Monthly Market Wrap - November 2009 - Articles - Investment Intelligence

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Monthly Market Wrap - November 2009

Added on 10 December 2009 @ 12:52 PM

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The end of the year is normally a time for reflection and investors are trying to come to a conclusion on whether the global market and economic recovery will be sustained into 2010. If not, have equity markets run too hard? There's no doubt that the market rally has been an impressive one, but is it justified? Some of the factors that have supported the rally include: earnings reports from the world's largest corporations that have beaten most analyst forecasts; banking institutions, that sparked off the financial crisis have been doing better and have actually been producing profits this year; China's government's aggressive stimulus has been successful and the Chinese economy is on course to grow 8% this year; near-zero interest rates which encourage investing in riskier assets. However, skeptical analysts argue that corporate earnings have beaten expectations off a low base, due to companies' efforts to rigorously cut costs, particularly by laying off workers. The effects of this can be seen in the record high unemployment rate in the US of 10.2%. Nonetheless, equity markets have held on to recent gains during November, with markets betting on a slow yet successful economic recovery.

Indeed, several countries have already exited recession. During November, various countries - including the US, Eurozone area and South Africa - released official third quarter GDP figures revealing positive growth. This shows that policy efforts have been successful. However, these efforts have resulted in budget deficits ballooning, while on the monetary side, low interest rates might be fuelling asset bubbles elsewhere and contribute to inflation down the line. But the biggest risk by far is withdrawing stimulus efforts too soon, which could lead to a double-dip recession.

The JSE All Share added little during the month of November, as profit taking eroded gains and the Dubai World debt scare towards the end of the month hit emerging markets. The All Share index broke through the 27000 level, but ended the month at 26894. Resources was the best performing sector, largely due to the relentless increase in price of gold. The spot price of gold continued to rise to record new highs during the month, as a weaker US dollar and increased demand due to inflation fears spurred the yellow metal to close at $1179.15/oz. The spot price of Brent Crude and platinum also benefited from a weaker greenback to gain 2.5% and 9.8% respectively.

The US Dollar declined to 15-month lows against a basket of major currencies during the month, as the US Federal Open Market Committee (FOMC) confirmed that interest rates will remain low for the foreseeable future, and also indicating that they were comfortable with the pace of the dollar's decline. Investors continued to diversify out of dollar-based assets towards riskier emerging market assets. The rand benefited from this and maintained its level below R7.50/$, despite potential headwinds, such as rumours about the government ‘freezing' the rand. The Reserve Bank continued building foreign exchange reserves, but emphasised they would not intervene in the local currency.

As mentioned earlier, South Africa finally emerged from recession in the third quarter with a quarter-on-quarter growth of 0.9% following three consecutive quarters of negative growth. Manufacturing contributed 1.1% to overall GDP growth, growing by 7.6% in the quarter, while the finance, real estate and business services sector, the economy's largest, detracted -0.3% from GDP growth by shrinking 1.5% over the quarter. The local consumer will continue to be under pressure for the next few months, as households grapple with rising unemployment and high debt burdens. Demand for credit by the private sector fell for the first time since October 1966 (-0.4% year-on-year), reiterating that economic recovery in South Africa is likely to be slow and uneven.

New Reserve Bank governor Gill Marcus chaired her first Monetary Policy Committee meeting (MPC) in November. She emphasized that there are signs of a recovery but also highlighted the risks of high unemployment, depressed consumer spending, and high debt levels. She also added that cost-push pressures from electricity hike tariffs, cloud the inflation outlook. For the time being, however, inflation is still slowing with CPI growing by 5.9% year-on-year October from 6.1% in September according to StatsSA. CPI growth moved into the Reserve Bank's 3%-6% target range for the first time in 31 months. However, and as expected, there was no interest rate cut, with the repo rate remaining at 7.0%. Is there any room for further rate cuts? Its seems unlikely in this market cycle, especially with inflation in line with the Bank's outlook and GDP in positive territory. The rand could prove to be the deciding factor: if it strengthens further, it could result in a positive inflation surprise.

Fairbairn Capital | Old Mutual

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Monthly Market Wrap - November 2009

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