Monthly Market Wrap - February 2010 - Articles - Investment Intelligence

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Monthly Market Wrap - February 2010

Added on 05 March 2010 @ 4:23 PM

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Greece's debt problems plagued markets in February, as concerns over the effect its ballooning deficit (13% of GDP) may have on neighboring Euro-zone countries, soured investment sentiment. Greece needs to raise about €53bn this year to finance its deficit, and much of this financing will need to be found by April and May. The total debt burden is expected to grow to €290bn by year end - around 120% of GDP. To get the deficit and debt ratios under control, Greece will have to slash public spending at a time when the economy is still very fragile. If Greece defaults on its debt payments, Spain, Portugal, Italy and Ireland could be next. European banks would also face massive losses. On the other hand, bailing Greece out could result in a recurrence of the problem in the future, and could set a precedent for other weak European economies. European policy makers are caught between a rock and a hard place, and at the time of writing they had offered no concrete plans to address the situation. Either way there is no doubt that a massive challenge lays ahead for the Eurozone. As it stands the 16 Eurozone economies' collective GDP grew by only 0.1% in the fourth quarter, compared to 0.4% in Q3 and less than the expected 0.3%; overall GDP fell by 4% in 2009.

On the side of the Atlantic, the US dollar continued to make ground against the Euro, as investors sought the greenbacks safe haven appeal- on a year-to-date basis, the US dollar is currently up 5% against the Euro. Adding to the dollars gains was the US Federal Reserve's decision to raise its discount rate (the rate it charges banks for emergency loans) to 0.75% from 0.5%, to wean banks off government funding. Markets however took this as a sign of tightening monetary policy. Fed Chair Ben Bernanke, however, in testimony to Congress stressed that interest rates would remain low for an extended period. He also highlighted that unemployment and not inflation remained the biggest threat to economic recovery. Despite weaker US consumer confidence, the S&P 500 managed to end the month 3.1% up as major corporate earnings reports beat expectations.

On the local front, the JSE All Share experienced a modest gain of 0.4%. The Resources sector was the only sector which lost ground in February, losing 1.0%, despite commodity prices of gold, platinum and Brent crude gaining 3.3%, 2.6% and 7.9% respectively. Listed property was the best performing sector, adding 3.1%. Residential property also had a good month: according to the latest FNB Residential Property index, house prices increased to 5.8% year-on-year in February, from 3.6% year-on-year in January.

The rand lost further ground in February as investors piled into the US dollar. However, these losses were surprisingly muted given the apparent realignment underway in global currency markets (stronger dollar, weaker euro). Against the euro, the rand has maintained its strengthening trend, gaining 0.7% during the month. Part of the reason for the rand's resilience can probably be ascribed to policy continuity. In delivering the annual budget, Finance Minister Pravin Gordhan reassured there are no plans to peg the currency, and that the Reserve Bank would continue to target inflation. Overall the budget was deemed a good one by the public, especially since the Minster did not have much room for maneuver. The economic growth forecast was revised upwards from 1.5% in 2010 to 2.3%, meaning better tax revenues and hence a slightly smaller deficit. Importantly, a firm commitment was given to reduce the deficit from 7.3% of GDP in the current fiscal year, to 4.7% in 2012/13. Also, despite the massive revenue shortfall in the current fiscal year, Gordhan managed to find R6.5bn to adjust tax brackets for inflation, providing some relief to tax payers.

Latest economic data releases revealed that local GDP for the fourth quarter of 2009 grew at a healthy 3.2% quarter-on-quarter from the modest 0.9% in Q3, and contained the economic contraction in 2009 as a whole to -1.8%. The main contributor to the increase in GDP growth was the manufacturing sector, which expanded by 10% off a low base in Q4 to add 1.5% to GDP growth. However, the domestic demand side performed less convincingly: finance grew by 1.1% and trade lost 0.7%. The latest demand for private credit reinforced these weak numbers, as credit extension fell 1.12% year-on-year in January, the fourth negative consecutive month. High unemployment also underpins a weak domestic demand, as the official unemployment rate as compiled by StatsSA, measured in at 24.3% in Q4 2009, virtually unchanged from 24.5% from the previous quarter.

CPI surprised in January, with the latest figures coming in at 6.2% year-on-year, marginally down from 6.3% in December. The market had expected 6.4%; however a slow-down in food and services inflation kept the key measure of inflation from rising. Producer inflation on the hand accelerated to 2.4% year-on-year in January from 0.7% in December, but is still historically low. Finally, Nersa granted Eskom annual tariff increases of 25.5% on average( application was 35%) over the next three years, which effectively means electricity costs will double, further burdening the consumer and pushing up inflation. However, the 25% grant was in line with the Reserve Bank's expectations, and if inflation decline over the short term, there may be room for another interest rate cut. At least interest rates should remain stable for the remainder of the year.

Fairbairn Capital | Old Mutual

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Monthly Market Wrap - February 2010

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