Summary of current investment views given recent market turbulence…

"Having read the many articles and views emanating post the market ‘turbulence' over the past week or so, and trying to get my head around a lot of what I have read, I have summarized below some of the views and points from some of the global investment houses.

It's always useful to look at the views of other professional money managers. Interestingly many of the below views co-incide with our own (other than Marc Faber who is a permanent bear!).

Birinyi - one of first to recommend buying when bull market began in 2009

"S&P will continue ascent and bull market is intact. While target of 1450 in mid 2012 is a bit shaky, but still expect 10 percent plus return in 2011. Decline is mainly political and not financial”

Belski - Oppenheimer and Co - "Dividend investing is an excellent strategy". Doing this 22 years, to me this has to be the type of bottoming that the U.S. needed to just clean the slate. A year ago, we were only a couple quarters into the rebound, now we're further in. There was less belief a year ago because nobody really believed forward earnings growth. Now they've proven themselves.” He estimates the S&P 500 will reach 1,325.

Marc Faber – believes current selloff is overdone and expect a short term correction, but still expects the S&P to drop to 1100 by October." Brainless strategists in us are still predicting 1400 to 1500 by year end". "Investors have lost faith in politicians and economic policies." Faber believes that treasuries are over-valued and calls long term treasuries as the " short of the century". He believes that the Fed are underestimating the extent of the economic downturn and that QE1 and QE2 have done nothing to labour market and only lifted stock markets and commodity prices, which has created greater inequality and higher energy and food prices. Markets will not test new highs this year as technical picture is horrid. He says that everyone should own some gold in their portfolios and that emerging economies are in far better state than developed world.

Phillip Saunders - key concern is threat to euro in its current form because problems have migrated to larger nations such as Italy, Spain and France. ECB has only provided short term respite by buying bonds. He, however, believes that world economy is likely to prove more robust and therefore some excellent long term opportunities. Developed economies are better positioned than those of the developed world with much lower levels of indebtedness and plenty of growth to sustain growth rates at higher prices.

Thanos Papasavvas - fixed income and currency strategist at IAM - core bond markets will be well supported but peripheral bond markets in Europe will continue to be volatile as markets test the resolve of politicians and the ebb to contain the crisis from spreading. USD will continue to decline versus majors and emerging market currencies over medium term due to "benign neglect", central bank reserve diversification, interest rate differentials, and poor fiscal policy.

Investec Asset Management Commodities team - recent intervention in safe haven currencies to try and weaken them has made gold the ultimate currency. Will continue to be well supported in a world of negative real interest rates.

Peter Eerdmans - head of emerging market debt at IAM - " EM debt has been seen as more of a safe haven than a high risk asset due to strong fundamentals. EM debt still are at significant risk is US goes into double dip recession, this is not the base case. Maintain long exposure to EM currencies due to continued flows, positive fundamentals, and expectation of growth rebound later in year."

Jerome Booth - Ashmore - "Greatest irony is that emerging markets are still considered a risky asset when all the world's problems are emanating from developed market, and the flight to safety came one day after a US downgrade. Investors have to get their head around the fact that emerging markets are no longer the main source of risk in the world. The main pools of liquidity now reside with emerging markets central banks, which hold most of the worlds foreign exchange reserves. A conservative investor should have 90-95 percent of their assets invested in emerging markets.

Hemming Gehardt - head of European equities at DWS, Germany's largest fund manger - " Shares look good value on forward earnings, price to book or dividend yields. Dividend yield of 5.5 percent in Dax is more than double the German government bond yield. Current valuations imply that market is expecting a deep recession, which he believes is an overreaction".

Chief investment officer at Vanguard - main difference to other bear markets is that valuations are more modestly priced now and are not priced for perfection. For long term investors, this is a buying opportunity.

Jim O Neill - chairman of Goldman Sachs Asset Mgmt - " Immense challenges face US and Eurozone to try and keep their currency alive. Demand in BRIC's is now more important to world economy than US and Europe. The world desperately needs a strong domestic Chinese economy. It is critical that Chinas inflation rate is falling as this, helped by lower commodity prices, has a positive impact on domestic demand. Pre-crisis, China was led by exports and investment, but post crisis, it will be led by its consumers, yet this cannot happen if inflation is rising. As much of inflation of China and other developing economies comes from food and energy prices, G7 policy makers should think carefully about consequences of fresh monetary stimulus, as it might make matters worse if it resulted in new bout of rising commodity prices. Inflation peaking would lead to China to stop tightening, which is important for rest of the world. Aim should be to boost the economies of these crucial export markets, whose help the west is going to need even more in future. "

Can't understand what is happening in markets as feel that there have been some positive policy decision by US and Eurozone over past week yet markets plummet. Still believe that bull market is not over and there are some Gretchen buying opportunities, BUT we need to break the spiral of falling equity prices of US and Euro banks, and they are cognizant of what markets are doing.

Jamie Dimon - CEO JP Morgan - "The strength of the system is going to blow your socks off when it comes out of this malaise,” "This will pass too. I don't know when, three months, six months, nine months or a year, but it will pass.”

Dave Kostin - US Equity strategist at Goldman Sachs - We see S&P 500 valuation as attractive for long-term investors given a large discount to fundamentals but do not expect the discount to close in the near term due to rising recession risk and elevated uncertainty in macroeconomic and political conditions, earnings views, and the path for interest rates,” Kostin wrote in a note dated yesterday.

Jonathan Golub – UBS chief market strategist – "This is a crisis of confidence and not a liquidity event. I'm reluctant to overreact to some shorter-term weakness, no matter how real it is, because the market has proven to be unbelievably resilient. If you would have been acting that way for the last two years, you would have gotten killed by this market. Companies have done an absurdly good job of managing through this environment.” Golub says the S&P 500 will end the year at 1,425.

Andrew Garthwaite, London-based strategist at Credit Suisse, reiterated an "overweight” recommendation on stocks even as he cut his 2011-end forecast for the S&P 500 by 7 percent to 1,350. "Our economists are not forecasting a recession and, indeed, are looking for U.S. growth to accelerate in the second half,” Garry Evans, global head of equity strategy at HSBC in Hong Kong, wrote in a note today. "Investors should look to raise equity risk gradually over the summer.”

Mark Mobius – "We're looking at equities all the time and equities are looking better and better with all this turmoil. If you look at the gross domestic product levels, foreign exchange reserves, emerging markets are in a very, very sweet spot.”

Tobias Levkovich, Citigroup Inc. (C)'s chief U.S. equity strategist – "It's unlikely I will change my view because we had a bad week or get really excited because we had a good week. That's not a well- reasoned market outlook.” He forecasts the S&P 500 will end the year at 1,400. "That's a reactive trader mindset, but that's not what I'm supposed to be doing.”

Barry Knapp, the New York-based chief U.S. equity strategist at Barclays, said that it's unlikely the economy will contract even though data show a slowdown. "If you sell stocks at 1,250, that's a bet we're going back to a recession, and we don't buy that.” His year-end projection is 1,450. "The probability of the U.S. going back into a recession is low. These things have a way of running their course.”

And now for a summary of Investec Securities view:

1. What is clear is that the macro-economic picture has deteriorated somewhat over the last 2 weeks, with developed markets reacting to 1. a lack of credible political leadership (‘weak' coalitions in Germany, UK and US) & 2. a lack of confidence in economic growth (and / as a result of economic policies) going forward, mainly due to a lack of belief in governments / sovereigns being able to tackle issues.

2. All of this against a back-drop of US corporate profits /earnings mainly continuing to surprise on the upside (US earnings projections: 2011: +19%; 2012: +15%; 2013: +15%), strong corporate cash flow & balance sheet strength, and cheap stock valuations (S&P earnings to approach $100 by end 201 putting it on a forward 11.5x PE which is cheap & MSCI World forward PE of 12.3x vs. 15.4x median), which are supported by M&A activity & share buy backs.

3. A week ago the market was worried about whether the US Federal government could pay its August bills and whether firms were still hiring in July. Both of these concerns were allayed but last week still saw risk markets lurch down, momentum which has been be reinforced by the S&P downgrade of the US long-term credit rating to AA+ late Friday. A credit downgrade, by itself, should not trigger a large re-pricing of US assets but the motivation for the downgrade is important in understanding broader market movements. The market and rating agencies have understood for some time that the fiscal adjustments facing the US are more challenging than other large developed economies with the exception of Japan. The debt ceiling agreement manufactured an artificial crisis which produced only a small step in the right direction.

4. In the Euro area, it is encouraging to read an ECB announcement that pledges to "actively implement” its bond-purchase program. However, no concrete steps were announced. And it is hard to believe that the ECB will take on sizeable credit risk in Italy and Spain in an environment as a substitute for Euro area government's reluctance to do so. We believe the solution in the Euro-Zone should be obvious – full quantitative easing in Europe. Recent moves to widen powers of the EFSF and by the ECB to buy bonds of PIGS can be expanded into a solution for the crisis. But the longer action is delayed, the more damage is done. All this made this week's FOMC meeting the next key event. Even before the US credit rating downgrade we forecast that the Fed would act this week – by 1) providing guidance that there will be an extended period before it considers ending the reinvestment of its maturing portfolio and 2) altering the reinvestment policy to extend the average maturity of its securities portfolio. The power of these actions comes from the signal they send about the Fed's commitment to supporting the recovery and stabilizing financial conditions. Last year, a similar signal from the Fed effectively lifted risky assets during August and September. Markets appear to have re-acted favourably to the FED's comments at its Tuesday's meeting.

5. On the positive side, many of the concerns / icebergs from the first half of this year are dissipating namely what was a Japanese industrial and manufacturing slow down, higher Oil, & Emerging Market Monetary Tightening. Banking systems are generally in much better shape now than in 2008.

We believe that there are still solid investment and consumption trends in most regions: the global financial crisis saw over-reactions in consumer durables spending, capex, job-creation & bank lending, which have started to unwind but have some way to go. China & India have shifted to a lower but still strong growth path (from 11% GDP to 8.5-9%) & their monetary tightening cycles are at or near an end. Real interest rates are to remain historically low so as to maintain economic growth and achieve higher tax revenue to counter fiscal deficits. Sovereign debt issues will take years to structurally change , but we believe that short-term solutions will be found.

6. In SA we believe that interest rates will stay low (we see the ‘risk' being the next move in rates being LOWER) in order to spur economic growth. The steepest yield curve since 2000 supports risky assets like equities. SA equities continue to offer value in our opinion:

– Forecast ALSI 2 year earnings per share (EPS) growth expected well above inflation (decelerating in year 2), superior to other emerging markets, current EPS growth is 10% below trend & likely to overshoot as in previous cycles. We forecast EPS growth of 20-25% P.A. for the next 2 years.

– ALSI PE multiple of 10.5x consensus 12m forward earnings is below historical average. Growth-real interest rate indicators support above-average PE multiples.

– Meaningfully under-owned by both domestic & foreign investors.

7. My view is that at worst the market could go back to the levels of August last year (ALSI around 26,500 points) which is another 8% down from current levels, however this is not our base case scenario. We do expect the political clouds to clear before a double-dip recession is precipitated. We continue to focus on the medium term (12-18 months) outlook for equity which is attractive, even if the next couple of months may be tricky. We currently forecast an ALSI total return of 13 to 17% over the next 12 months.”

Richard Cardo, CFA
Portfolio Manager
Investec Wealth and Investment
Richard Cardo is SAIMechE's Portfolio Manager: Investec