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An icy black swan

By Reuters Staff
April 21, 2010

GuestinvestecBy Jeremy Gardiner, director, Investec Asset Management
There is a term in financial markets known as a black swan event. This term describes an event that has a significant impact on financial markets, but which could not / was not predicted by anyone. A volcano in Iceland leading to massive ‘eruption disruption’ certainly could not have been predicted by anyone. Certainly, market commentators were expecting some form of financial explosion out of Europe, but not a volcanic one!

 Fortunately it seems to be ‘blowing over’ and within a week the world should be back to normal. However, this, together with charges against Goldman Sachs and ongoing fears over Greece, could just have provided the catalyst for the much expected correction markets have been anticipating for close on six months now.

 Greece is fixed, for now. The EU and the IMF came to the rescue, which is good because it averted a default, but it is also problematic as it sends out an implicit signal to errant EU countries that there is a lifeline waiting if they need it. Germany is unimpressed, with Angela Merkel even threatening to develop a smaller, more disciplined collection of Euro countries than the current diverse bunch that comprises (or compromises) the EU. Unfortunately, Greece is not alone, and potential financial explosions from a variety of other European countries remain quite possible. Volcano-induced silence in the skies above Europe certainly hasn’t helped either.

2010 thus far has been predictably choppy, with markets generally grinding upward, far more slowly than last year, as the wounds from the financial crisis gradually heal. Equity markets, having run ahead of themselves, are more circumspect this year. Economically, while developed market economies limp towards recovery, the developing world, with Asia and in particular China, remains rampant.

 Meanwhile back in SA, Investec Asset Management hosted an investment conference last week. The conference consisted of several panel discussions featuring South Africa’s leading portfolio managers and the common theme throughout was that given how hard emerging markets and South African equities have run, money managers are bearish on future returns from current levels. While there wasn’t much discussion around potential crises or corrections, single digit equity returns for SA going forward seemed the consensus.

 So what should South African investors be doing? Future returns depend enormously on what price you buy your assets. The choice at this stage is tricky. Nothing is particularly cheap, and although equities are more attractive than cash, potential equity returns are not that appealing and do carry risk. One area which South Africans should be considering is offshore diversification. The rand has run hard and is not expected to maintain current strength for too much longer than the World Cup. While the direction of the rand is impossible to call, you could probably rely on some weakness at some stage going forward. 

 Unfortunately, however, most South African investors are jaundiced towards offshore investing, after having (along with the rest of the word) invested every cent they could, by hook or by crook, into the US markets at the end of the nineties. At that stage, the US markets and the US dollar were viewed as ‘bullet proof’, and the SA markets as ‘avoid at all costs’.

 Since then, i.e. for the first ten years of this century, the US dollar has halved and the US equity markets basically delivered a zero return. Over the same period, the SA markets returned 15.8% per annum in US dollars.

 The lesson there is twofold:

  • Firstly, no financial asset goes up or down forever. There was a time people thought the US dollar only went up and the rand only down. Rather, financial assets all go through periods of over- and undervaluation, and it is the level at which you buy them that is important.
  • Secondly, be careful of buying anything after a strong run or an extended period of strong returns, as your potential returns going forward will be limited.

 So purely from a currency perspective, the timing for diversifying offshore looks favourable.

 The run-up to the 2010 Fifa World Cup

With less than two months to go to the World Cup, the infrastructure facelift that has inflicted numerous disruptions on South Africans over the past four years appears to be over as scaffolding is gradually disappearing, revealing world-class airports, roads and stadiums. It is important to reflect on our reasons for hosting this World Cup. What the event offers us is the chance to rebrand ourselves in front of a global audience, in terms of doing away with perceptions around our third world infrastructure, and secondly about addressing fear.

 Foreign perceptions of South Africa’s infrastructure are far more third-world oriented than the reality on the ground, and they are likely to be pleasantly surprised by the first-world levels of many of our roads, airports, hotels, restaurants and indeed the general business environment. Throw in world-class bandwidth and hopefully we can start attracting some serious investment interest.

 The second reason we are hosting the World Cup is to dispel fear. Nobody is disputing that South Africa has serious crime issues that need to be addressed as soon as possible, but it is not at the levels portrayed in the UK and European press, where citizens are literally warned to buy bullet-proof vests, take them on the plane and put them on before disembarking in Johannesburg for fear of getting shot. We need to show the world that you can come here for two weeks and have a great holiday without being attacked or falling victim to crime.

 Unfortunately, thus far, what was meant to have been a once in a lifetime opportunity for us to rebrand ourselves positively as mentioned above, the reverse has actually been true. I have spent a  great deal of time over the past two weeks trying to explain to clients from Tokyo to New York that Messrs Malema and Terre’blanche have not rendered South Africa irreversibly on the road to racial carnage, and that there is no need to turn their backs on us from an investment perspective. A stream of bizarrely negative UK and European press hasn’t helped matters either!

But all is not lost, and the main event is yet to start. It is up to all of us to do our bit to make sure it’s the success we want it to be. If we are going to complain about traffic, queues and fully-booked restaurants, then it’s not going to be great. If you are friendly and offer to help every time you see a tourist looking lost, it will be a great World Cup. A good or a great World Cup, it’s up to you!

There will be fewer visitors than initially expected, which although unfortunate from a jobs and growth perspective, will make it easier logistically to pull off a faultless World Cup. However, the TV audience remains enormous, which from a country promotion perspective is a massive opportunity that we must grasp with all our energy and enthusiasm.

Jeremy Gardiner is director at Investec Asset Management and writes in his personal capacity.


Obviously, there continues to be two standards of operating procedures for the world in which we live; one for Europe,Asia and North America…but a “different” one for “Black” Africa.Perhaps Sub-Sahara Africans should have bullet-proofed themselves from Arabs/Europeans.

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