Investment Environment November 2011

15.12.11

Equities are attractive but patience is required
 
Politicians in the developed world are struggling to agree and implement practical solutions to a debt crisis that has existed for many years. The world will recover but the question is how long will it take. Arguably, the risk of investment is at its highest while macro economic decisions are being made but the corollary is that the potential returns should also be there.
 
2011 has been a very volatile year in all respects. To put it into context, we should look back to 2007 when the debt crisis first manifested itself in the USA. Since that time the debt crisis has developed into a sovereign issue which is currently most evident in Europe but unfortunately is also prevalent in the USA. The Euro Treaty is being renegotiated as Germany and France require more “bang for their buck” and at the same time in the USA we see political arguments surrounding the debt ceiling and austerity measures. Effectively, both Europe and the USA are over borrowed and this is well demonstrated by the picture (see downloaded article).
 
Furthermore, the four charts below (see downloaded article) contextualise what has happened in markets since 2007. The graphs above show the equity market crash in the second half of 2008. This has to a large extent been recovered up to 2011 when this recovery stalled and for the last year markets have remained in a volatile state. This is an indication that markets await political outcomes, so as politicians grapple with the problems, markets will continue to wait and see. Until there is clarity on a plan for Europe and the reaction of the US and Asia (most importantly China) is understood, market direction will be difficult to forecast.
 
SA is in an unusual situation as the graphs demonstrate with the recent weakness of the Rand and the sustained strength of the gold price. As International investors withdraw from emerging markets, like South Africa, and take refuge in US Treasuries awaiting political outcomes, the Rand takes a knock. Gold is driven by its “safe haven status” as an alternative to currencies and also benefits being unaffected by politics. To some extent both the Rand and Gold (a major portion of SA reserves) provide South Africa with “shock absorbers”.
 
In all this turmoil there must be some opportunities and world will recover! Douglas Investments believes the patient equity investor will gain superior returns by investing in large cap, well funded multinational companies.

Download Full Investment Environment Article (PDF, 438KB)