Living in a PCC World

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By Jeremy Gardiner

It’s been a very difficult year. But no matter how hard the first half of the year was, the third quarter was worse. And it’s by no means over yet. The extreme market moves of the past two months led to a new term being phrased, appropriate across the globe. “PCC”, post credit crunch, is the new world we live in, and this new world is very different from the old.

There was a time when China was emerging, and every business worldwide had to re-examine their business model to ascertain whether they were working with, or competing against the Chinese, with the latter option obviously requiring an adjustment to strategic direction. Similarly, in the wake of the past two months, as the storm passes, companies have had to reassess their business model. Financial services firms, banks, insurers, etc, were hit first with the resultant drop in revenue. The phase now, and indeed the phrase now, is that the crisis is moving from Wall Street to Main Street.

What does this mean?
As the financial world cuts back on staff, projects and generally every expense that can be spared, all the affiliated industries are affected. Advertising, property, IT, etc. all lose contracts and have to start retrenching people. In addition, the shortage of credit puts many projects on hold, and any asset that requires a loan in order to purchase it, (cars and houses in particular) are vulnerable from a pricing perspective. In a world where the wealthy from the US to the UK, from Russia to the Middle East and China, have lost significant portions of their wealth, luxury goods and retailers are next to be hit, as consumers cut back their spending. This in turn then hits the residential property market and so the slowdown continues. South Africa will be less affected, but by no means unaffected.

We recently wrote how newspaper headlines would follow suit as the crisis moves from Wall Street to Main Street. The stock market has taken its pain, which is not to say that negative days are over. However, the wild panic selling, often by leveraged hedge funds caught on the wrong side of a trade, is probably over.

Government intervention in the form of the bailout packages has been sufficient to restart inter-bank lending, thereby allowing the system to start healing. Now we have to wait and watch as the crisis moves to the economy. Already, newspaper headlines are less preoccupied by the stock market movements and increasingly covering the economic deterioration. Expect this to continue. Growth slowdowns, recession, earnings collapses, retrenchments and rising unemployment – all paint a pretty bleak picture for 2009.

Many seem to believe President Obama can fix the world. Although he will inject fresh vigour and respect into the White House, he cannot simply fix the crisis. The Federal Reserve and US National Treasury, along with central banks across the world, will have to keep fighting that war.

There is obviously also an expectation that a President Obama will be great for Africa. Although Africa generally prefers a Democrat, it is interesting to note that while Clinton spoke more on Africa, Bush in fact did more. President Bush was a good friend to the continent, leading Kofi Annan to remark recently that he hopes President Obama would be as good a friend to Africa as was his predecessor. Expect Obama to be protectionist towards US farmers, which is not great for Africa. However, also expect him to be supportive of good behaviour on the continent and quite tough on bad behaviour. On balance, he will be good for Africa because he has an interest, and because he is likely to take a firm stance.

So, as we head towards the end of 2008 – a year which we described in January as “The year of living dangerously” – expect stock markets to start stabilising into a boring and uncomfortably bumpy phase. There is a fair amount of money waiting to enter into equity markets, but investors are reluctant to commit funds to a market capable of losing 8% in a day.

Once investors feel comfortable that we have entered the soggy, sideways phase, expect two things to happen. Firstly, the selling should stop; and secondly, funds will start filtering into the market, which should start cementing a foundation from which the broad-based recovery can begin during the first half of 2009. It could happen sooner, as markets are oversold and historically from current valuations good returns have been made. However, a V shaped recovery is unlikely in an environment of significantly deteriorating economic data. Markets do not like constant reminders that the economy is deteriorating. However, stock markets are forward-looking; they have already adjusted in anticipation of the economic deterioration. Once they can see an end to the current downturn – the length of which is up to the authorities (there seems to be general consensus that we are looking at an economic downturn lasting a year to 18 months) – stock markets will start pricing in the recovery well in advance.

Source: Jeremy Gardiner, Investec Asset Management, November 11, 2008.


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