Inside Insights 11 April 2011

Investment Intelligence|Inside Insights

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

Added on 11 April 2011 @ 10:24 AM

HIKING CYCLE STARTS

Inflation, interest rates and, yes, eurozone debt issues dominated market agendas last week. Starting with the latter, Portugal faced up to reality and accepted a bail-out package that could be as large as €80bn. In return, it will probably have to impose harsh budget cuts. Its similarly embattled neighbour, Spain, has so far survived contagion. It successfully auctioned around €4bn in bonds to finance its huge budget short-fall, at a reasonably low average yield of 3.5%.

The European Central Bank (ECB), ignoring the debt and unemployment crises of the peripheral PIGS countries, and taking a very narrow focus on inflation, hiked its main policy rate by 25 basis points to 1.25%. This is the first hike since June 2008 (remembering, as an aside, that that particular rate hike occurred even as the world was sinking into recession.) The move was not unexpected, with the ECB having made its ‘hawkish' stance clear at its previous monetary policy meeting. The higher interest rate pushed the euro stronger versus the dollar and yen. The weaker dollar in turn has seen the rand back at the strong level it started the year.

Across the Channel, the Bank of England (BoE) took a ‘dovish' stance, leaving interest rates at a record low 0.5%, despite the fact that consumer inflation is currently almost double than in the eurozone (4.4% vs. 2.6%), and the fact that both central banks have the same inflation target (2%). Indeed, inflation in the UK is currently higher than in SA, historically a fairly unique situation. The BoE is clearly taking a view that inflationary pressures - including crude oil at a 30-month high - are temporary in nature, and are still concerned with the weak recovery of the UK economy. Their counterparts in the US Federal Reserve have taken a similar view, with unconventional monetary stimulus (quantitative easing) expected to continue until June.

China's central bank has taken an contrary view, and continued tightening monetary policy. Some investors have the same view as the People's Bank: inflation fears and concerns over turmoil in the Middle East pushed gold and silver prices to fresh record highs.

CAR MARKET BOOSTS FACTORY SECTOR

In line with the higher purchasing managers' index, manufacturing production rose by 6% year-on-year in February, according to StatsSA. This was almost twice the expected growth rate, and follows January's disappointing 1.6% performance. It seems that manufacturing is finally starting to catch up with consumption spending, or more specifically, increased consumption of durable goods is a boost for manufacturing. Nine out of the ten major sub-sectors showed positive growth in February (only textiles and clothing declined, but at a slower pace than in January. The motor vehicle and parts sector was the strongest during the month, rising by 21.6% year-on-year. To what extent the sector is still catching up lost production from last year's strike is unclear, while it is also likely to be the sector most impacted by the Japanese tsunami.

Earlier in the week, data from Naamsa showed 22.8% year-on-year growth in new vehicle sales in March. Exports of new vehicle sales were particularly strong. Sales of passenger vehicles reached the highest level since October 2007, as households use rising lower debt servicing costs to replace ageing vehicles. Commercial vehicle sales increased by 15.4% year-on-year. Vehicle exports rose by 37.4 year-on-year in March, reflecting improved global conditions, but also a very low base. The rand averaged R6.90/$ in March, from $7.16/$ in February, so a weak rand certainly is not behind the strong export performance.

THE WEEK AHEAD

• A quiet week ahead as far as local data releases are concerned.

• South Africa will join the BRIC grouping (Brazil, Russia, India and China) of leading emerging markets at their summit this week.

• The first quarter ‘earnings season' starts in the US this week, kicking off with bellwether Alcoa.

• The World Bank and International Monetary Fund release their outlook for the world economy, government finances and international financial stability.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights