Investors should now be patient before making emotional financial decisions due to fear of loss.

This is according to MitonOptimal Multi Asset Management MD and fund manager, Scott Campbell, after the last few days sell-off locally and on international stock markets. From peaks just a month ago, markets are now down between 10% and 20%. When talking about South Africa, he went on, “We remain optimistic about the SA rand’s potential to remain attractive to yield-seeking global investors. Also, that local interest rates will stay lower for longer as this US and EU economic calamity plays itself out.

“We also remain in favour of global equities to generate long-term capital growth in local and offshore portfolios,” Campbell said.

The reasons for this dramatic collapse are mainly due to two causes:

The problems and consequences of the ever growing government debt in the US, Europe and Japan are now becoming clear in investor’s minds.

Economic data that is softening further, such as the Australian unemployment figures, and weakness emanating from the US consumer despite the better than expected unemployment figures.

Irrational market behaviour will start to settle when investors realise that more than 60% of the world’s population and consumer base (and therefore potential economic growth) is based outside the US and Europe.

The monetary, fiscal and economic stability offered by China, India and Asia is what will drive global economic growth of the future, expanding in a ‘two speed world.’ Emerging economies currently grow by 2% to 3% per annum faster than the developed world.

This is while US economic growth, its fiscal repair, EU debt, banking, and growth repair have still many years to run, with many episodes of market lapses and policy support actions likely to be encountered before these unstable conditions are left behind.

According to Campbell the US downgrade from AAA to AA+ by the rating agency Standard & Poor’s (S&P) is rather meaningless. A country that issues debt denominated solely in its own currency and which has control of its monetary policy, will not willingly default on its debt. Countries default because they run out of foreign currency to service their debt; but the US does not need foreign currency to service its debt.

S&P’s decision is an indicator of the degree of fiscal strain that the world’s largest economy is under. Although alarming, this may be the wake-up call the US needs to change its approach to the long-term difficulties. The same can be said of the European Union (EU), which needs to take far more decisive action in addressing the sovereign debt problems of its member states. Meaningful deficit reduction can only be achieved through a combination of revenue increases and carefully targeted spending cuts.

While steepening falls in equities reminded many of the shockwaves that swept through the markets in the wake of Lehman’s collapse, money and corporate credit markets are not yet seeing a repeat of the strains witnessed three years ago.

The Lehman event was based on a systemic risk to the banking sector. This is not related to bad assets in the banking sector’s books; it is related to the fact that the economic growth is not there to support the kind of national debt levels and benefits pay-out that politicians have promised its public.

Besides US rates staying lower for longer, the Fed will likely signal that its expanding balance sheet may be expanding even further with a form of quantitative easing. When announced, it may give renewed boosts to market perceptions, benefiting equities.

From an investment point of view, there are ironically two multi-national companies that have a better credit rating, growth prospects and management than the U.S government:

- Apple is still selling for less than 11 times forward earnings. It has no debt, almost $70 billion in cash and cash equivalents, top management, and a return-on-equity of nearly 42%, maybe they should be managing the federal government’s budget?

- Microsoft is selling near the bottom of its five year valuation range based on Price Earnings, Price to Book ratios. Microsoft yields 2.6% (higher than US Treasury Bonds) and has increased its dividend pay-out by an average of over 11% annually over the previous five years. Microsoft has a AAA rated balance sheet, has about $40 billion in net cash on the balance sheet and sells at just 8 times operating cash flow.

You know there are problems afoot when certain countries have banned ‘shorting’. Whilst this might invoke the pretence of creating stability it is really only confirming no-one knows what is going on. With markets going up and down like an office lift it is vital to make rational decisions and not suffer potential losses that could be recouped if given a chance. Above all, don’t panic and remain liquid!

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]