The financial markets scare and Namibia

THE recent sell-off in financial markets was part of the normalisation of credit spreads around the world, as too much money had been lent too cheaply and too easily to many people who could not afford it.

This is the view of Johannes !Gawaxab, MD of Old Mutual Africa. He said these spreads – the difference in returns offered between lower-quality debt and high-grade investment instruments such as US bonds – became too thin, resulting in a credit crunch which forced central banks around the world to inject more than US$320 billion to shore up confidence in the financial system.Markets across the world, including Namibia, were hit hard as evidenced in negative returns of 6,29 per cent and 4,45 per cent by the NSX Overall Index and the JSE All Share Index respectively for the period July 1 2007 to August 10 2007.These losses affect the value of pension funds and unit trusts of many Namibians.!Gawaxab said the sell-off was primarily caused by the US sub-prime mortgage crisis – a collapse in the US housing market.Many retail investors in the US bought houses at a time when interest rates were low and house prices appreciating.The banks that provided these loans did not take these exposures on their balance sheets but securitised the loans – used external funds to finance these loans.When interest rates started rising and house prices dropping, low-income house owners started defaulting on the generous loans they had received.A credit crunch was inevitable as investors bailed out and this led to a sudden loss of confidence in the banking system.Central banks in the US, Canada, Europe, Australia and Japan injected billions to reassure investors, to calm jittery markets and to ensure a smooth functioning of financial markets – central banks lent money to commercial banks at a cheap rate to meet their obligations.!Gawaxab contends that we are not out of the woods yet and that investors should anticipate short-term headwinds and market volatility.In this regard, he noted that the Bank of Namibia is expected to hike its repo rate this week.The cost of borrowing is expected to increase from 14,25 per cent to 14,75 per cent due to inflationary pressures caused by the effects of the US sub-prime mortgage market, higher oil and food prices, as well as credit exuberance.For every N$100 000, a one per cent increase in short-term rates means a six per cent increase in one’s instalment.The latest developments do not constitute a bubble though, but is merely a normalisation of spreads.Global growth remains strong whilst corporate earnings are also solid, he says.Commenting on investing opportunities under these circumstances, !Gawaxab suggested the following: * Those planning to retire over the next few months and need to preserve their capital or need to lock-in their pension, should consider pulling out of the market and moving into vehicles available for this purpose; * Local investors should ensure to invest with companies which are de-risking their business by investing across key currencies and continents, and companies that are properly capitalised and manage their risk as much as they manage the generation of superior investment returns * For long-term investors this is a definite buying opportunity.econHe said these spreads – the difference in returns offered between lower-quality debt and high-grade investment instruments such as US bonds – became too thin, resulting in a credit crunch which forced central banks around the world to inject more than US$320 billion to shore up confidence in the financial system.Markets across the world, including Namibia, were hit hard as evidenced in negative returns of 6,29 per cent and 4,45 per cent by the NSX Overall Index and the JSE All Share Index respectively for the period July 1 2007 to August 10 2007. These losses affect the value of pension funds and unit trusts of many Namibians.!Gawaxab said the sell-off was primarily caused by the US sub-prime mortgage crisis – a collapse in the US housing market.Many retail investors in the US bought houses at a time when interest rates were low and house prices appreciating.The banks that provided these loans did not take these exposures on their balance sheets but securitised the loans – used external funds to finance these loans.When interest rates started rising and house prices dropping, low-income house owners started defaulting on the generous loans they had received.A credit crunch was inevitable as investors bailed out and this led to a sudden loss of confidence in the banking system.Central banks in the US, Canada, Europe, Australia and Japan injected billions to reassure investors, to calm jittery markets and to ensure a smooth functioning of financial markets – central banks lent money to commercial banks at a cheap rate to meet their obligations. !Gawaxab contends that we are not out of the woods yet and that investors should anticipate short-term headwinds and market volatility.In this regard, he noted that the Bank of Namibia is expected to hike its repo rate this week.The cost of borrowing is expected to increase from 14,25 per cent to 14,75 per cent due to inflationary pressures caused by the effects of the US sub-prime mortgage market, higher oil and food prices, as well as credit exuberance. For every N$100 000, a one per cent increase in short-term rates means a six per cent increase in one’s instalment. The latest developments do not constitute a bubble though, but is merely a normalisation of spreads.Global growth remains strong whilst corporate earnings are also solid, he says.Commenting on investing opportunities under these circumstances, !Gawaxab suggested the following: * Those planning to retire over the next few months and need to preserve their capital or need to lock-in their pension, should consider pulling out of the market and moving into vehicles available for this purpose; * Local investors should ensure to invest with companies which are de-risking their business by investing across key currencies and continents, and companies that are properly capitalised and manage their risk as much as they manage the generation of superior investment returns * For long-term investors this is a definite buying opportunity.econ