Doing a pre-emptive strike to minimise the pain of the global liquidity withdrawal
Investors need to look forward, but to do that we must first look backwards to understand what has happened and why
Equity investors have experienced a fair amount of pain recently, with global, emerging and SA equities all falling as much as 10% in as little as eight or nine weeks to the end of October. It is completely understandable that investors are nervous, even fearful about the status of their investments. Accordingly, the risk of making a bad decision at this time is heightened. Investors need to look forward, but to do that we must first look backwards to understand what has happened and why. While many reasons for this downturn are being touted, the root cause of what we have just gone through, in our view, is the withdrawal of liquidity. After many years of liquidity propping up asset prices and driving valuations of most assets to expensive levels, that liquidity is gradually being withdrawn through the raising of short-term interest rates in the US, and the European Central Bank (ECB) and other central banks gradually reducing their purchases of government and corporate bonds. It is...
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