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Risky Business - some investment advisers say this is the time to invest

Strategists say the market volatility means now is the time to embrace risk rather than run away, writes Abdul Milazi in the Sunday Times

23 March 2008 · Staff Writer

The financial markets will recover as quickly as they have fallen and investors should look at taking the risk and into buying them now, say some asset managers.

Max King, strategist at Investec Asset Management, says with the US Federal Reserve expected to slash interest rates again and other central banks sure to follow, it is time that investors embraced rather than avoided risk.

Markets will recover as quickly as they have fallen, and it will be much harder to buy on the way up than now, said King.

"Anyone who has been following the news or the movements of markets could be forgiven for assuming that the world's financial system is locked in a death spiral of collapsing confidence, cascading insolvency and falling asset prices," he said.

It has been said that every moment of crisis is also one of opportunity.

"According to past crises, what would we expect at the bottom of the current one? First, one or more major financial collapses or near misses, comparable to the Savings & Loans Associations in 1989, Continental Illinois in 1994, Long Term Capital Management and sovereign emerging-market debt in 1998, Enron and, nearly, Citicorp in 2002.

"We would expect universal fear of a domino effect of further collapses, participants in all markets to be frozen into inaction as liquidity dried up, equity markets to develop a remorseless downward momentum and all hopes of a turnaround to be indefinitely postponed," said King.

Analysts agree that the US economy is probably in recession and US house prices are still falling.

But King says the recent insolvencies at Peloton Partners, Carlyle Capital and Bear Stearns are not associated with bad debts, but with a lack of liquidity in prime-quality, government-backed bonds that have no chance of defaulting unless the US government defaults.

"As liquidity dried up, investors required an increasing yield premium to hold them, so prices fell. It may look as though the bonds are discounting a risk of default, but anyone who buys them with real money and holds them is certain to be repaid at par," said King.

He said the US government might have to step in to remind investors that it is not going to renege by either injecting more liquidity into the market or physically buying the bonds, financed by issuing Treasury bonds, otherwise US corporations would start buying the debt at a discount.

If you don't know where to put your money, the word from those in the know is that the commodities market continues to sparkle.

Brina Sieber, marketing manager at Global Trader, said the past six months have been a record breaker on many fronts for the commodities market.

It is as if global investors have decided that commodities are the only sane place to take out insurance against America's debasement of its financial system.

"Predictions for the gold price are now well beyond four figures, with platinum raising its own benchmark at an even swifter rate," said Sieber.

"Add to that copper, silver, aluminium and a host of other record breakers, and all that glisters may actually be gold, or better."

South African investors know the precious metals market all too well - it has been the mainstay of the local economy for decades.

Cees Bruggemans, FNB chief economist, said the weakening rand presented an opportunity for the local manufacturing industry as it will boost the incomes of many producers, especially farmers, miners and some manufacturers. This, he said, could neutralise the unfolding spending weakness domestically.

"The good news is that the falling rand is the shock absorber of the moment, shielding the economy from the fallout of the global credit and banking contagion," Bruggemans said.

But he added that it remained to be seen whether there would be back-to-back bad news if the Reserve Bank were to raise interest rates to neutralise the effect of the weaker currency.

"If oil remains global-grease-of-last-resort for the high rollers, its rising price may prevent us from gaining an overall advantage from our rising precious metals prices.

"Only if our precious metals achieve a break- out relative to oil, would our current account deficit suddenly become positively transformed."

So far the rand is 20% weaker than in 2007. Analysts say that weakness could still balloon to between 30% and 40%, which would inject a lot more income than what is now being lost due to slowing spending momentum.

"We are in the midst of a major disturbance that's moving our cheese. Happily it isn't impoverishing us as a country, but the currency effects are rearranging the winner-loser line- up," said Bruggemans.

Rian le Roux, chief economist at Old Mutual Investment Group SA (Omigsa), said the chances of the local economy lapsing into stagflation ( a period of relatively high inflation combined with economic stagnation) have risen in recent months.

"However, any such occurrence will be more of a short-term cyclical phenomenon than a serious structural problem," Le Roux said.

He said any stagflation should be relatively mild compared to the country's experience in the '70s and '80s, when growth averaged about 2.5% and inflation around 12.5% a year.

"Over the next two years we expect growth to average about 4% and inflation about 6.5% a year. This is nevertheless a notable deterioration from the great conditions of the past four years when growth averaged 5% and inflation 4.8% a year," Le Roux added.
 

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