To my mind
ONCE THE TEA ladies start buying shares you must know the bull market is heading for an implosion, they say. If those selfsame ladies start offering their views on the terrible state of the markets the bear market must be approaching its lower turning point, or so we hope.
Unfortunately, things are far more complicated.
It’s an open question whether recent events, such as the governments of countries such as the United States and Britain – the world’s financial centres – buying their banks’ shares in a desperate rescue attempt, have changed irrevocably the nature of the free-market system. But the million-dollar question remains: When will the markets reach rock bottom? Not even respected economists or experienced investment analysts have the answer to either of those questions.
We’re hearing plenty of talk that the market now offers wonderful buying opportunities for long-term investors. To corroborate their views, advocates of that school of thought cite the fact that Warren Buffett, the world’s legendary most successful value investor, recently bought an exceptionally large interest in a bank.
The closest to a “scientific” standard of measurement indicating whether the timing is right to start picking up knocked-out shares at bargain prices is the so-called Vix index, explained by Vic de Klerk (see page 17), himself an experienced market player. That index, which measures market volatility, shows that shares currently (at the time of going to press) have a 16% likelihood of moving up down. With such high volatility it obviously makes sense to contain your buying appetite for the time being.
In the same way, it stands to reason that in this climate you shouldn’t embark on a selling spree. That kind of emotional reaction will not only mean you’ll be selling at an enormous loss but that when the market starts climbing – without any warning – you’ll also be left out in the cold, unable to share in the new prosperity of the new run, normally characterised by prices spiking sharply.
Though there’s no question of banks in SA having to be rescued from their predicaments by Government, the financial turmoil caused by First World banks – due to the greed and self-enrichment of highly paid executives and inadequate control measures – will be felt here.
Economic growth will fall worldwide, partly due to the fact that the infected financial markets will have to be subjected to strict discipline. However, this essential focus on restrictive fiscal and monetary policy will mean the emphasis will not be on the stimulation of economic growth. That will obviously have a further negative impact on commodity prices. Bad news for SA. In addition, the international crisis has caused the rand to plummet, affecting inflationary expectations negatively.
Some good news for punch-drunk investors and consumers is that interest rates aren’t likely to rise soon, even though that’s normally the accepted course to counter increasing inflationary pressure. The fall in the prices of resources, and of crude oil – which has already fallen by more than 50% in US dollar terms – will dim the extremely worrying warning lights of inflation, especially since the latest dramatic fall in the rand’s exchange rate.
The monetary policy measure of higher interest rates, relentlessly applied by SA Reserve Bank Governor Tito Mboweni in recent times is, like proper control of banks and the introduction of the National Credit Act, formed part of the healthy control measures that safeguarded SA against the mess of imploding financial services companies in which large portions of the rest of the world find themselves.
In the current extremely volatile times, such a cautious approach and moderation should stand investors in good stead.