At the most recent Chartered Financial Planning Transitions series presentation, Marketing Director for Africa at Investec Asset Management, Steve Watson, offered this quirky alternative title to his presentation “Yesterday, Today and Tomorrow” on 27 August. The 60 Chartered clients in attendance benefitted from his experience and insight regarding the current state of the market, and the way forward.
Black Monday, he said, should not have been unexpected … it was the speed of this shift that was a surprise. Nevertheless, asset managers, investors and planners would have anticipated such a move, given the extended period of positive returns. “The asset markets have been strong for a long time,” he stated. “What has happened now is both overdue and not as bad.”
While Black Monday suggests a dramatic and gloomy event, Steve contextualised the drop in the market by citing 1987 statistics: “The DOW fell 22%, precipitating that Black Monday; compare that to the current S&P500 fall of 3,9%, and the more than 9% fall in the Chinese market.” He also referred to Naspers, a company the most exposed to the Chinese economy, that is nevertheless still up.
Planners and asset managers anticipate such shifts by creating diversified portfolios. “Were you invested in Equities only, it would take you a long time to come back,” Steve noted.
So, why the panic?
The words of French philosopher, Voltaire, seem appropriate here: “Uncertainty is an uncomfortable position. But certainty is an absurd one.” While the change in the market was expected and prepared for, the intervention by the Chinese government created the uncertainty to which investors are so averse, as it disrupts anticipated patterns in the markets. What form did this intervention take? A three-fold approach was adopted:
- To prop up the equity market, the big banks were ordered to buy equities.
- The Chinese currency, the Yuan, was weakened.
- The cost of borrowing was lowered.
Steve expressed doubt regarding China’s claim of 7% growth, in light of the plummeting industrial productive, retail sales, fixed asset
investments, and the property downturn. “This is a market in transition – the GDP has been overstated,” said Steve.
Since this was a Chinese problem, why did all emerging markets sell off? Steve explained that market participants tend to move together. In addition, “movements in the market are greatly amplified in smaller markets.”
Emerging markets are in the red for the year, but for one year, and this is not a disaster, according to Steve.
What about Greece?
While there are signs of recovery in Europe, Greece’s situation is going to end messily. How many will be impacted as a result is still up for discussion.
South Africa’s GDP growth remains slow, at 1,2% currently. Our electricity woes lies at the heart of mining and manufacturing’s slowdown, while the 17% contraction in Agriculture is attributable to the present drought, the worst since 1992. “We expect only modest increases in the repo rate, and probably only next year,” said Steve. The weak rand is undervalued and vulnerable owing to our twin deficits.
In concluding his address, Steve used Warren Buffett’s wisdom to focus attention on the future: “If past history was all there was to the game, the richest people would be librarians.” To support his assertion that nothing lasts forever, Steve alluded to the rapid acceleration of technology: it took 38 years for radio to reach 50million users, and 13 years for television to achieve the same milestone. Facebook? One year to reach the same number of users. Are you sporting a new Apple Watch? Are you ready for an In-car? “But perhaps the biggest change will be who we work for, how – and how long,” Steve said in conclusion.