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Investment Strategy
Sunday, January 1, 2012
Zoned out

Probably the most significant events to unravel in 2011 was the tide of civil rights upheavals in the Middle East. Systematically, one  dictator after another was dislodged from power beginning in January with President Zine El Abidine Ben Ali and his Tunisian government. In early February Egyptian President Hosni Mubarak resigned; in July violent protest against Syrian President Bashar al-Assad erupted and these rage on. In late August Muammar Gaddafi’s government was overthrown and in October the man himself was killed. Added to this, on May Day, a proud looking President Obama announced the assassination of Osama bin Laden. “Clearly tectonic shifts have been occurring in the social, political and economic landscape in the Middle East,” comments Adrian Clayton of PSG Asset Management.

On the point of tectonic shifts, 11th March 2011 was also memorable for all the wrong reasons for inhabitants of the east coast of Japan, particularly around the nucleus of Sendai. The 9.1 magnitude earthquake and subsequent tsunami resulted in approximately 16 000 deaths and is estimated to be the most expensive natural disaster ever – a cost thought to be between $250 billion and $350 billion. One global consequence was the increasing questions on the use of nuclear power.
Clayton also refers to the “ticking bomb” of the “utterly dysfunctional European Union and their inept politicians.”
Endless economic and political shuffles and hollow announcements have done little but undermine confidence in a system that was already fundamentally flawed, he says. Heterogeneous economic zones being forced to operate under a set of rules that are ill equipped to deal with their differences was always a likely recipe for disaster. On the 27th October, at an emergency meeting in Brussels, the European Union announced an agreement to tackle the sovereign debt crisis. They decided to write down 50% of Greek bonds, to recapitalise the banks and increase the bailout fund of the European Financial Stability to One Trillion euros. “This has to be seen as a step forward, but the complexity of the situation has meant that details that would reduce market distrust and lift confidence continues to be missing.”
Against all of this, the markets have been volatile and largely wealth destructive for investors. The MSCI World Free Index has lost 5% in dollar terms. Large emerging markets have been particularly poor performers – China is down 20%, India 33% and Brazil 24.5% in dollar terms. Although Europe has been the epicentre of uncertainty during 2011, these markets have not performed as poorly as the emerging bourses – the Dax, for example, has fallen 11.6% and the Cac 13.5%.  Against this backdrop the US markets are slightly positive for the year.
These numbers do not reflect the extreme volatility which has dominated the investing landscape. Most crucial to returns in 2011 have been the starting and ending dates of when performance is measured .
On the domestic front, the JSE has actually been a relatively sound performer this past year. The All Share Index returned a positive 5.1% in rand terms in 2011. The weak domestic currency has however meant that for foreign investors, the JSE has produced negative returns of 14.3%. The headline local index return of 5% in rands belies some of the outstanding performances from sub-indices and particular companies. Domestic consumer goods companies, mobile telecommunication stocks, oil and gas producers and technology stocks have shot the lights out.
Our bond market has also performed superbly with both inflation-linked and conventional counters producing high risk-adjusted returns.
This is an edited version of a report in the PSG Angle, the electronic newsletter of PSG Asset Management.

Copyright © Insurance Times and Investments® Vol:25.1 1st January, 2012
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