Inside Insights 12 April 2010

Investment Intelligence|Inside Insights

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

Added on 12 April 2010 @ 11:00 AM

Markets moving ahead

It was another positive week for global equity markets, but the Dow Jones failed to cross the significant 11,000 level, falling just three points short (why this level is considered so significant of course has a lot more to do with sentiment than anything else.) Strong March sales numbers from US retailers in particular lifted world markets, as consumer spending accounts for around 70% of US gross domestic product (GDP). Merger talks between two leading US airlines also lifted stocks, as merger talks tend to do. However, Greece’s woes continued, with the embattled country’s borrowing costs rising to a record high (in other words, investors were dumping Greek bonds, pushing down prices and thus increasing yields). Greece must now be very close to the ‘last resort’ stage of borrowing from the emergency funds set aside by the European Union and International Monetary Fund.

The local market was supported by higher commodity prices. Platinum shares in particular had a strong rally on a higher global price for the white metal. While oil prices closed slightly below off their most recent highs, local motorists will be concerned to see the ongoing strength of crude prices. Higher oil prices are to be expected as economic recovery continues, and in a sense should be seen as a good sign. Nonetheless, with retail fuel prices having already risen sharply at the beginning of the month due to increases in fuel levies, the last thing motorists would want to see is a further increase early next month. Fortunately for them, the rand remained well supported throughout the week against major currencies. A strong rand reduces the impact of imported inflation, but on the other hand tends to harm exporters. In this light, the Reserve Bank continues to puzzle analysts with its approach to buying foreign currency. The Bank’s total reserves of foreign currency were basically unchanged in March at $38.283bn. The Bank has clearly not been all that active in buying forex to prevent the rand from becoming too strong. Lastly, the announcement that the World Bank had approved a $3.75bn loan to Eskom also supported sentiment on local markets.

Manufacturing data disappoints

SA manufacturing production increased for the third consecutive month on a year-on-year basis in February, rising by 2.7%. However, while this figure is certainly positive following the 18 month manufacturing recession, it was below expectations for growth of around 4.7%. The purchasing managers’ index (PMI), the most widely used leading indicator for the health of the manufacturing sector had a particularly strong showing in February, rising to 60.4 index points. While the manufacturing sector has lead the way out of the recession due to an inventory rebuild (in other words, inventories had fallen so far that they needed to be replenished even if sales were still low), sustainable growth in the sector requires stronger final demand. This is still lacking as the local consumer remains shy due to high unemployment. The data reflects this weak demand for durables and semi-durables: output of textiles, clothing and footwear fell 11.3% year-on-year while furniture output fell 9.3% year-on-year.

The strongest contributor to manufacturing output was the motor vehicles and parts category which rose for the fourth consecutive month and was up 20.4%, as the global auto sector rebounds off a low base. This also corresponds with the latest local vehicle sales released during the week by industry body Naamsa. Total sales of new vehicles rose 15% year-on-year in March, an 11% month-on-month increase. Sales of passenger cars increased by 13.7% year-on-year, while sales of commercial vehicles posted a strong 17.3% year-on-year increase (especially due to bus sales ahead of the Fifa World Cup). On a quarterly basis, total new vehicle sales were up 14.4%, the first positive quarter since the first quarter of 2008.

The Week Ahead

StatsSA releases real retail sales data for February on Wednesday, which will give a very good indication on the strength (or lack thereof) of the consumer recovery in South Africa. Following January’s –1.7% year-on-year contraction, the expectation is for a slight increase in February.

The US Treasury is expected to release an eagerly anticipated report that analyses the exchange rate policies of various countries. This report, which normally goes largely unnoticed, will be closely scrutinized as there is the possibility that the Treasury will declare China a currency manipulator, a move that could potentially lead to the US announcing protective measures to stem the flood of Chinese imports. Of course, it would strain relations between the world’s first and third biggest economies.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights