It can be dangerous to paint oil pictures using broad sweeping strokes on a pristine canvas. Even if the big picture captures the essence of the scene, the vivid, and often intricate, detail of the specific is trivialised or absent altogether. Global stock markets currently present this interesting conundrum as virtually every market continues to flirt with all-time, or at least six-year, highs.
Using broad brush strokes to paint a picture of world markets will accurately, and even artistically, produce a delightful scene of a strong bull, a really splendid specimen, charging across the countryside having covered a great deal of distance without displaying any evidence of weakening stamina. But the devil may well lurk in the hazy detail.
As the markets plot a course ever higher, investors release increasing quantities of nervous energy as they hunt for possible stumbling blocks - both real and imaginary.
The market will never disappoint and provides ample scope for intrigue, because it has an action-packed life of its own and is continually responding to stimuli. The life of the market is linked, to some extent, to economic fundamentals, political developments, corporate profitability, future expectations and investor sentiment. This cacophony of stimuli creates markets that are at once vibrant and subject to instant responses, and it behoves the investing public to be alive to this reality and to keep its eye firmly on the ball.
This year we have already witnessed two little stumbles.
In February, the Asian markets led a short, but sharp, 10-percent fall that was attributed by many to the unwinding of some of the yen carry-trade. A yen carry-trade is basically borrowing money in Japanese yen at an interest rate of about one percent and investing this in higher-interest-rate economies such as, but not limited to, South Africa at a yield of about eight percent. The critical factor here is the stability of exchange rates.
A second factor was the Chinese government's comments that its economy was over-heated and that it may need to cool things down. This prompted the Chinese market to fall 10 percent, but this needs to be put in perspective as it had grown 80 percent in the previous year.
The other ingredient in the sell-off appears to have been the comments made by Alan Greenspan, the former chairman of the United States Federal Reserve, that there was a 30-percent chance of a recession in the US this year. What a shame that Greenspan cannot find something else to do in the splendid silence of retirement. He needs to accept that his days of moving and shaking markets are over and should consider planting a rose garden!
Then, ahead of the Ides of March, we had another stumble precipitated by worries of default in the US sub-prime housing mortgage industry and the possible snowball effect this may have on the economy and the recessionary implications of such an eventuality because it is feared that consumer spending will dry up.
So we seem set for a volatile market this year, but the underlying trend still seems to be decidedly bullish. It may be as well to keep a supply of tranquillizers within easy reach as nerves may become a little jaded as time rolls by.
When you work in financial markets, you always have to have a view.Nothing goes down as more unsatisfactory advice than when you are given a fairly compelling scenario to be followed immediately by a number of "on-the-other-hand possibilities" that make decision-making so difficult.
It is far better to develop an informed view and stick to your guns. I have a view that the current bull market is set to continue for another year or so and that it will continue to be driven by resources.
This view is predicated on the fact that the political and economic changes that have been taking place in China over the past decade have paved the way for a period of sustained growth and development in Asia as a new superpower awakens. This may well be the most powerful human development since the industrial revolution in Europe in the 19th century led to decades of rapid development, economic growth, urbanisation and a Eurocentric way of life that, for better or worse, dominated the globe for the next 200 years.
Today the world has a huge population in excess of six billion, and 20 percent of these people live in China. Despite huge urban populations, most Chinese are rural, and waves of urbanisation are on the cards. The implications of this are mind-boggling as these newly urbanised Chinese will aspire to modern housing filled with appliances.
This means that there will be a sustained demand for resources of every kind and a new source of consumer spending, the power and scale of which has never been witnessed before. Sure, this does not happen overnight, and markets do not rise in a straight line.
We are going to see volatility in the markets as the world changes with a tilt to the East and all the socio-economic implications this has.
The raging bull will again run out of steam and return to the pasture to graze before building up the strength to begin the next cycle.
As with the analogy of the painting, the big picture is still decidedly bullish, but there are many factors that contribute to economic cycles, and it is only a matter of time before the next bear market arrives.
You should always invest for the long term. Do not lose sight of the big picture, your long-term objectives and risk profile, or get caught up in the noise and argy-bargy of the detail.
- David Sylvester is the chairman of the Shareholders' Association, telephone 021 686 7567.