Monthly Market Wrap March 2010

Investment Intelligence|Articles

Articles on a range of investment-related topics, written by ourselves and sourced from leading asset managers and other investment experts.

Added on 07 April 2010 @ 2:01 PM

Market highlights

March was a very good month on global markets, after February’s dip. With equity valuations looking stretched, many players clearly waited for a pull-back before committing new money to the market. On the other hand, earnings are recovering for many of the world’s bellwether companies, and while global economic data is still very mixed from one week to the next, and from one country to another, the general trend points to a return to growth and a reduced likelihood of a double-dip recession. The Dow Jones Industrial Index, for instance, hit an 18-month high, coming close the key 11000 points level, and on the JSE all the main indices rallied.

There has finally been some movement on two of the world’s potential debt disasters. In the Gulf, the government of Dubai announced a restructuring of the debts of development company Dubai World and Nakheel, its subsidiary. In Europe, European Union (EU) leaders announced a joint plan with the International Monetary Fund (IMF) to support Greece as it struggles to repay some €50bn in short-term debts. The announcement followed the downgrading of the sovereign debt rating of Portugal, a country considered to be in the same boat as Greece. While the EU-IMF plan is not a bailout and will only kick in as a last resort – the Latin term ultima ratio was applied in the wording of the deal – and the numbers mentioned were vague, it still helped the struggling euro against the dollar, while the softer greenback supported commodity prices. For the average Greek citizen, however, the deal does not give any reason for joy. Greece will have to continue to make drastic cuts in public spending at a time when the economy is still mired in recession. It does so without the normal cure of a currency devaluation as it is part of the euro, and it cannot cut interest rates any further, as its monetary policy is controlled by the European Central Bank in Frankfurt (which can only set one interest rate despite the growing divergence between economic conditions across the various eurozone countries).

The contrast with South Africa, as we’ve pointed out before, is marked. The South African economy is recovering, even if unevenly and only gradually. Even the beleaguered consumer managed to grow spending by 1.4% in the fourth quarter, after five consecutive negative quarters. Public finances were in good shape before the recession hit, meaning that the impact of running budget deficits over the next few years will not push the country’s public debt stock into the atmosphere (our public debt stock is expected to peak at 47% of gross domestic product (GDP), compared to Greece’s which is already heading to 120%). Our current account deficit, according to the latest data, narrowed further in the fourth quarter of 2009 to 2.8% of GDP from a peak of 8.5% in 2008. It was financed by net capital flows of R113.4bn into South Africa in 2009, including R92bn of net portfolio inflows to our equity and bond markets, as foreign investors searched for higher yields. This is rand-positive, and indeed the rand has continued to trade at strong levels against major currencies. And while Greek 10-year bond yields increased to around 350 basis points above benchmark German bonds, South Africa’s recent successful international bond issue was done at around 170 basis points above the benchmark US bond, historically quite a small spread.

The big surprise of the month was the decision by the Reserve Bank’s Monetary Policy Committee (MPC) to cut the repo rate to 6.5%, taking the prime rate to 10%. The decision was unexpected because the economy was seen as recovering and it was thus debatable whether further stimulus was needed. The MPC took the view that the sustainability of economic recovery needed to be supported, given that especially the consumer recovery was fragile: household debt levels increased in the fourth quarter (79.8% of disposable income) and the cost of debt servicing remained high (8.2% of disposable income). Moreover, inflation had moved within the 3% -6% target range, with February CPI coming in at 5.7% year-on-year from 6.2% in January, and is expected to remain within the target range for the next 12 to 18 months (remembering that the MPC looks forward when making decisions). Food inflation was only 1% year-on-year in February, a significant slowdown from the double-digit levels in 2008 and 2009. Producer inflation (PPI) for February came in lower than expected at 3.5% year-on-year. The greater certainty on electricity pricing since the previous MPC meeting, and more specifically the ongoing strength of the rand were also deciding factors. In fact, some saw the cut as a deliberate ploy to weaken the rand, but remember that local rates are still significantly higher than rates available elsewhere. The rand did lose ground on the announcement, falling to R9.99/€ and to R7.42/$. But these losses were more than reversed by the end of the month.

Fairbairn Capital | Old Mutual

Investment Intelligence|Articles

Monthly Market Wrap March 2010

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