In today’s newsletter we take a look at current market and investing conditions and where there could be opportunities; and with so many low confidence levels we have some thoughts on confidence –what makes a confident investor?
Bad economics isn’t always bad markets
2009 – confidence and optimism down; opportunities on the up
While not wanting to start the year off on too gloomy a note, we have definitely been dealt a healthy dose of reality this week. Yes it remains tough out there. The tough who want to get going are facing challenging and difficult environments, with lower growth. Poor numbers (financially) from economies and companies. Continued credit issues. Bail outs and stimulus packages and ongoing questioning of the free market system. More regulation. As London based Guy Monson CIO and Managing Partner of Sarasin & Partners says, “it’s hard to be optimistic about any asset class.”
“The important thing today is to look forwards”, while not minimising the trauma of 2008. Monson says there are some astonishing opportunities but he does not know if these will play out in the long or short term.
Continued credit rationing continues to cause problems, but he says there are early signs that the worst effects are slowing. Governments are spending massive amounts and the US deficit is expected to reach USD1.2 trillion ie 8.3% of GDP. This is a post war high. The 1983 deficit was 6% of GDP. Monson feels the US deficit could easily go through the 10% level and he comments that even countries like Germany are looking to spend. “Of course spending like this is fraught with problems.” Potentially the bond market could be upset, the money may not be spent efficiently and governments will have multi decade deficits.
Stanlib Economist Kevin Lings says we should not confuse a bail out package with a stimulus package. A bail out package – like the USD 700 bn - is not a stimulus and has been used to buy banks’ troubled assets and part of it has been used for deposit insurance which has involved no spending. About half of the USD 700bn has been used so far.
A stimulus package is spending and is aimed at bringing money into the economy. Lings says these packages are not big – around 1 – 1.5% of GDP and they will take some time to spend. Projects like infrastructure, as we know here at home, are longer term projects. Tax cuts would also stimulate the economy.
Monson says there are also aggressive moves in the monetary sphere, particularly in the way central banks treat private/public banks, and he sees liquidity improving.
In addition volatility is starting to fall, albeit tentatively, and the VIX Index is just over 40 (12 January 2009).
The next three to six months are likely to give a pretty horrendous economic picture, but will have less of an impact on markets. “Markets where you do take risk are looking increasingly attractive.”
His is a message of optimism and recovery opportunities – but only to regulated and transparent markets.
Monson says investors need to remember that bad economics isn’t always bad markets.
Locally you might have held lots of optimism in the first few days. By some accounts retailers had a better than expected December. But if you tracked your own and others spending, this gives only a small part of the picture, from a small selection of retailers. Spending may have been on more practical items and cash/value retailers may have held up better. Retail sales have been declining for 6 consecutive months (October 2008 figures).
Lings says that the consumer remains under enormous pressure from a cash flow perspective. Together with job losses and only a 0.2% growth in real disposable household income, consumer activity has fallen. “Unfortunately the consumer sector is heading towards recession, with the retail trade sector already firmly in recession.” The current economic, business and investment environment remains extremely challenging and approximately 60 – 70% of the world is in recession.
Lings says past recessions have lasted an average of around 18 months.
Matt Brenzel, Investment Strategist and Portfolio Manager at Cadiz African Harvest Asst Management feels that the worst of the financial crisis has “most likely passed us by.”
But he says earnings visibility is quite cloudy.
However, as he says, the current weak environment lays the foundation for better prospects in 2009.
“At the forefront: weak demand implies low (if not negative) inflation and hence a stimulatory fiscal and monetary backdrop. Whilst this appears negative for commodity producers, governments are falling over themselves to create a fixed capital formation boom to protect and create employment. These projects are commodity intensive and if the current trend by producers of closing down high cost facilities is maintained, upward commodity price action might just coincide with leading economic indicators, rather than lag them.”
“Aiding the last point is our view that the US dollar has probably peaked. Although interest rate differentials between the US and its major trading partners will narrow as rates in the latter’s regions fall further, enhanced prospects in those regions will prevent the Greenback from appreciating further.”
“The interest rate sensitive counters on the JSE will get additional boosting from lower South African rates. Expectations are for another 400bps cut in lending rates. Similar falls have triggered substantial share price appreciation in the past. Whilst we do not believe that one can unequivocally expect the same this time around given the remaining strains and uncertainties, the All Share Index should rise by at least double-digits in 2009.”
In 2008, the South African equity market declined by 23.2%. Lings says that in the 49 years since 1960, the local equity market has recorded a decline in 14 of these years (including 2008), which is 29% of the time. Stated differently, the equity market declines on average one in every four years.
“Despite this reality, equities remain the best performing asset class over any extended period of time. In fact, our research shows that South African equities have never yielded a negative return over any four year rolling period, and have outperformed the bond and cash markets over any period longer than 6 years.”
Paul Hutchinson, Head of Collective Investments at Cadiz Wealth, says “my sense is that 2009 will prove to be a challenging year for the collective investments industry.”
Hutchinson says that although there will be relief (lower interest rates) this extra money is likely to go to servicing consumer debt. Household debt still sits at around 75% of disposable income.
He suspects that investors will continue to be risk averse, however notes that “at some level cash investments will lose their relative attractiveness.” Expect Flexible Fixed Interest and Targeted and Absolute Return funds to attract inflows.
And be prepared for a far closer look at costs. “At a product level fees and Total Expense Ratios will come under far greater scrutiny.”
To invest you need to be confident
I think it's the mark of a great player to be confident in tough situations – John McEnroe
So an investment outlook fraught with challenges, and for investors looking for real returns above inflation in the long term one of the biggest knocks 2008 delivered was to confidence levels. Optimisim and confidence is down the world over. As investors we need a measure of confidence. It can help us stick to our strategies when challenges arise. It can create discipline and it can help us achieve our investment goals. What is confidence and what makes a confident investor? Below we share some thoughts.
Confidence (from Latin) means to put one’s trust in someone. Confidence means the belief in yourself and your abilities. Confidence is about being certain.
Confidence is not overconfidence
Confidence does take knocks. Overconfidence would imply that we are immune to knocks and are unaffected by events. A confident investor can never be overconfident – investing is essentially about trust and hope – the belief that by putting aside today we will have tomorrow. Tomorrow is an unknown over which we do not have complete control. We only have control over how we prepare and plan for the future.
Confident investors have vision and a plan
A confident investor has a good plan and the discipline to stick to that plan. They have the ability to think ahead and identify possible outcomes.
Confident investors have knowledge and are aware
Confident investors have knowledge, and know where their knowledge is incomplete. They know what they know and know what they don't know. They can then transfer their confidence to experts in whom they trust. As we see so often in investment scandals this can unfortunately go wrong. How do we counter this? By making sure we understand exactly what is on offer? By making sure everything is regulated? With thorough investigation and attention to detail?
Confident investors make decisions and can recognize good and bad decisions.
Confident investors take action and have the ability to recognize good and bad decisions. It is improbable and unlikely that we will make good decisions all the time. We are often adversely affected when we make bad decisions and end up not taking another decision. But as investing is forward looking decisions must be made. Just as it is okay to feel bad in a bear market, it is also okay to feel bad about a bad decision. It is better than okay to change that decision and make another decision. (performance is as much about what you don’t hold than what you do). It is not okay to retreat after making a bad decision and do nothing further. The ability to look through the emotions and at the facts is essential when you evaluate your investment decisions. So is the flexibility to change when necessary and appropriate.
Confident investors are responsible and realistic
A confident investor is a responsible investor. They are accountable and can comment on their investment decisions and have valid reasons for investing and making their decisions.
Confident investors recognize success and learn from mistakes
Confident investors are realistic and acknowledge successes and failures. They appreciate their achievements and learn from their mistakes.
Confident investors have staying power
Patience is required, as is determination. Just as one year will not achieve a long term investment goal, the correct decisions and an appropriate plan cannot be reached by hasty reactive actions. Chopping and changing too often can cost valuable growth in the long term. A confident investor would need to know that their decisions are appropriate and necessary, but also that markets can and do react with far greater intensity in short spaces of time. To stick with your best plan requires staying power.
If I have the belief that I can do it, I shall surely acquire the capacity to do it even if I may not have it at the beginning. Mahatma Gandhi
Google confidence and you get 78,5 million hits. It’s a big thing. It’s necessary for investors to have faith in their investments and their ability and decisions. When it takes a knock we often need to reexamine it to get it back. It often takes time and patience. Just like investing for long term returns – you need time and you need patience.
A hero is no braver than an ordinary man, but he is braver five minutes longer.... Ralph Waldo Emerson.
The information in this newsletter does not constitute financial advice. All financial decisions should be taken in consultation with a professional financial adviser and according to a carefully constructed financial plan.
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