Another month, another acronym. January saw the announcement of an unlimited LTRO (“long‐term refinancing operation”) by the ECB (“European Central Bank”). The LTRO has allowed distressed banks to borrow 3 year money from the ECB at very low interest rates, thereby providing a substantial boost of liquidity to troublesome balance sheets and – for the moment at least – deferring the possibility of a run on the banks. This was a smart move, equal in effect to the implementation of TARP (“Troubled Asset Relief Programme”) in 2008 in the US aimed at bailing out those financial institutions that had been savaged by the sub‐prime crisis. Coupled with a continuation of above expectation performance by the US economy and a reasonable set of corporate results, the LTRO changed the investor mindset to one of greater risk appetite: where December disappointed, January surprised on the upside (see the return for Greece below).

12 Months

With an improvement in sentiment, the US$ was on the back foot for the greater part of the month. Whilst the recovery in the Rand was fairly muted (+4%), the currency impact on some of the markets shown in the upper table was significant. Thus a positive swing of 9% by the Indian Rupee against the US$ had a sizeable impact on the total return of the Indian share market. With the investor view of the world decidedly rosier, there was a strong swing out of the defensive sectors that dominated attention and returns last year into cyclically oriented areas such as Materials and Diversified Financials.

The sustainability of the current mood still depends largely on resolution of the European crisis. There are substantial debt rollovers to face within the next few months and Greece remains an oozing sore that refuses to heal. The LTRO is a good start though.

• At least one long outstanding question was answered in the last month: when would the All Share regain its previous high? The fact that this would occur in the first month of the new year was definitely not on anyone’s radar screen at the end of last year. It took a clever European financing package early in January to get the party back on track.

The upper graph alongside illustrates the profiles of the South African bear markets over the past three decades. The performances are indexed to 100 at the trough of the All Share Index, with the profile of each line indicating the fall from the previous peak to its low and the subsequent retracement back to that peak. The X‐axis indicates the time in months that each cycle took to reach its low and the time that it took to regain its previous high. The table below

the graph puts numbers to the moves. It is interesting to note the following: firstly, whilst the bear markets of ’69, ’74 and ’80 took a lot longer to bottom out, their annualized falls were not as vicious as those of ’87, ’98 and the most recent of ’08; secondly, the recovery periods of the earlier bear markets of ’69 and ’74 almost matched the time it took to reach the bottom, stride‐for‐stride. The more recent bear markets were typified by a far shorter time to the bottom and a longer grind back to the top. Thirdly, the ‘08 bear was particularly vicious. Whilst it matched the collapses of ’87 and ’98 in terms of the (short) period that it took to hit rock bottom, the recovery this time around took twice as long. In fact, clawing back that which was lost in ’08 – ’12 took longer than was the case in the aftermath of the ’69 and ’74 crashes. Whatever it takes.

• Global politics has become increasingly relevant over the past few years as voters in certain regions have indicated a resistance to letting the normal 4‐year cycle that an incumbent is in power, to run its course. Abundant policy mistakes have heightened the risk of political tenure and decision‐making. This year sees a number of crucial elections taking place, the most important of which will be in the United States, France, Russia and China. These countries comprise 40% of global GDP, and are key players in the political arena. Other elections to watch will be those of Greece, Egypt, Venezuela and Korea. Share markets have reacted favourably to elections in the past – especially in the US ‐ but with policy maneuverability constrained, it might not happen this time around.

By Matt Brenzel of Cadiz

Tags: #China, #global politics, #JSE, #Markets, #Russia