Investment Environment May 2013

18.06.13

Apart from a difficult April, equity markets have continued to trend higher on a virtually uninterrupted basis. This is probably in anticipation of the global economy reaccelerating in the second half of 2013, notwithstanding weaker indications from the Chinese PMI <50. Fortunately inflation remains low allowing most central banks to keep interest rates equity friendly. All developed economies have benefitted from a policy of monetary easing and this extremely low interest rate environment makes equities with dividend yields > interest yields very attractive.

The positive trend in equity markets is illustrated in the MSCI Index. What is interesting is this is supported by what is called the VIX Index (also shown above) which is a measure of the volatility. The implication is that volatility has declined significantly since 2009 which indicates that investors have increasing confidence in markets, ie the higher the volatility the bigger the price movements and the less certain investors are of market pricing – this is not the case currently! Furthermore the valuation of global equities is not exorbitant but is moving to the average of the last two decades although this is in an unprecedented low interest rate environment.

Against this international backdrop, South Africa, while exhibiting the same confidence in equity markets (ALSI40 reached a new high in May of 37,511), has weathered the political and union upheavals but the Rand has been the shock absorber as foreign investors withdraw. The economy continues to grow at a pedestrian pace with the Q on Q GDP at 0.9% vs expectations of 1.6%. The numbers indicate the pressure on the economy and the unions should take note of the damage they are causing. The major disconnect in respect of the JSE, and for that matter international markets, is the continued rise of equity markets but commodity prices remain weak. If the world is going to continue to recover, the implication would be better commodity prices as production increases. This argument is even more compelling in respect of South African mining stocks, because of the weak Rand, but the labour disputes and political over-ride will have to stop.

In general, Douglas Investments remains positive on equities and while patience will be required in respect of resource stocks, the market outlook continues to improve and interest rates are expected to stay lower for longer.

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