Global equities celebrate dual anniversary: Sanlam

Claude van Cuyck, Head of Equities & Portfolio Manager at Sanlam Investment Managers writes that stock markets continue to rally while the dollar loses ground against key currencies

During the second week of March, global stock markets celebrated two happy and not-so-happy anniversaries. On the one hand, equity investors celebrated the staggering returns they had experienced over the past year after stock markets hit their lowest point in the wake of the sub-prime crisis. On the other, the following day marked the 10-year anniversary of the bursting of the Nasdaq bubble - and a lost decade for US investors whose equity investments have actually declined.

The graph highlights that on a year ago the S&P500 had rallied a phenomenal 68% by March 9. But viewed from a longer-term perspective, the index is still nearly 20% lower than the tech boom peak established in 2000.

Meanwhile, the 2009 global and local equity rebound has continued into 2010, despite concerns about valuations. On international stock markets, the S&P500 has gained 7% since mid-February and European and Asian stock markets between 5% and 9%.

In SA, the All Share Index increased 5% with financials the best performing sector (up 6%) and Resources the laggard (up 3.5%). The SA equity market is at best fairly valued but we do see potential in the small-cap universe where there are more stocks that are trading at price to earnings ratio of less than 10 times (see graph).

With concerns about the Greek government’s heavy indebtedness waning after having dominated the global news since the beginning of the year, the dollar’s strength against the euro has dissipated somewhat more recently. Since mid-February, the Dollar Index has declined 0.6% and 1.6% from its high point on February 18. Against the euro, the greenback shed 1.2% from mid-February to mid-March.

At home, the rand continued rallying against the dollar, gaining 4.4% since mid-February and appreciating to below R7.40 to the dollar despite general consensus that the local unit is overvalued at less than R8 to the dollar.

On capital markets, global 10-year government bond yields began their upward march again in March on concerns about how the developed world is going to reduce their massive fiscal deficits after retracing in late February. Safe haven demand for US Treasuries also waned in March as fears about the potential for a Greek sovereign default faded away.

The local bond market was dominated by the release of Budget on February 17, which underlined the government’s commitment to prudent economic management. It also reaffirmed the SA Reserve Bank’s inflation targeting mandate. The Finance Minister did, however, surprise the market by announcing that Treasury will issue new 20- and 30-year bonds. This resulted in a selloff in the R209 bond in particular. Eskom’s approved tariff increase of an average 25% a year over the next three years was lower than expected and thus less of a negative factor for the inflation outlook – and bonds.