US crisis may kill SA projects

He points out that we have already seen the currency depreciate to above R8.30/$ in the wake of the news that Congress voted against the bailout package on Sunday night.

"Countries with current account deficits that are unable to fund them with domestic savings could well experience some currency weakness. While SA has R500bn pencilled in for infrastructure projects over the next few years, that funding will need to come from the fiscus, as well as from international borrowing, and if credit markets are not functioning well internationally that could result in the potential cancellation or delay of these projects.

"Thus events in the US could well also affect us in terms of our infrastructure spending programme," says Tyer.

"Events over the past few weeks have also seen commodities show the first serious signs of a reversal," he adds. "After sticking to our conviction and remaining short the commodity cycle for the past 18 months, it is good to see resources move down in line with our expectations; vindicating our investment view."

Lethal concoction

Unfortunately this has been concomitant with a general fall in asset classes. As a result, the one spectre now facing the financial markets according to Tyer is deflation - in sharp contrast with the inflationary fear that has gripped markets more recently.

"When you combine significant amounts of debt with falling asset prices and no growth - a la Japan for 15 years - you have a lethal economic concoction. In this event, the only place to hide is in assets that are a store of real value, namely gold, cash and bonds," Tyer points out.

"We hope this outcome does not materialise and that the current cheap price:earnings ratios in the equity market do offer a good opportunity for investors. However, investors who do not have at least a five to 10 year investment horizon and who don't know 'who and what they are' are advised to exercise caution," says Tyer.

He says current turmoil in the financial markets brings to mind a quote by John Maynard Keynes: "If you don't know who you are, the stock market is an expensive place to find out."

Greed

"At times like these it is difficult to separate the psychology of the market from the fundamentals behind it and if you don't have character and fortitude to stick to your convictions you will lose a lot of money," Tyer says.

"One consistent theme is the way human emotions drive markets, with fear preventing investors from buying and greed preventing them from selling.

"There is no doubt that the current capitulation we are seeing could well offer a valuable buying opportunity, notwithstanding a couple of lingering concerns, namely whether the US congress will eventually vote in favour of a bailout package and then whether this will do the trick in getting the credit markets to work again.

"Several commentators have indicated that the consequences of there being no bailout package would be quite dire. We share that view because it is no longer just a Wall Street wholesale bank issue - it has become a commercial bank issue with Wachovia and various regional banks hitting the wall this week.

"Congress's failure to vote in favour of the bailout package last night gave a strong indication of the underlying psychology of US citizens, which is one of anger towards Wall Street. But this does provide investors with a potential opportunity to make money.

"However, in this environment of heightened uncertainty, you would have to have at least a five to ten year investment horizon because you could well still lose money before current financial market volatility settles down to business as usual.

"For instance, Keynes lost more than three quarters of his wealth in the 1929 crash, which has many of the same characteristics with the events of 2007/2008. At the time, he thought he was being highly conservative in averting risk!" Tyer points out.

- I-Net Bridge