talkingpoints

talking points
Why new RA laws should grab your attention
Asset allocation is still the cornerstone
A cool head will prevail in turbulent times
Investors behaving badly?
A contextual long-term view
October 2008 - Issue 01
Why new RA
laws should
grab your
attention
These changes
Nick Battersby
CHIEF EXECUTIVE
OFFICER
It’s easy to get distracted and overwhelmed by the extreme
turbulence that we’re currently witnessing in financial markets.
These trying market conditions can easily appear bewildering to
the somewhat removed individual investor and it is an indictment
on our industry that at such times many amongst us revert to
language that is at best vague and at worst downright evasive.
In his article in this edition of talking points, our CIO David
Green presents a detailed and deliberately straightforward
assessment of recent events; an approach that I hope you will
find valuable and refreshingly different.
I’d like to take this opportunity and draw your attention to recent
legislative changes that will affect your longest term savings –
those assets that you have been diligently setting aside for your
retirement years.
It’s been a couple of years since the Pension Funds Adjudicator
catapulted retirement annuities and related issues into the
limelight. Only now, however, is the resultant legislation being
introduced. These changes have not commanded headline status
in the broadsheets; yet their combined impact will have a profound
effect on your own personal retirement wealth.
What are these changes and how will they affect us all as members
of retirement annuity funds?
Freedom of choice for investors – in the past, members of many
retirement annuity funds were prevented from transferring to
another fund by prescriptive fund rules. Rather like the cell phone
industry, ‘portability’ has now been legislated and all such limiting
rules have been replaced to allow members to transfer to more
appropriate funds if they want to.
Advice on retirement annuities is readily available again – the
advent of the new generation of retirement annuity products has
presented an entirely different value proposition compared to the
old products of years gone by that many of us are still invested
in. We should all assess whether it is financially appropriate to
transfer legacy assets into the new generation products as there
are significant cost and flexibility benefits in doing so – but this
assessment often requires the assistance of a qualified intermediary.
Puzzlingly, legislation prevented your financial advisor from
earning a fee from you for work done on transferring a retirement
annuity fund. This barrier has thankfully been removed and
financial advisors can now earn a fee to assess investor’s options
in this regard, which is fully justifiable. After all, not even the
will have a
profound effect
on your own
personal retirement
wealth.
most benevolent professional is going to allocate valuable time
on a pro-bono basis all of the time.
Clarity on improved termination values on transferred retirement
annuities – for many would-be transferors of retirement
annuities, the punitive penalties that life insurers apply on
so-called early terminations have been an understandable retardant
to transfers. This is arguably the sole potential reason for not
transferring from a legacy fund to one of the new generation
funds. Recent legislation provides welcome clarity on the
maximum levels that insurers are permitted to withhold from
transferring members. For transfers of policies initiated after
1 January 2009 the maximum penalty will be 15% of the fund
value, whilst for older policies the maximum penalty that can be
applied would be 30% - it’s important to note however that these
are maximum levels and that over time these penalties reduce.
So an essential step in the analysis of the merits of transferring
will be to ascertain from the insurers what level of penalty will
be applied to your individual case.
The returns on your investments over time will ultimately be
determined by 2 factors; the investment return and the charges
levied against your investment. The level of investment return
you experience (once you have chosen your appropriate asset
class exposure) is largely beyond your control, unless you make
the mistake of trying to time the market. You’re time is much
better spent paying attention to the costs and charges levied
against your investment i.e. securing the best value investment
offering available.
PPS Investments, as the investment business that is actually
owned by all of the members of PPS offers exceptionally priced
investment products with the added benefit of ownership –
a unique proposition in South Africa.
For more information on the PPS Multi-Managed unit trusts please visit www.ppsinvestments.co.za for our latest quarterly report.
Asset
allocation
is still the
cornerstone
Typically investors have three main asset classes to invest in:
equities – the highest risk asset class, but which also has the
potential for the highest returns; bonds – generally less volatile,
but which offer more modest returns; and cash – where the chance
of losing money is very low, but the risk of not outperforming
inflation is greater.
Zee de Gersigny
PORTFOLIO
MANAGER
South African equities have been in a bull market since mid2003, returning an average of 27.3% per annum, in comparison
to the very pedestrian 9.6% per annum earned by bonds and the
stable 8.4% per annum returned on cash. It is in this market
environment that investors have been tempted to ignore the
merits of asset allocation, preferring instead to invest in last
year’s best performing asset class. However, it is in the current
financial crisis that we are reminded that nothing is a sure bet,
with the FTSE/JSE ALSI recently losing -38.5% from peak to
trough in just over five months. This once again affirms the
importance of asset allocation and the value of Regulation 28
of the Pension Funds Act.
The use of these three asset classes in combination, according to
an investor’s needs and risk profile, gives an investor diversified
exposure that should help achieve their financial goals over the
long term. This works on the basis that these asset classes move
up and down in an uncoordinated way and will result in an investor’s
overall portfolio return being less volatile. It was with the importance
of asset allocation in mind that the Prudential Investment Guidelines
in Regulation 28 of the Pensions Funds Act were introduced.
Governing all retirement funds, this Act prescribes certain asset
allocation limits that are intended to protect the interests of fund
members. The act, for example, prescribes that no more than a
maximum of 75% may be invested in equities.
The PPS Personal Pension and PPS Preservation Funds are required
by the Pensions Funds Act to comply with Regulation 28, at the
aggregate fund level. However, in the interests of all current and
future members of these funds, our Trustees have directed that
we apply these guidelines to each individual member. In other
words, we are required to safeguard investors from allocating in
Optimal combination of assets is based
on an investor’s time horizon and their
ability and willingness to tolerate risk.
The asset allocation decision, though often overlooked, is the most
important decision an investor takes when investing. It accounts
for close on 100% of the level of returns earned in a portfolio,
90% of variability in return over time and 40% of the variation in
returns across different funds, as illustrated in an important study
by Ibbotson and Kaplan in 2000. Asset allocation is the mechanism
that balances the amount of risk investors take with the level of
reward they expect to earn over the period of their investment.
It is a decision that should take the combination of an investor’s
goals and risk constraints, and distil them into an optimal mix
of asset classes that meet these objectives over time.
a non-prudent manner their all-important retirement capital.
In this way we are limiting risk in the exact manner intended by
the Act. We accept that this may be in contrast to other available
individual retirement products. However, we are comfortable that
our application of this principle is not only consistent with the
intention of the Act, but is also entirely appropriate for our members.
This optimal combination of assets is largely based on an investor’s
time horizon and their ability and willingness to tolerate risk,
typically the longer the time horizon the greater the investor’s
ability to comfortably take on risk. Over the long run investors
expect to be compensated for bearing market risk. All investments
involve some degree of risk; however, making an informed decision
to accept some risk also creates the opportunity for greater reward.
Our website provides an easy-to-use calculator which will indicate
if an investor’s selection of unit trusts comprises a Regulation 28
compliant asset allocation. Investments into the following PPS
multi-managed funds are automatically regulation 28 compliant:
PPS Enhanced Cash Fund, PPS Flexible Income Fund,
PPS Conservative Fund of Funds and the PPS Moderate Fund
of Funds.
Similarly, a recently published industry code specifies that the
same guidelines should apply to investments in Living Annuities,
ensuring that individuals do not suffer because of an excessive
allocation to a risky asset class.
For more information on the PPS Multi-Managed unit trusts please visit www.ppsinvestments.co.za for our latest quarterly report.
Issue 01
A cool head
will prevail
in turbulent
times
What on earth is going on?
In his recent book “Hedge Hogging”, veteran investor Barton
Biggs quotes the adage that trying to find out what’s going on
in the world by reading the daily paper is like trying to tell the
time using only the second hand of your watch. This has been
particularly true of late.
David R. Green
CHIEF INVESTMENT
OFFICER
The events of the past few months have been of truly staggering
proportions. It would be hard to give a full account of them without
resorting to excessive hyperbole, or lengthening this article even
further. Allow me instead to begin with an analogy: The end of the
quarter saw the death of screen legend Paul Newman. This prompted
me to re-watch his old classic “The Sting” which also starred a
still-very-boyish Robert Redford. The story is one of grand deception
at the end of which the “mark” is painfully parted from his money,
and the apparatus of the scam is dismantled with remarkable
speed and efficiency.
And so it has been with financial markets. After a multi-year buildup of easy-credit-based excesses, the deceptive nature of the game
has been revealed. With startling swiftness, the players have been
brought to book and their businesses removed from the financial
playing field. In what follows, I’ll first give a brief summary of
market performance. I’ll then offer a few insights into the dramatic
events that have been happening around us. And I’ll conclude with
some implications for portfolio positioning and the way forward.
The headlines have been captured by the drama of the US
government’s bail-out of loan guarantors Freddie Mac and
Fannie Mae and of giant insurer AIG. On the other hand, we
have read of the same government’s allowing a 157-year old
investment bank Lehman Brothers to fail, and of the Bank of
America’s purchase of ailing Merrill Lynch. Earlier in the drama
two Bear Sterns hedge funds collapsed after sub-prime loan
investments turned sour, to be followed 8 months later by the
collapse of Bear Sterns itself and its subsequent sale to JP
Morgan for $10.00. Towards the end of the quarter investment
banks Goldman Sachs and Morgan Stanley completely changed
their stripes and were swiftly converted to conventional bank
holding companies.
The investment banking misery spread to other parts of the
US financial system and to other parts of the globe. Initial
concerns about Washington Mutual, the US’s 3rd largest bank,
proved well-founded and its collapse and sale to JP Morgan
constitutes the biggest banking failure in US history. Wachovia,
the 6th largest US lender, folded shortly thereafter, and was
taken over by Wells Fargo after an initial standoff with Citigroup.
While all this and more was going on in the US, on the other side
of the Atlantic UK mortgage lender Bradford & Bingley collapsed
and was nationalised, as was Northern Rock before it, as were
Glitnir Bank and 3 others in Iceland. Also in the UK, HBOS bank
found itself in severe funding difficulties, and was acquired
by Lloyds TSB.
Financial markets are always
uncertain to a greater or lesser extent.
Performance summary
The 12 months to end-September have seen returns of –18.0%
from the All Share Index, +8.5% from the 1-3 year Bond Index,
+11.3% from the money market and –10.7% in rands from the
MSCI global developed-markets equities index. Consumer price
inflation over the period ran at +13.6%, continuing to make inflationplus targets hard to beat for now. Of course these numbers don’t
tell the whole story. Some very steep declines in global financial
markets have happened over the last quarter, and since quarter-end.
In the context of dramatic world-wide equity market declines, I’m
pleased to report that we have consistently maintained our lessthan-gutsy equity exposures in the 3 inflation-targeting unit trusts
(the PPS Conservative, Moderate and Managed Flexible Funds of
Funds). I am very pleased with the strong performances of the PPS
Enhanced Cash and Flexible Income Funds. The PPS Equity Fund
has beaten its benchmark over the quarter but, in retrospect, would
have benefited from a greater exposure to the less-benchmark-aware
managers in the mix.
Many central banks, national treasuries and legislative bodies
have responded to the crisis. I’ve already mentioned a few of
the bail-outs and guarantees above. The European Central
Bank came to the rescue of Dexia Bank as did Belgium and
the Netherlands for Fortis Bank, the Reserve Bank of India for
ICICI Bank, the largest in India, and Ireland for all six of its
largest lenders. The $700bn US Troubled Asset Relief Program
(TARP) was initially rejected by the legislature, prompting
further market carnage, and something of a rally on its passing
by the Senate on 2 October. A week after quarter-end several
of the world’s central banks, including China’s, launched an
unprecedented co-ordinated interest rate reduction, but equity
market declines continued unabated, demand for allegedly riskfree US Treasury assets remained intense, and inter-bank lending
rates remained stubbornly high.
So what’s really going on here? I’m reminded of the following
from economist Lord Maynard Keynes “In the long run we are
For more information on the PPS Multi-Managed unit trusts please visit www.ppsinvestments.co.za for our latest quarterly report.
all dead. Economists set themselves too easy, too useless a
task if in tempestuous seasons they can only tell us that when
the storm is long past the ocean will be flat.” This tempestuous
season had its origins long before the first bankruptcies of
sub-prime mortgage lenders American Home Mortgage and
New Century Financial Corporation in the second half of 2007.
And it is more complex than simply the failure of banks which
made questionable loans to insubstantial borrowers. Yes, the
souring of the sub-prime mortgage bubble has been an important
catalyst, but I believe that we are seeing the unwinding of
systemic asset bubbles fuelled by decades of relatively low
global interest rates, lax credit granting standards, global
financial market integration, and de-regulation or self-regulation
of financial market institutions.
I mentioned above that inter-bank lending rates have remained
stubbornly high, despite central bank rate cuts. This is a crucial
observation. It is the result of the world’s commercial banks,
spooked by the sub-prime-related defaults of their peers, being
unwilling or unable to lend to each other.
This has left them in a severe liquidity (if not solvency) crisis,
and required the intervention of central banks and national
treasuries to provide liquidity and recapitalise them. The fact
that inter-bank lending rates remain at record highs indicates
that the confidence of banks themselves in the global banking
system has yet to be restored. Think of it as a very modern,
and wide-spread, equivalent of a retail banking run, draining
liquidity from the entire banking system.
Catalysts like the current sub-prime crisis often strike when
the tide of economic fortunes has already turned down. This
was true of the great Wall Street Crash of 1929, and was true
most recently of the 9/11 terrorist attacks in 2001, and of
many crises in between. A recession in the US, led by reduced
US consumer spending, and a global economic slow-down, are
now firmly on the radar screen. This implies, inter alia, reduced
immediate demand for South African commodities exports,
and helps explain the –38.3% fall in our investable resources
index over the quarter. I thus believe it would be myopic to
expect an immediate, smooth or sustained recovery in economies
or markets. Two silver linings are worth noting: the reduced
fears of inflation allow the world’s central banks more scope
for interest rate cuts, and the internal economies of China and
India still appear robust for the foreseeable future.
Positioning for the future
These are dramatic times indeed. Extreme uncertainty abounds.
But then, financial markets are always uncertain to a greater
or lesser extent. What’s important is consistent adherence to
the simple verities of investing. By far the most important of
these is: buy assets when they’re cheap (while avoiding what’s
deservedly cheap). At PPS Investments our adherence to this
principle goes a long way to explaining our very conservative
stance to date, and our likely positioning going forward. Since
implementing our first investments, we have been consistently
cautious about the valuation levels of certain asset classes
and market sectors, particularly local listed property, longdated bonds, and resources stocks. We have accordingly biased
the funds entrusted to us away from these expensive assets.
Of course we don’t possess the fabled crystal ball, but I have
seen several times over my investing career that while market
events are not forecastable, valuation episodes are usually
plain for all to see. So… how will we be positioned now? We’re
aware that equities are looking cheaper than they have for
quite a long time. However, we are still cautious as we know
that South African companies are coming off a multi-decade
peak in corporate profitability, some of which is still reflected
in current price levels.
In other words, South African shares may be cheap by the
standards of recent history, but they are not nearly as enticing
in the context of a global economic slow-down, and anticipated
reduced corporate profit margins. And although the most acute
phase of the global shake-out may now have passed, aftershocks are bound to still occur for some time to come. Our
approach may therefore be to very cautiously increase equity
weightings towards our strategic long-run target allocations.
But we will not do this by simply allocating capital to equities
managers. Instead, we are more likely to achieve this by upweighting our clients’ exposures to genuinely-skilled balanced
managers like Prescient Investment Managers (PIM) who ably
use financial instruments to protect our clients from inevitable
equity market declines.
Not only will our exposure to local equities remain cautious,
but our exposure to global equities will probably not be fully
weighted, and will remain firmly indexed. Indexing global
equity exposure over the past several months has already
allowed us to very handsomely out-perform actively managed
alternatives, whether before or after management fees. Outside
of equities, we remain cautious of listed property and longdated bonds, and are pleased to see that our appointed fixedinterest managers are not over-anxious to avail themselves of
the now more-enticing yield spreads available on South African
corporate debt issues.
In summary then, we are very mindful that: “Other peoples’
money is… other peoples’ money.” We will continue to be
cautious with the valuable funds that have been entrusted to
us. Where we increase exposure to more favourably priced
asset classes, it will be:
1.
2.
3.
4.
5.
to help achieve our clients’ strategic multi-year objectives;
protected where possible against short-term surprises;
implemented by managers we regard as genuinely skilled;
in as cautious and cost-effective a manner as is possible;
supported by analysis and research of the highest order.
For more information on the PPS Multi-Managed unit trusts please visit www.ppsinvestments.co.za for our latest quarterly report.
Issue 01
(ACI) statistics clearly illustrate that retail investors have panicked
with the majority of the flows going into money market (cash) funds
– at precisely the wrong time! These people will regret missing out
on the next equity Bull Run and will subsequently try to reinvest
their money right at the top of the cycle, which will lead to them
suffering the same fate again. When you are confronted with this
bias remember the following quote from Warren Buffett (the world’s
leading investor and richest man): “We simply attempt to be fearful
when others are greedy and greedy when others are fearful”.
Investors
behaving
badly?
Nico Coetzee
HEAD OF SALES
The end of 2008 is fast approaching and with this for some comes
the prospect of annual bonuses. As we know, many recipients will
undoubtedly have over-spent during the year buying consumer
products or the latest “must-have” items in anticipation of receiving
‘bonus-relief’. They will now have to use this much needed cash
injection to repay the bank! The financially prudent amongst us
who have managed their debt and spending patterns will have to
decide what best to do with this excess cash. The question that
those who are in this privileged position should be asking themselves
is: “What is the best investment vehicle for my hard-earned money?”
Behavioural finance
has shown that emotional
and cognitive biases are
heightened in times of
extreme volatility.
The availability bias is a cognitive bias and refers to the tendency
to rely on the most readily available information in order to make
decisions, not necessarily having confirmed its accuracy. Simply
extrapolating recent personal experiences leads to an assumption
that current trends will persist. By way of an example: the Yale
Investor Confidence Survey gauges the investors’ general expectations
with regard to anticipated market returns for the following twelve
month period. In 1998 during the IT boom, 76% of US investors
expected returns of 10% and higher whilst 20% of US investors
anticipated returns of 20% and higher. Contrasting this to March
2001 after the dramatic unravelling of the IT boom, the majority
of US investors anticipated returns in the region of 10% whilst
only 8% believed that prospects for a return of 20% or more were
good. Understandably, the same shift in sentiments has been
experienced again across the globe during recent time, but this
time unrelated to IT of course. Those same investors who believed
a year ago that the strong performance of the equity markets would
continue for at least the next few years have now changed their
tune and are running for the hills! In order to avoid falling into the
“follow the herd” trap, you need to remain focussed on your longterm goals. Most importantly, only adjust your portfolio when YOUR
circumstances change, not when the market does.
Investors wanting to protect themselves against these biases
can select a PPS Multi-Managed Fund that corresponds to their
risk profile. This leaves the asset allocation, manager selection
(and stress) to our qualified team of investment professionals.
We have always maintained that you let the professionals do
what they do best.
The fascinating field of behavioural finance has shown that these
kinds of decisions will be influenced by several emotional and
cognitive biases which are heightened in times of extreme volatility,
as experienced in the past few months. It is therefore essential
that both clients and financial advisors have a framework within
which they can identify, analyse and address their biases when
selecting investment products or constructing investment portfolios.
Although an alarming total of 50 systematic biases are understood
to have an effect on investor behaviour; the most common ones
that threaten investors in the current turbulent market conditions
are referred to as the ‘regret aversion’ and ‘availability’ biases.
Research estimates that only 6.5% of South African investors
can afford to retire at age 65. This is primarily because South
Africans have earned low investment returns, paid high fees and
have not saved enough. The first issue is easily circumvented
by sticking to a long-term investment strategy. A long term
strategy necessitates exposure to riskier assets, such as equities,
that over time will generate returns above inflation. Always follow
the motto: time in the market, not timing the market. PPS
Investments addresses the problem of high fees by providing
professionals with access to our range of discretionary and contractual
savings products, such as the PPS Preferred Funds and the PPS
Personal Pension Fund, at very competitive rates. No initial
administration fees are charged on any of our products. In addition,
any rebates on fees that we negotiate with our third party managers
are passed back to our clients.
Regret aversion is an emotional bias and refers to the feeling of
regret investors experience because they weigh up the questions
of “what is” and “what could have been”. The massive downturn
in the markets has left many investors regretting their decisions
to invest in equities. The latest Association of Collective Investments
So, if you are one of those prudent few who have not fallen
into the trap of not saving enough and have a couple of rand
to invest, use the opportunity the recent market decline has provided
and diversify your portfolio across all asset classes, including
equities.
For more information on the PPS Multi-Managed unit trusts please visit www.ppsinvestments.co.za for our latest quarterly report.
As the dust settles and the banking crisis abates, the focus shifts
to the outlook for the global economy. It seems probable that the
credit crisis will push Europe and the US into recession. Growth in
Asia will slow significantly, partly because of a contraction in world
trade, but also because many developing economies also have
developed unsustainable excesses which have to be worked out of
the system. Investment will slow. A decline in world growth will erode
commodity prices. Corporate profits are likely to decline significantly.
Business conditions will be difficult.
A contextual
long-term
view
Sandy McGregor
Guest contributor
PORTFOLIO MANAGER
OF ALLAN GRAY
LIMITED
History suggests there will be light at the end of the tunnel
South Africa’s banking system so far has survived the crisis in
financial markets relatively unscathed. This is also the case in China
and Japan. However in Europe and the US there is a serious problem.
One of the most remarkable features of the current crisis is how
its extent and scale has taken even extreme pessimists by surprise.
We are experiencing the worst banking crisis since 1931-1933.
Its immediate cause was poor mortgage lending in the US.
The IMF now estimates total losses will reach US$1.4trn, of
which about half will be in the banking sector.
Banks – much higher gearing than superficially apparent
Since August last year banks, mainly in Europe and the US, have
made provisions of US$635bn for sub prime losses and have raised
US$495bn of capital to bolster their impaired balance sheets. The
negative impact of these losses has been aggravated because there
was, in practice, a much higher level of gearing in the banking system
than was superficially apparent. Banks boosted their returns on
capital by shifting risk off their balance sheets. This business model
has totally collapsed. Collectively the global banking system is too
undercapitalised to provide the normal expansion in credit a growing
economy requires. A freeze in lending is already adversely affecting
the global economy. Since March 2008 lending by US banks has
hardly grown. Central banks have acted to maintain liquidity within
the system, but have been unable to restore the banking system’s
capital base to a level which would allow normal lending to resume.
Private investors’ appetite for further bank capital is limited. Those
who provided the US$495bn of new capital raised so far have
experienced significant losses. There is only one source of capital
left – the state. As a result, banks in Europe and the US are moving
unavoidably into some form of public ownership. Some banks will
survive unscathed. Many others will see their existing shareholders’
interest in their business substantially diluted.
What will be considered ‘normal’ moving forward will be
different to the recent past. It is difficult to predict the outcome of
this saga. Certainly the experience of the 1930s is still sufficiently
real in the collective memory to make a wholesale collapse of the
financial system politically unacceptable. It is noteworthy that US
Federal Reserve chairman Ben Bernanke’s area of academic expertise
is the financial crisis of the 1930s. Allowing Lehman Brothers to
collapse is now generally recognised to have been a major error.
Governments are going to stand behind the rest of the banking
system until normality returns. However, what will be considered
normal will be very different to the recent past.
We’ve been here before
It is not easy to make meaningful predictions about the economic
outlook. However recent economic history does offer useful insights.
Since the end of the 1960s there have been four major periods of
economic contraction.
1974 – 1976: This period witnessed the first major global recession
after the Second World War, mainly caused by a big rise in the oil
price. The Dow declined 41% from 987 in October 1973 to 578
in December 1974 – similar to the recent decline of the Dow from
its peak in September 2007. Another similarity with 1974 is that
investors were lulled into complacency by a long period of financial
stability. For about 20 years after 1950 Europe and the US experienced
continuing growth. The idea of a serious recession was totally alien.
More recently, there has been a sense that we are living in golden
age. As in 1974, the shock to investors’ psyche has been profound.
Interestingly, in 1975 the markets bounced back rapidly. By June
1975 the Dow reached 880, up 52%. Business conditions, which
peaked in the middle of 1973, declined for 20 months and then
picked up strongly.
1980 – 1982: This recession was caused by a decision by central
bankers, and in particular Paul Volker, chairman of the US Fed
(1979 – 1987), to bring inflation under control by hiking interest
rates. This is the only significant example of governments engineering
a recession to eliminate inflation. In contrast, the Fed’s policy under
Alan Greenspan (1987 – 2006) was to sustain growth at all costs.
Economic activity declined over a period of three years from mid
1979 to June 1982. After peaking in November 1980 the Dow fell
to 783 in June 1982, down 22%. It then bounced 37% in six
months.
1988 – 1991: After six years of strong growth the world economy
stagnated for three years as it digested the consequences of the
collapse of communism and the Japanese investment boom.
2000 – 2002: The 1997 – 1999 Asian financial crisis had adverse
effects on emerging markets which did not start to recover until
2002. This was followed by the implosion of the dot.com bubble,
which was one manifestation of a major slowdown caused by various
economic factors. While the recession was comparatively mild, global
economic activity stagnated for three years.
We may enter a period of economic stagnation as the world
adjusts to the new banking realities. However, it is important to
recognise that we have been here before. Our experience since
1970 suggests these problems take up to four years to resolve.
Recessions are bad for share prices because they decimate
earnings. However the market is forward looking. Typically the
biggest stock market rallies occur immediately after share prices
collapse into an economic downturn.
Selected Allan Gray products are made available by PPS Investments within the range of PPS retirement and savings products.
Issue 01
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