is going to be a tough year. On the global front, the recessionary conditions will be further entrenched and unemployment statistics will continue to climb.

On the local front, consumers will get some breathing space in the form of lower inflation and lower interest rates, but they won’t be rushing out to buy new cars or flat screen tv’s. Tough global economic conditions are going to weigh heavily on South Africa and job losses are likely to be severe – particularly in mining and manufacturing – and it won’t be an environment that lends itself to happy spending sprees. Inevitably for tough economic conditions, particularly when the banks are not that keen to lend, businesses will go bust.

While markets will rally hard at some point in this bear market, volatility will be around for some time. Volatility goes hand in hand with uncertainty, and we feel that it will be some months before we have greater clarity of how deep and long the economic downturn is likely to be.

Global financial markets are currently in the trenches fighting off a fearsome beast called deflation. If price deflation takes hold, like it did in Japan twenty years ago, we suggest you consider hibernation as if that happens, it will be a long cold winter.


The good news is that deflation is likely to be staved off. This is because the benevolent forces that are governments and central banks around the world are collectively trying to spend their way out of this mess. The baton of “spender of last resort” has been passed from the US consumer to government and they look like they are coming to the party.

The long term impact of the explosion in government borrowings and expanded money supply remains uncertain, but at some point the various stimulus packages will anchor the financial system and provide a base from which the panic in markets can subside. If some of the fear subsides, risk premiums will subside somewhat and markets will recover some of their losses.

Equity market valuations are already very attractive. In many cases, it is difficult to see shares getting much cheaper barring a calamity such as company bankruptcy or the end of the world as we know it. This is particularly the case in an environment of low and declining interest rates. We all should know by now that the best time to buy is when fear abounds and we also know how much cash is sitting on the sidelines in the perennial anticipation of timing to perfection its entry back into riskier assets.

Markets could well go lower, but at current levels your opportunity to extract good future returns is looking very good.


The good news for South African investors is that even after the JSE’s 40% decline, they are still well in the money over the past five years. The All Share Index is back to levels it was last at in early 2006. From the 2003 levels, the JSE has still delivered a 23% annualized return to date. In dollar terms, the decline has been more pronounced (59%) and we are back to late 2004 levels.

On the other hand, spare a thought for US investors who saw their markets climb for almost five years to late 2007 before the 46% decline thus far which has taken them back to 1997 levels. The 2003 to 2007 rally has proved to be a sizeable bear market rally!

The long term themes that underpin South Africa’s economic opportunities still hold true. A long term super cycle in demand for commodities is underway and South Africa stands as a significant beneficiary, though current focus is on the shorter term fall off in global demand. In addition, don’t lose sight of the impact that the expansion in infrastructure will have on the economy and its capacity in the long run. Don’t forget either the not so small matter of World Cup 2010 – besides being a boost to our national morale, the financial spin-offs will be significant.

Equity investors that are left holding their head in their hands with a growing sense of despair should also take perspective from what is currently being priced into markets – a large amount of very bad news. One needs to remember that the world has lived through many bear markets and, without fail, when it appears that all hope is lost, they start to rally.

From me and my family to you and yours, I wish you all happy holidays.

Source: Shaun le Roux, Alphen Asset Management, December 5, 2008.


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