My earlier posting on the state of the Rand refers. I imagine many of you are beginning to think that your future looks very bleak in South Africa .... I mean let's be real, the only thing worse than being white in South Africa is being poor and white. So I will explore this topic a bit today. Hopefully most of you ostriches will pull your heads out when I make a posting.An update first. When I last reported, the market was down 28.86%. This blood-letting has now become 36.50% BEFORE factoring the depreciation on the Rand. Your USD based net worth is now down 61.11%. Almost 2/3 of your net worth gone, as measured against the real world. This is devastating. If you had diversified into USD based assets your losses now would only have amounted to 2.49%, an improvement over the original 4.02% loss.
Ok so you didn't diversify, your broker is a doos and hindsight is 20:20. When will it all end? Nobody knows but let's speculate.
Markets in the short term are driven by sentiment. In the long run markets are driven by earnings. At the end of last year (2007) the ALSI40 (a good measure of the overall South African market) had an earnings yield of 6.83%. This means a market PE ratio (an important measure of price versus earnings) of 14.65.
So what, you say? Well let's look at history. Historically the PE ratio has always been around 11. So the market was overvalued somewhat. Let's speculate where we could end up. Assume the market deteriorates in the short term to below its long term average, to a PE ratio of say 9. Assume that earnings deteriorate by say 25%, and it could be way worse. What will this look like? That means the market needs to lose another 27.40% from its current position. Oh shit, you say. Yes it could be bad, so let's watch those corporate earnings, that will confirm where we are headed.
So what, you say? Well let's look at history. Historically the PE ratio has always been around 11. So the market was overvalued somewhat. Let's speculate where we could end up. Assume the market deteriorates in the short term to below its long term average, to a PE ratio of say 9. Assume that earnings deteriorate by say 25%, and it could be way worse. What will this look like? That means the market needs to lose another 27.40% from its current position. Oh shit, you say. Yes it could be bad, so let's watch those corporate earnings, that will confirm where we are headed.
So what to do? Well this isn't the forum for advice, but most importantly look at appropriately diversifying your portfolio, the Rand is shot and during times of global crisis the Rand will remain shot, probably never to recover again. The "experts" will advise caution, but caution MUST NOT include only being invested in South Africa. In fact as hard as times may be for the developed world, times will be even harder elsewhere, so again diversify across currencies and across markets. DO IT NOW.
7 Opinion(s):
Good post and very sound advice VI.
Hi Vanilla ice
Right now the whole financial world
is in a huge flux to put it mildly. Nobody can predict the final outcome of this chaos with the exception that those miserable bastards in NY and the City of London that engineered it will come out with increased clout one way or other. The average guy in the Western world and his off spring will be further enslaved. I believe that the Rand will strenghten against the U$ to at least 1U$ : 9.3 ZAR within 5 month. I think that for people in the RSA there are 2 fundamental different routes to contemplate when deciding into what and how to invest for your future:
A - Am I getting out of South Africa
B - Am I planning to stay.
In case of option B your investment might read like the manual of a survivalist group.
Indeed whiteadder, nobody can predict the outcome. What is certain is that in times of universal uncertainty market correlations go to 1, in other words they all behave in unison. At the same time there is a flight to safety, and as much as it irks me, the safe haven currency remains the USD. This means that other currencies will depreciate, relatively speaking. You are correct, there are 2 fundamental routes to contemplate BUT both should pursue exactly the same investment strategy, namely protecting the value of your worth as benchmarked against a first world currency (I use the USD as a proxy). If you only invest in SA assets on the notion that you will be remaining in SA, then you fail to diversify away diversifiable risk, like currency exposure and politics. As regards my views being survivalist, they are. There is nothing more debilitating than seeing your hard earned worth depreciate at a ridiculous rate, Zimbabweans can attest to that.
Hi Vanilla ice
Zimbabwe is a very good example. What I ment with investment on option B was certainly not any financial instruments out of Africa. I totally agree with you that in the end the people in South Africa will be in a similar or perhaps worse situation than the ones in Zimbabwe. To survive under such circumstances you need a different toolbox. Most people I know that are naive enough to opt for B have not even organised their " Africa " toolbox yet - nevermind comprehending the clear and ascellarating erosion of buying power and all the associated consequences.
Hi there
When are you going to fire Censorbugbear? Did you see the crap she caused at SAS with that LWB BS Detector on her blog?
She is a stinking traitor with no decency.
The rand is down again....and has performed much better than the australia dollar...so what's the message ? ASustralia is doomed !!! Doooooooomed !!!!
try again buddy.
Rooster said ...
"The rand is down again....and has performed much better than the australia dollar...so what's the message ? ASustralia is doomed !!! Doooooooomed !!!!
try again buddy."
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Australian investors should have been pursuing exactly the same strategy, namely portfolio diversification. As regards why South Africa may not recover, well you need to compare the differences in productivity, work force skills, political stability, inflation etc.
Any of you that may think rooster has a point, remember this. If I am wrong you haven't lost your wealth, if the likes of rooster are wrong you are wiped out. Go figure.
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