Coronation Fund Managers is upbeat that improving international commodity prices are likely to lift Botswana up from taking a deeper slide into recession.
The Chief Executive officer of Coronation Fund Managers, Hugo Nelson, made comments at Phakalane just days after De Beers’ Managing Director, Gareth Penny, assured the international community in Antwerp, Belgium that the diamond industry is now stabilising.
Nelson was officially donating thousands of pulas to disadvantaged groups, which included the Kagisano Society, the Cancer Association of Botswana, Pudulogong Rehabilitation Centre and SOS Children’s Village at Phakalane.
“Encouragingly, we have already seen signs of the commodity markets stabilising. This provides support for those countries that rely on commodity exports as a source of revenue. In addition, the price of rough diamonds has recovered slightly ÔÇô a positive signal for the Botswana economy,” observed Nelson.
Rough diamond sales, which constitute 33 percent of the GDP and over 50 percent of government revenue, collapsed in the fourth quarter of 2008. The move saw exports dropping from a monthly average of P2.1 billion during the first nine months of the year to a monthly average of P695 million in the last three months of 2008 – a 67 percent reduction.
As a result, full mining in Botswana has been suspended since December to mitigate the effects of the sharp drop in global diamond sales.
In February, Debswana, the world’s second largest diamond producer after Russia, unveiled plans to temporarily shut down its operations until mid-April as well as to suspend production at its Damtshaa and Orapa 2 plants for the remainder of 2009.
“Many investors may believe that it is sensible to wait for confirmation of better economic conditions and signs of more stable markets before reintroducing risky assets to their portfolios. We think that this timing-based strategy is dangerous. A recent study by Legg Mason confirms that the bulk of the returns happen in the first nine months after the low point in bear markets. By the time you know things have stabilised, everyone else does too – meaning that better conditions will already be reflected in higher share prices,” he said.
He said over the past two years most global markets declined between 60 percent and 80 percent from peak to trough (in dollar terms). Even after recovering by between 35 percent and 80 percent this year, the major markets are still only valued between 40 percent and 60 percent of peak, leading to negative dollar returns from all markets except China over the past three years,” he said.
“The good thing is that the global stock markets are no longer plumbing the depths of earlier this year, though most fear that we are not out of the woods yet. Fear was so pervasive that the S&P 500 touched a new low of 666 in early March. The death of capitalism, equities or banking was being proclaimed and government bonds have never been as expensive or corporate debt so cheap,” Nelson said, adding that “investors, or rather market participants, were being led along by their emotions”.
“Further evidence of this fear was manifest in the price market participants, which were prepared to pay for so-called safe assets. Prices of government issued yield (no growth) assets were being bid up to levels last seen during World War II.”
“Surely, we can agree that this is not rational! I guess most of us were not around during World War II but trust me, that was a whole different ball game. It is inconceivable that yield assets should be as prized in today’s environment, especially considering the dramatic correction in capital values of most other assets. The only explanation for the observation lies in the way we all feel. We need to force ourselves to ignore our feelings and act rationally despite them!“ he stressed.