Glimmer at end of the tunnel

Recent market gains can’t be dismissed as a mere respite

I LOOKED forward to the long weekend.

I had gathered a pile of articles and magazines and promised myself that by the end of the four-day holiday I would be better informed to comment on how the government’s bail-out packages were likely to shape the outlook for the global economy, and how the decision to drop charges against ANC leader Jacob Zuma might influence South Africa’s future.

When I sat down at my computer to write this column, I had made little progress on either count.

I felt as if I were trapped in a call centre that transmitted an uninterrupted message: “For a cheery and upbeat view of the world, press 1. For motive to abandon society and dwell in a cave, press 2.”

It’s hard to ignore the stock market’s gains over the past five weeks. I have always considered a stock exchange a barometer of an economy’s health and so have believed that the steady improvement in share prices was proof that the government’s various stimulus programmes were at last beginning to spring roots.

On Thursday, when traders were bracing for a correction ahead of Easter, share prices moved in the opposite direction, responding to a splattering of good news.

Wells Fargo, a large US consumer bank, reported that its profits for the quarter would soar to record levels, strengthened by increasing mortgage refinancing business and a decline in loan losses.

Same-store sales for US retailers, though down, provided further evidence that the rate of decline in the world’s largest economy was slowing and that the country appeared to be weathering the financial crisis.

Not everybody shared that notion, nor that thawing credit markets, more money in consumers’ wallets and revised accounting rules would empower the financial industry to lead the world from the brink of disaster.

A number of commentators warned sternly that banks still faced major write-downs from credit cards, corporate loans, and residential and commercial real estate. And, for as long as the economy remained under strain, jobs would be lost. With unemployment on the rise, spending would contract and profits shrink.

George Soros, the renowned hedge fund manager, joined the naysayers, expressing the view that the current financial crisis is unlike any we have experienced in our lifetime and that the recovery in the equity markets would sputter because the economic downturn hadn’t yet reversed.

Marc Faber, another lively and well-known money manager, concurred, believing markets would decline by at least 10percent before finding support, but only after July. Even President Barack Obama admitted that the US economy was under severe stress.

It’s tricky to decide on which side of the fence to sit.

Naturally, any recovery after an epic fall will be distrusted . But to call the recent rally a temporary respite in a bear market implies that, at some point, share prices will turn and sink into a void beyond their November lows. That’s where I draw the line.

I can accept that there are still a number of obstacles to negotiate before we can claim that the world economy is on the mend, but the glimmers of light emerging from the dark tunnel are adequate to make one hopeful that perhaps the worst point in the downturn has been reached.

The good news out of all of this for South Africans is that, with the world still stunned by the conduct of those reckless and greedy bankers who sabotaged the world economy, few international investors have paid attention to the negative press surrounding the plotting and scheming of the government officials in the state’s corruption case against Zuma, or the fact that the future president will escape sitting in the dock.

Instead, investors have taken comfort in the country’s disciplined fiscal and monetary position, and the strength of its banking system. But don’t rest on their continuing magnanimity. Eventually, when conditions in the world normalise, questions will be raised about Zuma’s integrity and his questionable relationship with convicted fraudster Schabir Shaik.

In the meantime, their distraction will offer the new president breathing space in which to fulfil his election promises and, one hopes, prove that, despite the stain on his character, he is a capable and effective leader.

Article by: David Shapiro - www.thetimes.co.za