Global market rebound possibly 'eye of the storm'

Consumers should continue to be cautious with their spending despite global markets stabilising and Wall Street registering its highest gains in a single day since the darkest days of the Great Depression, writes Michael Appel.

While stability is retuning to the markets with a general reversal in losses sustained over the last two weeks, economist warn this could only be the eye of the storm.

Investec Asset Management strategist Michael Power told BuaNews on Wednesday it was the real economy which was most likely to come under strain in the next few months.

The real economy will be affected in terms of the growth or fall of Gross Domestic Produce.

Of the $700 billion approved recently by Washington to buy the bank's existing debt, the US administration is rumoured to have allocated as much as $250 billion to buy into the US banks.

The nationalisation or semi-nationalisation of banks has not been viewed as ideal for free market economies, however, Mr Power said in this case it was a necessary evil.

"To keep the patient alive, it's what needs to be done," Mr Power explained.

The necessary amount of capital to add liquidity to global markets and get the lending-ball rolling again is about $4 trillion, he said, adding that Germany had also recently approved an amount of 500 billion Euros to be injected into its markets.

Economist at Econometrix Treasury Management (ETM) Russell Lamberti similarly told BuaNews that the government buy-in into banks was a necessary step to repairing the damage caused to global markets.

"But I don't think you want to nationalise banks indefinitely. It's got to be a case of nursing the balance sheets back to health, restoring financial credibility and then over time, selling it back to the private sector.

"The nationalisation of banks is necessary to keep the system working."

Meanwhile, the US administration is also using a further $125 billion from the $700 bail-out package to buy into the world's top nine banking institutions.

The $125 billion, Mr Lamberti said, will be used to buy preference shares and create certainty within the markets again.

As global markets return to some sense of normality, even if only briefly, market levels are likely to hover around these same levels for the next two years, said Mr Lamberti.

The liquidity problem in the US has led to the withdrawal of capital and investment in emerging markets - and South Africa has been no exception to this.

Investors have pulled capital out of emerging markets in order to pump funds into the US market, leading to some of the losses the Johannesburg Stock Exchange (JSE) has witnessed recently.

Mr Power believes though that the bulk of investor capital flight has now taken place and that emerging markets will stabilise to some degree for the moment.

As a leading emerging market with sound macro-economic principles and policies in place, combined with properly capitalised financial institutions, Mr Lamberti said South Africa was well positioned to take advantage when foreign investors return to emerging markets.

"If there is a really positive turnaround with all this government intervention in the financial sector crisis, and investment and growth opportunities in the developed world have dried up, then investors will return to developing countries.

"Investors with increased risk appetite will return to emerging markets and South Africa is structurally well placed to take advantage of this," Mr Lamberti told BuaNews.

The developments on the financial markets at the moment are positive and a step in the right direction, but it is certainly not a guarantee.