Investment Environment November 2013

08.01.14

Equity markets have been very strong in 2013 and in particular performed outstandingly in the latter half of the year. As shown in the graph below, equities have come into their own, showing a return of 18% to the end of November whereas other asset classes have lagged. This in fact, should be the case, taking into account the risk of equities.

 So what is the risk that equities carry? Because we are generalising with regard to the asset class, this would have to be an external event affecting equities in general rather than being company specific. The most obvious external event would be if the FED (US Federal Reserve Bank) decides to “taper” it’s QE (Quantitative Easing) programme which has really been about “pumping $85bn a month of liquidity into the US banking system” which has the following effect: 

  1. QE creates money for banks to onward lend into the economy. It is difficult to determine the extent of this often referred to as “money velocity”, but at least it seems to have had the desired effect.
  2. With the Fed purchasing US$40 billion of mortgage backed securities and US$45 million of US Treasuries, this has the effect of keeping yields / interest rates low.
  3. With short term interest rates at zero, borrowing costs are very low which means investors are encouraged to borrow to fund another asset class that should provide them a better return eg equities. It also encourages consumers to acquire on borrowed funds which is stimulative to the economy.

 Recently the equity markets have taken fright when tapering of the QE program is threatened as it did in June this year.

 A knock-on effect in the SA market might be the implications of strong economic growth, causing Fed tapering and/or other global central bank tightening. The negative consequence for emerging markets and in particular South Africa, is the vulnerability to capital outflows. The South African current account deficit is funded largely by portfolio investment (market investments) rather than direct investment which makes the South African quoted markets (in particular equities) and the Rand susceptible to a correction.

While Douglas Investments displays a cautious stance to equity markets above, it must be remembered that the event of tapering will only occur if economic growth is robust and strong. In the longer term, economic strength is good for business and therefore equities so any correction as a result of tapering should be short term and taken advantage of.

Nelson Mandela (1918 – 2013) – A Tribute

As with most fellow South Africans we mourn the passing of Nelson Rolihlahla Mandela. He was a truly great leader and changed South Africa for the better. There is no doubt that the likes of Douglas Investments and its clients would not be carrying out the business of investment in South Africa had it not been for this great man.

Rest in peace Madiba.

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