Monthly Market Wrap - October 2009 - Articles - Investment Intelligence

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Monthly Market Wrap - October 2009

Added on 03 November 2009 @ 4:29 PM

Market highlights

October has on occasion been given the moniker, "black October" in the investment world. In October 1929, Wall Street experienced its largest market crash to date, which, linked with a chain of events, sparked off the Great Depression of the 1930s. In 1987, computerized trading was responsible for the largest one-day fall on Wall Street. Then of course in 2008, world markets were gripped by the credit crisis. October 2009 was quiet by comparison, with most developed markets posting minor losses. Most of the attention fell on quarterly corporate earnings in the US, which failed to meet expectations of investors. There were however some winners, such as JP Morgan and Intel. Losses from Bank of America and lender CIT filing for bankruptcy on the last trading day of the month, led to profit taking.

Despite the negative corporate results, there were some good economic data supporting recovery. The US emerged out of recession with an annual GDP growth of 3.5% in the third quarter, which was better than the anticipated 3.3%. The US housing and motor industries have been showing increasing signs of stabilisation; however high unemployment levels and depressed consumer spending still poses a threat to the recovery. Also at the back of investors' minds is what will happen to economic recovery when government stimulus is withdrawn, as it inevitably must be at some point in the future. For the month, the S&P 500, Dow Jones and NASDAQ returned -1.9%, 0.1% and -1.9% respectively.

Emerging markets are still faring better. China continued its impressive growth with 8.9% in the third quarter, and seems set on attaining a growth rate of 8.1% for 2009. The combination of better economic growth (though not all countries are growing at the same rate) and the revival of the carry trade which has seen borrowing in US dollar and investing in higher-yielding and commodity currencies, has seen emerging market equities do very well. The Brazilian BOVESPA put on 2.1%, MSCI China added 6.4%, while the MSCI Russia index gained 4.5% (in US $ terms).

The flip side of the weak dollar - which fell to 14-month lows against a basket of currencies during the month - has been that the competitiveness of other countries' exports have been eroded (except China, which pegs its currency against the US dollar). This lead to Brazil imposing a 2% tax on portfolio flows, to discourage the further appreciation of the real.

The JSE All Share gained a impressive 6% for the month, on improved global risk appetite. Sector performances were broad-based, with resources contributing the most by gaining 7.5%. Resources were supported by stronger gold prices, which rose to record highs at $1069/oz, but retracted a little towards the end of the month to $1044/oz. However, the spot price of gold remains above the technical level of $1000, as stronger safe haven demand and a weaker dollar filtered through. Increased optimism and the weaker dollar also resulted in the spot price of Brent Crude gaining 11.5%.

The rand strengthened to levels as low as R7.23/$, but weakened towards the end of the month as global risk appetite waned. In the Medium Term Budget Policy Statement (MTBPS), finance minister Pravin Gordhan, announced the easing of foreign exchange controls in order to reduce the effective cost of doing business in South Africa, promote direct foreign investment and also to contribute to a more competitive (weaker) exchange rate. Upon the announcement the rand fell by more than 2%, and ended the month down 3.9% against the US dollar. A weaker rand would be beneficial for the export sectors, particularly the battered manufacturing sector.

Other announcements from the MTBPS - including the R72bn revenue shortfall and projected 7.6% of GDP budget deficit for the current fiscal year, and the forecast of a 1.9% contraction for the local economy in 2009 - were in broadly in line with market expectations. From an economic recovery point of view, South Africa remains in a fragile state - the official unemployment rate rose to 24.5% in the third quarter from 23.6% in the previous quarter. Unemployment typically lags the economic cycle, meaning that joblessness could climb higher even as the economy starts to recover. Credit growth remains at 40-year lows, largely due to a significant reduction in corporate borrowing. The latest retail sales figures were also disappointing, with consumer confidence still low despite the cumulative 500 basis point interest rate reduction since December.

Inflation (CPI) continued to ease in September to 6.1% year-on-year from 6.4% in August. CPI is now much closer to the Reserve Bank's target of 3%-6%, with hardly any threat of demand-pull inflation in the near term. Producer price inflation was negative for the fifth consecutive month to -3.7% year-on-year in September. However, increases in administered prices, especially with Eskom's proposed tariff hikes over the next few years loom large in the inflation outlook. With this in mind, the Reserve Bank continues to be cautious in its monetary policy stance, and decided to leave the repo rate unchanged at 7.0% at the October meeting of its Monetary Policy Committee, the last to be presided over by outgoing governor Tito Mboweni.

Fairbairn Capital | Old Mutual

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Monthly Market Wrap - October 2009

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