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The Christmas decorations are out and silly season has arrived. Shortly it will be impossible to do any meaningful business as everybody will be feeling too festive to take you seriously. Appointments are rolling over to the New Year and people are looking forward to a well deserved holiday. It is time to reflect on what has happened over the last year and try to learn some lessons to take into the future.

2007 was offi cially the International Year of Planet Earth. It was also declared the International Year of the Potato by the United Nations. Like any year, there were ups and downs in all areas – markets, politics, sport, entertainment.

Sometimes headlines tell their own stories. The Economist is one of the world’s most respected fi nancial publications and it was interesting to go through last year’s covers. I listed a few. I think they paint a very interesting picture of the state of things.

• America’s Vulnerable Economy”, 17 November 2007;
• Lessons from the Credit Crunch”, 20 October 2007;
• The Trouble with Private Equity, 7 July 2007;
• America’s Fear of China, 19 May 2007;
• The Trouble with the Housing Market, 24 March 2007; and
• Rich Man, Poor Man (The winners and losers of globalisation), 20 January 2007.

Politically, the world has certainly had a turbulent year. The War on Terror is still a leading topic in this area, especially since a number of other countries other than the United States have been affected by terrorist acts during 2007.

Internationally, there were a few high-profile changes in leadership, notably in the United Kingdom, where Gordon Brown replaced Tony Blair, and France, where Nicolas Sarkozy took over from Jacques Chirac. Some politicians are certainly better than others and some never seem to go away, like one of our next-door neighbours.

There certainly were some political tensions during the year, too. The USA still tends to stick its nose into other people’s business and had two tense stand-offs with Iran and North Korea.

Here are some interesting 2007 statistics:
• Gold price 1 January 2007 $637/oz
• Gold price 19 November 2007 $785/oz
• Percentage increase 23%

• ZAR/USD exchange rate 1 January 2007 7.23
• ZAR/USD exchange rate 19 November 2007 6.71
• Percentage increase 7%

• JSE All Share 2 January 2007 23603
• JSE All Share 19 November 2007 29520
• Percentage increase 25%

Commodities had a good year. Nobody would have said oil would be on its way to $100 a barrel as rapidly as it is. Brent Light Sweet Crude is trading at $94.81 per barrel at the time of writing this article. It is up 55.3% over the last 12 months from $61.05 a year ago. The knock-on effect of the dramatic rise in the oil price is massive.

In terms of value, oil is still the highest traded commodity in the world and the most commonly used form of energy. Copper is up 13% to date. Platinum is up 27% to date. Interestingly, lead is up 92% so far this year. Nobody will argue that the sub-prime crisis ruffled a few feathers this year. We will also see further ramifications into 2008.

The best definition of sub-prime lending I could find was on wikipedia.com: “Subprime lending is the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history.” The phrase also refers to paper taken on property that cannot be sold on the primary market, including loans on certain types of investment properties and certain types of self-employed individuals.

Subprime lending is risky for both lenders and borrowers due to the combination of high interest rates, poor credit history, and adverse financial situations usually associated with subprime applicants.

The controversy surrounding subprime lending has expanded as the result of an ongoing lending and credit crisis both in the subprime industry and in the greater financial markets which began in the United States. Hundreds of thousands of borrowers have been forced to default and several major American subprime lenders have filed for bankruptcy.

The problem is very difficult to quantify as loans were grouped, packaged and sold as structured products. Some commentators are calling it a $3 trillion dollar problem.

Although Americans are the big spenders of the world, they have been spending on credit. When they stop, it will have a major impact on global consumption and GDP. Expect further ramifi cations into 2008.

Global stock markets certainly had a choppy time during 2007, mainly due to the sub-prime issue. The Dow Jones was trading at 12 000 in March at its lowest level for the year. It powered ahead to 14 000 in July, up 17%. In one month to mid August it dropped 9% and then rebounded to its highest level ever in October to 14 200, up 11% in two months. The Dow Jones is trading at 13 000 today, 21 November, down 9% from its peak a month ago – talk about volatile!

A hot topic at the moment is the issue of global warming. It seems to be the in thing to discuss at dinner parties. Suddenly people have realised that we are killing the planet.

Mr Gore, the man that used to be the next president of the US, even made a movie about it and won a Nobel Prize for his efforts. Average temperatures of the Earth’s nearsurface
air and oceans are rising. Increasing temperatures will cause the sea level to rise, and the intensity of extreme weather events is expected to increase.

In the short to medium term, insurers, reinsurers, and banks will be affected by the cost of increasingly traumatic and costly weather events. Other economic sectors likely to face
difficulties related to climate change include agriculture and transport. Unluckily for us South Africans, developing countries, rather than the developed world, are at the greatest economic risk.

All South Africans will surely remember 2007 as the year that the Springboks brought the World Cup home. Well done, Jake and the Bokke! Our country was jubilant and for a while everybody seemed friends.

Sport seems to be playing a more important role in South Africans’ lives. Just listen to the general conversation around a braai. Call it escapism. There is a lot to look forward to in 2008. All the usual events stunningly captured on DSTV. The Olympics in Beijing should be especially good.

South Africa still has the niggling problem of crime. What makes it even worse is that our crime is so brutal and violent. I read somewhere this year that South Africa and Columbia have similar homicide rates. The difference is that some days there are no murders in Columbia. We average around fifty a day. A lot is being done to stop the crime wave, but it certainly won’t go away in 2008. Unfortunately, every year we have deaths. Some well known people who died this year were Pavarotti, Lucky Dube and Bill Flynn. Politically, 2008 is going to be very interesting for South Africa. The picture won’t necessarily look better, but at least it will be clearer.

December sees the ANC’s National Executive Council meeting where the next ANC president will be elected. Normally the president of the ANC is also appointed as the president of the country.

Currently we are witnessing a no-holdsbarred succession battle. Going into 2008, the ANC will have a new leader. Who will it be? Jacob Zuma, Cyril Ramaphosa, Tokyo Sexwale or maybe even Thabo Mbeki again? Economically, South Africa will still benefit from high commodity prices. Our economy is ticking along nicely, but maybe not as nicely as we would have hoped.

The inflation rate has increased systematically over the months, which has consequently had a direct effect on interest rates. The prime rate is currently at 14% and is certainly nipping at our heels. Hopefully the interest rate increase will dampen consumer spending and infl ation will go back in line with the targeted 4 to 6% p.a.

Nobody could ever predict the future. One thing becoming clear is that it is getting even more difficult to do so. Things are changing so fast that futurists are having a hard time to keep up. Certain trends, however, are worth mentioning.

Economically, Asia is still a hot topic. Will it able to maintain its phenomenal growth momentum? Commodities will probably continue riding the wave of its super cycle. There is only so much of the stuff available. America might be the millstone around our necks that drags us down, economically. I expect words like globalisation, iphone, wireless, mobile, 3G, knowledge economy, poverty, global warming, derivatives and Jacob Zuma will be used even more frequently in 2008.

Note: This article was written in November 2007.
Jurie van der Merwe, UBS Wealth
Management, SA.

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