Daily Equity Report

Markets around the world have seen it all over the last 24 months. Economies have also been in flux. Yesterday Ian wrote about the global economy and today I will take a look at some market indicators, which as he mentioned can often not conform to one another.

Returns in the first half of 2008 were mixed as financial shares faltered with the system beginning to show some cracks, but resource shares roared up on the back of sky rocketing commodity prices. From around the middle of 2008 until the beginning of March 2009 we saw almost all shares being hammered in the global recession. Apparently only 3% of shares ended this period in the green! But as global stimulus measures started to take hold we saw an almighty rebound from the beginning of March until the end of the year.

What’s the likely outlook for the next two years?

For starters investors are becoming more and more confident as the markets rise. Apparently they are paying little heed to the fact that much of this rebound can be attributed to extremely loose monetary policy employed by many governments that can’t be sustained forever. If policy tightens (as a result of inflation increasing and economies rebounding quicker than expected) then the financial institutions need to open their taps to help stimulate the markets.

Research out of Bank of America Merrill Lynch indicates that investors are taking on above average risk for the first time since 2006. Key indicators in this survey are cash balances of fund managers, which continue to fall as their weighting to growth assets increases, the number of investors protecting themselves against market correction, which continues to drop, and more investors becoming bullish on company growth prospects.

As growth becomes the ‘consensus outlook’ one must become more wary of any blips on the road ahead. Some successful contrarian managers have already reduced the risk of their books.

Finally, a graphical illustration of this increase in confidence can be seen in the level of the VIX, which is now below its 20 year average, indicating that investors are comfortable investing in the market.

The VIX is often referred to as the ‘fear index’, but it could full well be called the ‘greed index’ when it gets to levels that are too low. Higher levels on the index relate to greater panic in the market, and incidentally what often turn out to be the best buying points in the market. Lower levels indicate investor comfort, and expectations that returns will continue to be attractive.

It is at times like these that investors need to be wary of what they invest into and why they make the investment. Have they done their research (there are still many sound investment opportunities) or are they afraid of missing out on more gains?

Take care,

Mike Browne
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966