Market View

05 Apr 2007 : Johannesburg Securites Exchange surprises many by reaching 27 267

Barry Shamley, portfolio manager of the Equinox Managed Portfolios writes that the JSE All Share Index surprised many during March by delivering a 5.7% return and reaching a record high of 27267. This was despite global markets (apart from Shanghai Composite) being lower than their pre 27 Feb sell off levels and without the assistance of a weakening Rand.

The star sector of the JSE was the resource sector (+9.97%) which massively outperformed the Industrial index (+2.75%) and the Financial index (+2.4%). This left any fund manager who called the end of the commodity cycle last year with a lot of ground to catch up and luckily there are still 9 months left in the year. Gold ended up 5.45% and looks like it has broken its 11 month downtrend and we expect improved performance from this sector.

The Rand weakened slightly against the US dollar ending the month at R7.2973. Global markets were volatile for most of March and it wasn’t until late March that we felt comfortable raising our equity exposure in the various managed portfolios. The FTSE ended +2.2%, the S&P 500 +1% and eastern markets were mixed with the Hang Seng +0.76% and the Nikkei -1.8%.

The month was dominated by concerns over the US Housing market and the knock on effects of the reckless lending habits of the US sub prime mortgage lenders.

What these companies did was lend money to people to invest/speculate in the booming US housing market. They did this without credit checks, proof of salary or even proof of employment. The idea was to borrow money at a low interest rate which often ticked higher in the next year. That wouldn’t be a problem though as everyone was planning on selling and cashing in on the easy profits to be made. What has happened though is that the US housing market slowed dramatically, interest rates rose and many people can’t afford the repayments on these houses.

This means that the number of foreclosures is increasing, there is more and more stock for sale every day and the sub prime lenders are sitting on a lot of bad/unrecoverable debt. The effects of this are far reaching. Obviously US consumer spending is expected to slow and less obvious is that a lot of the larger financial institutions in the US and elsewhere (i.e. Goldman Sachs, Morgan Stanley, HSBC) that either have lent money to these sub prime companies, own stakes in sub prime companies or in some cases bought exposure to these loan books though CDO’s (collateralized debt obligations) stand to lose money.

The other story that dominated the news wires and certainly oil markets was the capture of 15 British Navy personnel by Iran (the worlds 3rd largest oil producer) after they had supposedly trespassed in Iranian waters. Thankfully this has been resolved and the sailors should be on their way back home now as I write this. The oil price however is still at levels reached during the crisis ($68 up 12% for March) and if these levels are maintained the latest petrol price increase of 68c per litre may not be the last we see in the coming months.

Inflation both locally and abroad is a serious risk area. Although many interpreted Bernankes’ recent comments as doveish, the outlook for inflation seems to have deteriorated and although the talk has been of easing interest rates in the US, the Federal Reserve may not be in a position to do so given the deteriorating prospects for inflation. The risk of stagflation in the US economy is increasing (stagnant growth high inflation)!

On a positive note as far as inflation is concerned is that corn/yellow maize prices retreated in recent weeks after the enormous increase in acreage planted in the US on increasing demand for the commodity in the production of ethanol. The risk however locally is the recent heat wave and worst drought in 50 years but hopefully there may be some slight relief on this front thanks to the above mentioned developments in the US.

Demand for commodities seems to have continued unabated despite the risk of a slowing US economy. The Eastern markets (China and India) seem to have certainly taken up a lot of the slack and potentially a US recession may not be as dire for global markets as they been historically (although this remains to be seen).

Generally the period between May and September seems to be quite a disappointing time for equity markets and the old adage – ‘sell in May and go away’ is not to be taken lightly. Given however that we did experience a mini correction in recent weeks this period of underperformance may very well start a little later this year. Despite this we will re-evaluate markets towards the end of April and determine whether it is wise to stay almost fully invested or whether it may be better to save some cash for the opportunities over the coming months.

I would like to take this opportunity to wish all our readers and investors a pleasant break over the coming holidays.