A brief market update

The start of the year has been a rough and bumpy one. At the time of writing the ALSI continues to be extremely volatile with the index down 13.2% year-to-date. The Financial Index is down 14.17%, the Industrial index down 13.99% and Resources are down 11.22%. At the time of writing the ALSI was below the 25000 level. This means the market has fallen more than 15.72 % since its all time high at the beginning of October.

To put this in context let us compare it to some other market corrections in the last two years. In July/August the market fell slightly more than 13%, while in May/June 2006 the market fell almost 17% in a much shorter time. The market recovered rather quickly after both these downturns and people who switched out of equities into cash realized their losses and missed out on the subsequent market rally.

The reasons for the fall in global and local markets vary. The sub-prime crisis in the US is the main cause of the negative sentiment in our market as the big banks continue to report billions in sub-prime losses (especially affecting financials). Citi Group reported a loss for the fourth quarter and also that they would cut dividends by 41%. This news along with other sub-prime related losses has led to global risk aversion and changed investor sentiment. The US and global markets have also started to price in the possibility of a US recession which looks increasingly likely. In the near term it looks like the volatility is here to stay - at least for the next 6 months.

Locally, what has changed? South Africa is vulnerable to a US recession and negative investor sentiment, partly because of our large current account deficit. There is also a predicated electricity crisis in South Africa and we have to see how this impacts on our economy. The SA economy is still slowing as interest rates continue to rise, but no one is forecasting the SA economy to go into recession.

The most important thing is to make sure you can stomach these volatile times and ensure that your portfolios are in line with your risk profiles and time horizons. The market has priced in some of the bad news and more often than not overshoots these news events. Only time will tell whether we will see more losses and write downs regarding sub-prime. On the other side of the spectrum, the downturn in the market could provide a great opportunity for new investors, who can take advantage of this pullback to invest in discounted equities. In the same way that markets start to price in the possibility of a recession before the fact, they will also start to price in the possibility of a recovery before it occurs.

Source: Glacier Research Team

Our Investment Strategy going forward :

• All clients already in the market must stick to their specific investment strategy/s based on the Silke Financial Services philosophy of "time diversification"
• Monthly Debit order investments: Continue to buy or increase debit orders to buy unit trusts at bargain unit prices via rand-cost-averaging
• All new lump sum investments: the medium to long-term investor should be positioned to sweep up bargain unit prices via our recommended equity funds. The view of Silke Financial Services is to phase lump sums into equity unit trusts over the next 6 months while volatility ensues. In addition, if the market drops even further we can change strategy while you are phasing into the market

Silke Financial Services have the skill and expertise to look advise you correctly through all market conditions in line with your tolerance for risk.

If you have any queries regarding the above commentary please contact us on 021 683 3380 or info@silke.co.za.