The equity markets are breaking new records and the party has only begun. No, sorry, they have peaked and could be looking at a sharp correction …
Anyone could be confused by the conflicting messages coming from market pundits. The only things we can be certain of are that the JSE and Wall Street are hitting new highs and that no one is sure what the next move is going to be.
The bulls argue that we are in a commodity super-cycle, that the demand from China and other new economic powers will keep the price of resources at record levels and that the short boom-bust days of resources are over for now.
This is good news for South Africa as a commodity producing country. Locally, investors are still positive. Although the first rate hike sent the market into free-fall, this month’s 50 basis point hike was seen as a bonus because it wasn’t a 100 point rise.
Retail shares and banks reacted positively to a rate hike — which is unusual, but which suggests that the market had anticipated the rise and this was already reflected in the share prices. Lower oil prices mean that inflation from petrol hikes may be less than predicted, so at worst we will see a further 100 basis point hike in the next six months.
The construction and infrastructure story is also keeping the markets on a high, combined with all the buy-out talks around large companies like Edcon, Alexander Forbes and Shoprite. It is unlikely shareholders will let these shares go cheaply, and the final prices will be high.
While commentators argue that growth from the JSE will be a little slower, with Stanlib estimating only 10% from equities, no one is predicting a blowout. But it is argued that returns from offshore could be higher because of a weakening rand. But where does one invest?
The bears are painting a different picture, which is not a pretty one for South Africa or the United States.
Economists like Morgan StanÂley’s Stephen Roach question whether China’s rate of demand will be sustained. Roach points out that China is already orchestrating a slowdown in its economy to prevent a situation of overÂsupply and the dreaded deflation that was all the talk in the Nineties.
A slowdown in demand from China will be bad news, with far too many bets on the commodity cycle lasting a lot longer. If people start bailing, they will be throwing their shares away at any price. That will do the JSE no favours. But Roach believes the biggest threat is US consumers.
Consumption makes up 71% of the US’s GDP — so if consumption slows you can bet your dollar growth will too.
The really scary part is that US consumers have been funding consumption out of asset wealth, not income, as they spend more than they earn. The US has a negative savings rate, last seen in 1933, and consumers have been relying on their mortgage bonds to fund consumption as house prices have ballooned. But it seems the balloon has finally popped, with some regions experiencing declining property prices.
If the US cuts back on its $9-trillion consumer binge, China will be the first hit, followed by the countries that support it with their raw materials. There is no country in the world that could take the US’s place as the champion consumer. US consumers spend 3,5 times more than their counterparts in Japan and nine times more than those in China. Then again, let’s not forget the Wall Street saying: “One should never underestimate US consumers; they will always find a way to spend.”
If, however, Roach and other dissenters are right, then global growth could disappoint, and rather than the 4,9% the International Monetary Fund estimates, we could return closer to the average of 3,7%. A global slowdown is bad news for any commodity dependent country.
Despite the doom and gloom, Roach is positive on Japanese and German stock markets, as well as India, which he believes offers the most potential in terms of sustained growth from the new emerging economies. His bet is also on US bonds as inflation falls because of slower global growth.
The wise investor should probably diversify globally and not bet the farm on a single view, country, sector or asset class.