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STOCK MARKETSBy LUCIENNE FILD
Soothing investor brows against October feverIf the temperature gets too high, the pot boils over. This is not a boiling-over scenario - the market is only simmering In January last year, the local market dropped by 15% over three weeks. Nobody noticed. Everyone was still on holiday
WAVE cycles, the number of daisy petals, or the position of the stars: investors have been bombarded recently with theories of when the world's stock markets are going to topple. Investors are understandably anxious after all the hype, and what makes matters worse is that next week we hit the dreaded month of October - the tenth anniversary of the 1987 market crash. All these factors are contributing to the nervousness present in most of the world's markets. Indeed, the more talk of a market crash, the greater the chance that one will happen, because share prices are largely driven on sentiment. This week, BT Money canvassed some local and overseas experts for their view on the markets. And guess what: while most of them concede that there is weakness, they don't foresee a crash. Jonathon Rogoff, portfolio manager at Investec Securities, says the worst-case scenario for the JSE could be a six to nine-month bear market where stock prices are gradually depressed without the panic effect of a crash. He does not envisage a crash and puts the nervousness down to "October fever".
Rogoff predicts the JSE will be quiet next month, moving lower to sideways. Investors are likely to be cautious, and a buying opportunity could present itself towards the middle of October. He believes that as from November/December the market will pick up again. In defence of his view, Rogoff says present markets are nowhere close to the 1987 scenario, and points out they are way off their all-time highs. The local market is at present 10% lower than its previous high, and the American market is 5% below its all-time high. Rogoff compares the market to a pot of water. "If the temperature gets too high it boils over. There is no boiling-over scenario now, the market is only simmering."
Sidney Place, managing director of Liberty Asset Management and fund manager of GuardBank's Growth Fund, says the US markets are "toppy", but nowhere near meltdown point. Place says the US market might pull back 12% to 15%, but he does not predict any overnight correction which could be labelled a crash. He says if a correction takes place over three weeks, nobody worries. It's only when it happens overnight that investors panic. Place points out that the US market moved up 56% in January last year compared to the 15% upward movement by the JSE all-share index. Because this gap is so wide, he explains, the knock experienced by the JSE if US markets correct drastically would be minimal.
Place, who has been in the market for 17 years, agrees there is a lot of nervousness around, but cannot see the reason for it. There is not enough evidence supporting predictions of a crash, he says. Derek Sumption of Brantam Financial Services also does not support theories that the markets are heading for a crash. He makes the point that investors have to be very clear on what they consider to be a market crash. A 10% drop in share prices, he says, does not represent a crash and is merely a correction. Sumption says there is nothing on the horizon which points to a market crash. "In January last year, the local market dropped by 15% over three weeks. Nobody even noticed because everyone was still on holiday. "This just proves that a market crash is a psychological thing," says Sumption.
Ashburton Investment Managers say the US market is currently about 25% overvalued - high by recent standards but nothing like the 40% plus of September 1987. According to Ashburton, one striking feature of 1987 was the high degree of correlation between world markets. This is not the case this time - while Wall Street and European markets are booming, markets in the Far East are struggling. Ashburton says equity ratings are bound to be higher than those seen in the 70s and 80s because of a new global era of low inflation and economic stability. "Even when markets do become overvalued, corrections are unlikely to be violent since inflation remains well under control and continuing corporate profit growth will help alleviate the condition."
So what's an investor to think in the face of all this conflicting information on the state of the world markets? Louis Fourie of local consultancy, Citadel Investment Services, says investors should stick to looking at the economic fundamentals and ask the following questions:
"The US market is overvalued by at least 10% to15%, and therefore I don't advise people to invest in it. If there is a correction, it may temporarily affect the SA market."
Here you should ask yourself: if the US stock market takes a dip, will you be forced to lower your living standard because you haven't hedged your medium-term funds against such a correction?
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