Investment Environment February 2011


As we complete the first quarter into 2011 the momentum of 2010 has continued to allow equity markets to improve. The JSE has shown considerable volatility particularly when compared with the New York Stock Exchange as shown by the Dow Jones Index. This is demonstrated in the graphs.

The South African economic backdrop has continued to remain positive but to an extent this has been absorbed by the Rand strength which has made South Africa as an emerging market appear expensive in hard currencies. Interest rates remain low and it is likely that this will continue for the rest of 2011 as we have seen both the CPI and PPI decline this year which combined with Rand strength relieves pressure on the Reserve Bank.

Internationally the recovery in equity markets has been underpinned by monetary policy in Western economies supporting consumer demand. Unfortunately the turmoil in the Middle East has caused oil prices to spike which, if sustained at this high level, will dampen consumer consumption.

While the equity market recovery of 2010 to 2011 remains intact, the risk of a setback breaking the trend is increased due to high oil prices. However, economic prospects remain favourable and the value of risky assets such as equities remains attractive particularly in developed markets such as the US. It would appear investors are taking a wait and see approach expecting the risks of an oil crisis to dissipate. Emerging markets have been popular largely due to the stronger economic growth, interest rate carry available out of the US$ and Euro as well resource bias which is likely to be the first inventory build up as production demand builds against economic recovery. But, in light of the stronger emerging market currencies, such as the Rand, international investors are likely to be more selective. We should therefore remain in large capitalisation stocks with a Rand hedge element as the core of the equity component of a portfolio. The situation surrounding oil needs to be carefully monitored.

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