Where to from here?
Written by Marize Pieters

Over the last 15 months global market volatility has risen to unprecedented levels and along with it, investor irrationality. It all began with a collapse in the US housing market and ended up in a global credit crunch which has seen a number of the largest and oldest independent financial institutions collapse. Amongst other things, the credit crisis has been the catalyst for a meaningful slowdown in global growth resulting in major economies struggling to avert a recession. Central banks have responded by firstly injecting liquidity into the market and secondly lowering interest rates in order to stimulate lending and consumer spending.

Although SA's exposure to the subprime crisis has been limited so far, negative sentiment from global investment markets has had a direct impact on our economy as we continue to see offshore investors selling out of emerging markets like our own. This has resulted in a sharp depreciation of the Rand, which together with high inflation, high interest rates and the poor demand for resources, has resulted in a poor local economic outlook. However, with the latest inflation figures indicating a decline, this might very well point toward the peak of our interest rate cycle which signals some relief for the domestic consumer.

It's been a torrid market and in hindsight every investor probably wishes they'd moved into cash at least a year ago. In fact, over the last 6 months, record amounts of money have been moved into money market accounts as investors seek safe havens. Investors seem to be acting largely on emotion and investment decisions made emotionally generally tend to be wrong. Investors also tend to go against common investment theory which dictates buying low and selling high. Instead, out of panic, they end up selling low and buying back high.

Timing the market is exactly where the problem lies. If you sold into cash and were capable of calling the bottom of the market, this approach would definitely have worked. However, historically when markets turn positive and rally, much of the gains are made in the first three months, a period during which most investors are waiting for confirmation that the rally is sustainable.