Is the green shoot finally flowering?

From Gareth Stokes, MoneyWeek editor, SA

Dear Money Morning reader

Are you sick and tired of hearing about the so-called “green shoots” of economic recovery? Globally, analysts have sprouted this phrase repeatedly in the last six months; we’d expect to find them enrolled at advanced classes at their local nurseries. Instead, they continue to caress the market pages with their “green” fingers – going so far as to declare their infant plants “ready to bear fruit!” Yes dear reader, a mixed bunch of economists and market analysts are proclaiming the first buds on the stems of the “green shoots” of recovery!

Sentiment in developed economies is turning fast. In the US, Federal Reserve chief Ben Bernanke last week predicted the US was nearing a recovery. You need only consider the 52% surge in the US-benchmark stock index (the S&P 500) since its 9 March 2009 lows if you need evidence of this improvement in sentiment. And the feeling from the UK is similar.

Website bbc.co.uk proclaims that Recession in UK seems ‘at an end’ before publishing the positive result of a business confidence survey conducted among 1,000 financial professionals. Why are investors ploughing back into equities amidst so much uncertainty? “Bets that the sky is not falling after all and the economy will recover – paired with generous fiscal and monetary stimulus – have boosted the market,” writes Alexandra Twin on cnnMoney.com. What’s with all these “fairytale” analogies in the business world?

South Africa’s market commentators seem upbeat too. The consensus is for the country to return to positive GDP growth in the third or fourth quarter of this year. But don’t expect improvements in these statistical measures to display in the real world just yet. There’s still a long way to go before the current wave of corporate failures, insolvencies and retrenchments play out. And it takes time for the man in the street to process financial shocks like those experienced in the past 12 to 18 months. For as long as consumer balance sheets remain highly geared, we can expect sub-par new vehicle sales, retail sales and disappointing house price growth.

Economic recovery or not – your investment goal is to grow your available capital at a rate in excess of inflation. This feat is easily accomplished in rising markets as fund managers and private investors demonstrated through the five year bull market rally that started in 2003! You could practically earn
real returns by throwing darts at a list of local shares and investing in anything you hit. Does that sound too easy? You could also – until December last year – earn real returns by staying in cash. But the wheel has turned. Analysts expect around 7.5% real return from equities in 2009 and a similar uninspiring number in 2010. And real cash yields have gone negative following a series of aggressive interest rate cuts this year.

It’s difficult to correctly structure your portfolio when markets are in a state of flux. When equity markets are booming, you can afford to load up on equities. When markets hit the doldrums, you must be more selective.

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Turning to the markets...

The JSE all share index advanced 0.99% Friday. The gold mining index grew 2.31%. Resources slipped 1.84%. Banks and financials fell 1.23% and 0.19% respectively. Industrials closed up 0.91% and the platinum mining index slumped 0.84%.

London's FTSE100 jumped 0.81%. The Dow Jones closed down 0.38% and the Nasdaq traded flat with a 0.05% gain.

Tokyo's Nikkei lost 0.25%. Hong Kong's Hang Seng slumped 1.81%.

Brent crude is currently trading at $72.33 per barrel.

Spot gold's trading at $955.60 and platinum was last quoted at $1246.00.

And here's how the rand is performing against the major currencies:
R/$ 7.81
R/₤ 12.68
R/€ 11.16