Monthly Market Wrap - January 2010 - Articles - Investment Intelligence

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Monthly Market Wrap - January 2010

Added on 09 February 2010 @ 3:14 PM

Market highlights

January was the worst month for investors since February last year, before the robust market rally took off. It appears that nagging doubts and uncertainty over the strength of that rally versus the ongoing weakness in the world's economies have finally caught up with investors. As a result, major equity indices lost on average 3%-5% during the month. Some analysts argue that markets are experiencing a minor correction which is healthy given the exuberant gains since March last year. Others argue that the correction is less temporary and a precursor of what's to come. Considering the latter argument, we see that two main drivers behind the rally, namely commodities and US stocks, are currently at 2 month lows. Gold - the so-called safe haven - has fallen as much as 11% from its highest close of $1209.6/oz in December; the spot price of Brent crude oil is trading well below the $80 per barrel mark. Two months might seem like a short period to deduce a market correction, but there are more tentative signs.

For instance, investors have disregarded a host of good economic data releases, more noticeably the latest US 4th quarter GDP figures which showed that GDP grew at the fastest rate in 6 years at 5.7%, while an upbeat round of corporate earnings also seem to have been ignored. More worrying was the fear that Chinese authorities, who have already started to tighten liquidity in the market, would slow their economy down too much and too fast. The Shanghai Composite Index fell to 3 ½ month lows. Recent worries over bank regulations have eased after President Obama, in his first State of the Union address, reassured that economic recovery is his main concern. However, Greece's sovereign debt woes have resulted in a huge sell-off in Greek bonds and poses a great threat to the political and economic integrity of the Eurozone. All the while, several central banks have emphasised that they will maintain supportive policies, until economic recovery is well underway, probably implying that the will only hike rates once unemployment has fallen meaningfully.

On the local front, the FTSE/JSE All Share index shed 3.5% during January, in line with other emerging markets, and fell back below the key 27000 level. The MSCI Emerging Market Index shed a massive 5.6% in US dollar terms, further reflecting the decreasing appetite for riskier assets and a stronger dollar. The worst performing sector on the JSE was Resources, which lost 6.4% with losses in the spot price of gold and platinum weighing heavily on the sector. Despite the negative sentiment surrounding the tough proposed global banking regulations, the Financial sector was the best performing sector for the month, gaining 1.2%.

Heightened risk aversion resulted in demand for the safe-haven US dollar, pushing the it to six-month highs against a basket of major currencies. The rand followed these currencies lower, losing 2% against the dollar and ending the month at levels above R7.50/$. Nonetheless, the current level of the rand is probably still too strong and is hindering the export competitiveness of the local industry. Some argue that the Reserve Bank should build up foreign reserves more aggressively to halt advances in the rand, but this would be a costly procedure. If the rand does advance further throughout the year, pressure will grow on the government to intervene, but how is a hot debate.

The latest manufacturing and mining production data showed that the pace of decline in manufacturing output continued to slow in November, with growing -4.6% year-on-year; the decline in mining production also moderated to -1.5% year-on-year. Despite the rand's strength, export sectors faired much better than sectors catering for domestic demand, further highlighting that the local consumer is still heavily indebted and reluctant to spend. Annual credit growth contracted for the third consecutive month in December, due to depressed demand, coming in at -0.76%, however, it was better than November's -1.59%, suggesting the contraction might have bottomed out.

January saw the first Monetary policy Committee (MPC) meeting of the year. Governor Gill Marcus said that CPI should return to the 3% - 6% target range in March, with weak consumer spending and negative credit growth posing little risk of demand-led inflation. She did, however, highlight that if Eskom was granted tariff increases above 25% over the next three years, it would have a very negative impact on the inflation outlook. Conversely, tariff increases lower than 25% would mean there is a small chance of a further rate cut. With the tariff deliberations expected to be finalized in February, the Committee decided to leave the repo rate unchanged at 7.0% (however the decision was hotly contested). The latest inflation data revealed that December CPI was marginally below the 6.4% expected, coming in above the Reserve Bank's target band at 6.3% year-on-year. PPI on the hand picked up to 0.7% in December, after seven months of declines. This was largely due to the base effect created by very low commodity prices in December 2008, as well as higher electricity prices.

Fairbairn Capital | Old Mutual

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Monthly Market Wrap - January 2010

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