Monthly Market Wrap - August 2009 - Articles - Investment Intelligence

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Monthly Market Wrap - August 2009

Added on 03 September 2009 @ 2:45 PM

Market highlights

Global equity markets were extremely volatile in August, as investor sentiment shifted away from corporate earnings and became focused on the strength of the recovery. Over the past months, economic indicators have been slowly showing signs of stabilization and company profits were better than expected in the second quarter - albeit off a low base. In the US for instance, there were positive signs that the US housing sector is finally stabilising after 36 damaging months. The US's ‘cash for clunkers' programme to stimulate car sales was successful and second quarter GDP numbers were better than expected results at -1.0%. High levels of unemployment, household debt and low consumer confidence remain long-term issues that will need to be addressed, though.

The Chinese stock market was responsible for global investor nervousness as the Shanghai Composite experienced its worst month this year, shedding 21.8% in August in very volatile trade, including a 6.7% fall on the last day of the month. These steep declines occurred due to increasing liquidity concerns in the Chinese market as a result of central bank tightening. Loose lending polices had helped drive Chinese equity, commodity and property markets over the past few months. The fear, from an investor point of view, is that tighter lending policies would end up putting the brakes on the recovery and, at the moment, sentiment is weighed heavily on recovery hopes. Others believe that Chinese shares had rallied to unsustainable levels, and now its time for a correction/pause. Further abroad, other international markets largely had a positive month. The NASDAQ, Dow Jones and S&P500 ended 1.54%, 3.54%, 3.36% up respectively.

The JSE All Share broke the 25000 level early in the month, followed by choppy sessions in which the local bourse traded around the 25000 mark. The All Share index closed at 24929, due to the slide in Chinese shares on the last day. For the month, Financials and Industrials being the best performing sectors - returning 4.7% and 4.0% respectively - whilst Resources only returned 1.8%. While the JSE has had a very good rally since early March, it has largely lagged its emerging market counterparts.

Graph 1: Emerging market equities since February 2009, rebased to 100

The South African economy is also lagging the recovery underway in the rest of the world, with the manufacturing sector particularly remaining in the doldrums. Even though the global manufacturing arena is stabilising, a tough road lies ahead for the battered South African industry. The local purchasing managers' index (PMI) disappointed in July, falling to back to May's level of 37.3 from 37.9 in June and is still below the key 50 level. On of the main issues faced by the industry are the strengthening rand, which remains resilient against a basket of traded currencies and had year-to-date appreciation of 21.9% to the dollar. This makes our exports less competitive, especially in a global environment where demand is still fragile. Other issues are weakening local retail sales, which according to the latest data fell 6.7% year-on-year in June in real terms, after a 4% (revised) fall in May. This shows the continued strain faced by South African households due to high levels of debt and rising unemployment.

The weakened state of the local economy was reflected in the second quarter gross domestic product (GDP) numbers, which showed that the economy contracted by 3.0% on a quarter-on-quarter basis (seasonally adjusted and annualised). This was the third consecutive quarter of negative growth. One should bear mind, however, that GDP numbers typically only gives a view of what happened, not what is happening or is about to happen. As the first quarter experienced a 6.4% GDP decline, the pace of economic contraction clearly slowed during the second quarter, suggesting that the worst of the recession might be behind us.

Nevertheless, the Reserve Bank is clearly still concerned about the economic growth picture and surprised the market with a 50 basis points interest rate cut. Since December last year, the total cumulative rate cut stands at 500 basis points, brining the repo rate down to 7.0%. Of the total 500 basis points reduction, 300 points came since March, meaning that most of the monetary stimulus would have hardly impacted second quarter GDP results. The impact of these rates cuts will probably only be seen at year end, given the 12-18 month lag between changes in monetary policy and the full impact on the economy thereof.

Fairbairn Capital | Old Mutual

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