Inside Insights 1 June 2009

Investment Intelligence|Inside Insights

A weekly, in-depth yet concise report on the most important recent market movements and economic developments.

Added on 01 June 2009 @ 12:00 AM

Local is global

If we had forgotten how interconnected the word economy and world markets are, Tuesday last week reminded us. Firstly, the shocking local GDP number(see below), which was significantly worse than the -3.9% the market expected and due largely to the dramatic collapse in manufacturing and mining, the two sectors that are most closely tied in with the world economy. As the Business Day put it: "We were in denial for most of last year about the global crisis and how hard it could hit us. Now we can be in denial no longer." The JSE immediately and predictably fell about 1.5% on the news. However, the release of US Conference Board numbers later that afternoon showed that May consumer confidence had risen to the highest level since September, and much faster than analyst expectations. Global markets rallied, and the JSE managed to close in the green. The rand, which fell to R8.42/$ on the GDP news, also recovered to close at R8.25/$. Other US data were mixed: prices in the 20 largest US cities continued to fall in March, by 18.7% year-on-year, but durable goods orders improved. Towards the end of the week, world markets also had to digest General Motor's imminent bankruptcy. By Friday, risk was in vogue again on strong data out of Asia. The JSE All Share index pushed up to 22 771, while a weaker US dollar saw the rand go below R8/$ and commodity prices move upwards. Gold traded at $975/oz, but worryingly Brent crude oil hit $66/barrel, double its December lows. Saudi officials have suggested oil could be heading towards $75/barrel, which, if it happens, will once again painfully reminds us of our vulnerability to global forces.

Exchange rates since January 2009, rebased to 100

Recession hits SA, but Tito hits back

By now the reality of a 6.4% contraction in Q1 real GDP (quarter-on-quarter, annualised and seasonally adjusted) will have sunk in. It was the worst performance since Q3 1984. Mining declined by a staggering 32% and manufacturing contracted for the third consecutive quarter, by 22%. But the slowdown wasn't just in these export-orientated sectors. Retail and wholesale fell 2.5%, and finance, business services and real estate, the biggest sector, fell 2.3%. In other words, the strain felt by consumers from the lagged effect of high interest rates, indebtedness and, increasingly, unemployment, is feeding into the data.

April CPI rose 8.4% year-on-year, down from March's 8.5%, but higher than the expected 8.3%. Once again, rising food prices have been largely to blame. April's PPI numbers were far better, rising by only 2.9% year-on-year down from March's 5.3% and well below the expected 3.4%. PPI food numbers also suggest that consumer food prices could stabilise down the line.

Faced with the GDP and inflation numbers, the Reserve Bank's Monetary Policy Committee (MPC) had little choice but to cut the repo rate again. Interest rates have now fallen 450 basis points in the current cycle, and another 50 could be on the way, though Governor Mboweni indicated that we should not expect further substantial rates relief.

It is easy to get despondent about the GDP data, and of course one has enormous sympathy for those who are struggling. But it should be remembered that these numbers reflect the past, not the future. Even though the second quarter is also likely to see a GDP contraction, it is certainly possible for the economy to recover in the second half of the year. The effect of lower interest rates will start to feed through (always with a lag) as will the impact of ramped-up public sector investment spending. We are also fortunate to host a number of major sporting events this year that will inject billions into the economy. But we still remain dependent on recovery in the world economy, hoping that green shoots become sturdier plants soon.

Fairbairn Capital | Old Mutual

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