/ 25 May 2010

North Korea, oil spills and volcanos

Just when you thought it was safe to pop your head out, the North Korean leader Kim Jong II apparently ordered his military to prepare for combat.

That’s on top of the volcanic ash clouds, BP oil spills and pictures of Bangkok in flames beamed across our screens. Then last week when I turned on the Bloomberg channel all I could see were pictures of Athens burning and rioting, hardly constructive to investing.

You can all be forgiven for not wanting to buy the market right now. Do we really need the 24-hour market place? Bring back the old stock ticker any day!

After last week’s brief bounce on the Euro offering a bit of relief, it looks like the Euro is continuing to be sold off as it pushes back down to 1.22 against the dollar.

We did manage to call it right with the rand weakness as the foreigners were net sellers of South African stocks and emerging market currencies and the rand hit a new recent low of 8.00 against the US dollar. Isn’t it ironic that all the turmoil is doing the Reserve Bank’s job for them and therefore not a peep out of Cosatu. At least the turmoil has a bit of a silver lining for someone.

With the risk aversion back in a big way, it looks like business as usual this morning with equity markets all down over two percent and reversing yesterday’s gains as we are back to Friday’s levels. Feels like Groundhog day. So where to from here?

The European markets are now on course to have the lowest close since September and Asian markets are now down over 15% since the middle of April. We still have a long bias on equities and have mitigated some of the downside risk with being long volatility which still continues to be a winner.

The difficulty is dissecting the investment decisions with the trading decisions. The market clearly faces a lot of headwinds and in the short term, ‘going away in May” as we stated last week, might still be the best option. But, fundamentally some stocks are starting to look like good value.

The risk premium now on offer in equities after the recent pullback, relative to corporate bonds is 3,7%, close on the highest level in about the last 22 years. Also the forward PE this month has declined the most, bar the Russian default and Lehman’s collapse. So, it looks like I’m stuck between a rock and a hard place. I guess I’ll just keep my fingers crossed, turn off the TV, put on my hard hat and hope some sanity returns soon before I start adding to our long positions.

  • Nick Kunze is head of dealing at BJM Private Client Services

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