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Dangerous contradictions
Stock markets appeared to be faltering in mid-August, and share prices have once again resumed their upward trend. The jury is still out on whether or not the current rally in global stock markets is a new bull market or simply a rally in a secular bear market. This is an extremely difficult market to read at the moment. The contradictory signs and opinions make any predictions about the short-term trend very dangerous.
The most likely catalyst for the apparent faltering in mid-August was the breakdown in emerging markets such as the Chinese Shanghai Composite Index (-17.3%) and the Russian Trading System Index (-10.0%). Share prices have once again resumed their upward trend.
According to Dr Prieur du Plessis, Plexus Group chairperson, the MSCI World Index declined by more than 3% from 13 August (its mid-August high), while the MSCI Emerging Markets Index was down by more than 5% from its 3 August high.
“Just as we thought, the rally was running out of steam and a pull-back seemed imminent, share prices surprised by turning around again. As of 9 September, the MSCI World Index is now 3.3% higher than its 13 August high, and the MSCI Emerging Markets Index is 1.8% higher than its 3 August level,” says Du Plessis.
The rally in global stock markets from the date the MSCI World Index reached a low, namely 9 March 2009, has been nothing less than astounding, says Du Plessis.
The MSCI World Index has rallied by 60.7% and the MSCI Emerging Markets Index by 81.3%. The record-holders for the biggest recovery are the Bombay Sensex Index (+98.3%), Hang Seng Index (+83.8%) and Singapore STRAITS Times (+81.9%).
According to Du Plessis, the rally has been fuelled by further better-than-expected economic data and, more recently, announcements by the United States Federal Reserve and European Central Bank that they were not in any hurry to begin withdrawing liquidity from the market, as the risks to the financial system have not completely disappeared.
“This is an extremely difficult market to read at the moment,” says Du Plessis. “There are a lot of contradictory signs and opinions that make any predictions about the short-term trend very dangerous,” he adds.
“The gold price, for instance, spiked on Tuesday [8 September] above the $1 000 level, which could be due to more than one scenario. The market is possibly concerned about higher inflation going forward. The decline in the value of the US dollar has also played a big role.
“However, the oil price is not showing signs of increased demand due to improved economic activity. The price of Brent crude oil declined by 2.6% in August and has remained at the same level for the month so far,” says Du Plessis.
“The gold price may simply be rising due to heightened demand from concerned investors, which could be a sign that investors are not convinced the global economy is out of the woods yet.”
In view of this precarious situation, Du Plessis prefers to go back to stock market valuations for decision-making. The strong rally in equity markets has resulted in valuations going from cheap to either average or fair value and, in some instances, such as with the US stock market, to somewhat overvalued. “At this stage, I prefer to remain cautious and be slightly underweight in equities,” he says.
“Despite the extremely strong recovery in share prices, one must bear in mind that the MSCI World Index and the MSCI Emerging Markets Index are still just over 34% cheaper than they were at the time of their all-time highs at the end of October 2007,” says Du Plessis.
“The long-term investor should therefore not remain underweight in equities for too long.”
Du Plessis recommends a phasing-in strategy over the next three to four months. “Try to buy on dips,” he says. “September and October are seasonally weak months for equity markets.”
Source: Media release by Cadiz Street Communications on behalf of Plexus Asset Management; 10 September 2009
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