This week's bottom line... • This year’s Nobel Prize for Economics was shared between Eugene Fama, Robert Shiller, and Lars Hansen. Fama’s thesis is based on the efficient market hypothesis which states that all publicly available information is already reflected in stock prices. Shiller’s thesis is in stark contrast, that prices are driven by human emotion rather than rational pricing. This makes asset price bubbles a regular feature of the markets. The driving force of markets is summarized succinctly in the Investor Psychology Cycle below.
• Although difficult to pinpoint exactly where we find ourselves on the chart, it is worth noting that the All Share index will have gained for 5 straight years by the end of the year, barring any unforeseen correction. The index has increased from a low of 17,000 in 2009 to a recent all-time high of 46,000, with the price-earnings multiple of the index more than doubling from under 9x to 19x. Inevitably we may be approaching the “Greed & Conviction” stage.
Contempt: Usually marks the beginning of a bull market, the best time to buy shares. Doubt and suspicion: Anxiety ridden, markets are sceptical about the likelihood of recovery. Caution: Markets show sign of recovery but most investors remain cautious. Confidence: Caution gives way to new found confidence as share prices move upwards. Enthusiasm: All stocks go up on a rising tide. Contrarian investors may well take profits. Greed and conviction: Everyone is talking about the stock market. New listings abound. Indifference: Warnings that shares have become expensive are ignored. Dismissal: The change in cycle is dismissed as a mere short-term correction. Denial: There is prevailing view that the market will turn around. Fear, panic and contempt: Capitulation sets in leading to panic, desperation and contempt.
Week in review
Month in review
• SA’s GDP growth slowed in the 3rd quarter (Q3) to 0.7% quarter-on-quarter annualised, a steep decline from 3.2% in Q2 and well below the 1.3% consensus forecast. This marks the weakest growth in 4 years, caused mainly by the -6.6% fall in manufacturing output owing to industrial action in the automotive sector. Other sectors also suffered a notable slowdown including finance and real estate, wholesale, retail and accommodation, and electricity and gas sectors. Bright spots included the mining sector which rebounded from its -5.4% Q2 contraction with growth of 11.4%. Agriculture also rebounded after 2 consecutive quarters of contraction with growth of 3.6%. GDP is expected to accelerate in Q4 as manufacturing activity normalizes although not enough to boost full year figures. For 2013 GDP is unlikely to exceed 2%, placing pressure on the SA Reserve Bank (SARB) to maintain its accommodative monetary policy. The SARB is likely to keep its benchmark interest rate (repo rate) unchanged at 5.00% for an extended period.
• According to a survey of over 900 global investors conducted by Barclays, the prospect of the Fed tapering asset purchases is by far the main preoccupation. The consensus view among investors is for the Fed to start tapering in March 2014, with the Fed’s 1st interest rate hike expected in the 2nd quarter 2015. Meanwhile the majority of respondents expect the ECB to embark on further monetary policy easing, either through a Very Long-Term Refinancing Operation (VLTRO) providing discounted funding to the banking system, or other non-conventional easing. The overwhelming majority of respondents feel equities will offer the best returns in the next 3 months, in contrast with reduced enthusiasm for commodities and low risk bonds. The outlook suggests a continued asset allocation shift from safe haven bonds into equities. Confidence in equities is attributed to growing confidence in the global business cycle, which could drive “riskier” asset prices in the next few months.