Johannesburg — THERE has been a siz able correction followed by a recovery of 8% on the local and major foreign stock markets so far this year, an indicator of the continuing fragility of investor sentiment.

The correlation between the JSE and developed country market indices is striking.

The FTSE/JSE all share index (Alsi) fell 7,5% to 25793,60 on February 5 from 27895,18 at the beginning of January. It then recovered to 28262,40 on Friday and was at 28252,59 yesterday.

London's FTSE 100 index started the year at 5500,34, fell 7,9% to 5060,92 on February 5 and had traded back to 5628,9 by yesterday. In New York, the Standard & Poor's 500 index began the year at 1132,99, fell 6,7% to 1056,74 on February 8 and is now around 1150.

The head of research at Plexus Asset Management, Johan Pyper, said the correction had been driven by three fears: an increase in reserve requirements for Chinese banks, a rise in the US discount rate and the implications of sovereign debt risk in Portugal, Ireland, Italy, Greece and Spain, unflatteringly shortened to PIGS.

Pyper said it should be considered that the JSE remained 50% higher than last March, which would normally amount to 2½ years of average annual returns. In addition, "some companies have moved much more than others".

Unemployment had not yet improved, while consumer spending was sluggish. Nevertheless, China was growing strong, and France and Germany had pledged to aid the PIGS. "We expect the market to rise steadily, like up a flight of stairs," he said.

Cannon Asset Management chief investment officer Adrian Saville said though the global economy might be improving, there were at least two new asset bubbles forming. The strategy of throwing money at developed economies in order to resuscitate them was "far from likely" to succeed, he said.

The US federal deficit, at 9,9% of gross domestic product (GDP), was the highest since the Second World War, and national debt was near 100% of GDP. US median household income had risen 32% in real terms since 1970; but government spending had risen 221% in the same period. "This meteoric rise in spending is unsustainable," said Saville.

Tax in the PIGS was proving inadequate to reduce fiscal deficits and repay debt, and countries had resorted to the "Zimbabwe option" of printing money.

Another bubble was forming in China, said Saville. Chinese credit extension had grown, leading to high multiples on equities and real estate -- each a classic sign of an asset price bubble.

Another fear among investors was that share prices had rallied since last year and earnings might not catch up to share prices.

"The current price: earnings ratio for the market (JSE) is over 18 times reported earnings. This is well above the long-term average (since 1960) of 11,67 and is a ratio that has rarely been exceeded in the past," said Investec Private Client Securities chief strategist and economist Brian Kantor.

But there had been long periods when the ratios remained well above or below their long- term average, he said. "This decade, the average price: earnings ratio for the Alsi has increased to 13,6 times, making the current 18 times appear somewhat less stretched than by comparison with the long-term average."