After a surprisingly good start to the year, global equity markets have suddenly slammed on the brakes, says Paul Stewart, director of Grindrod Asset Management.
"Whether it is because of the problems in Europe, or just an overbought position in technical terms, the pull-back from the highs in 2012 has been quite large in some markets.
"Not surprisingly the markets that have come under the most strain are those in Europe, especially Spain and Italy, which are under close scrutiny and cited as the next countries to experience a debt crisis," says Stewart.
"In addition, of the indices under investigation, the Spanish stock market was the first one to start declining from its 2012 high, recording a decline of almost 25 percent to date."
What comes as somewhat of a surprise is the big difference in the returns from emerging markets, specifically Russia and Brazil versus South Africa and China.
"While commodity prices have come under severe pressure, the South African and Chinese markets were able to offset that with strong performances in other sectors," he explains.
"South Africa also only reached its 2012 high, which incidentally was also an all-time high, on 2 May, more than a month after other stock markets achieved their highs.
"However, there is also a foreign exchange rate aspect that comes into play," says Stewart.
"A weakening currency has provided some protection for investors in local currency terms.
"The difference in the performance of the South African stock market in US dollars is significant, from being down 2.89 percent in South African rand to being down 12.81 percent in US dollars," says Stewart.
It is thus apparent that rand weakness over the period is a factor not to be underestimated.
"With the exception of China, which pegs the renminbi against the US dollar, it is evident that returns that are significantly worse in US dollars are an emerging-market phenomenon," Stewart points out.
"It also explains investors’ aversion to emerging markets during times of uncertainty, even though their economies are considerably better off at present than those of the developed world."
Article continues on page two: market returns from 2012 peaks to 15 May 2012 in local currencies and the US$...