Inside Insights 13 June 2011

Investment Intelligence|Inside Insights

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

Added on 14 June 2011 @ 4:36 PM

DEJA VU?

The world economy seems to be entering a period of below-par growth. While talk of a ‘double-dip' is surely premature, the data definitely points to a slowdown in economic activity. In the US, unemployment is rising and the housing market took a fresh turn for the worse. While in China, the world's second largest economy, a deliberate attempt at cooling things down appears to be working. Interestingly, the world is facing much the same situation as it did this time last year. In June 2010, the economic rebound had stalled, particularly in the US jobs market. The eurozone debt crisis - particularly with regards to Greece - had flared up. The equity market fell as investors became gripped with fears of a double-dip recession. Then as now, it appears the Northern Hemisphere is heading into a summer of discontent. Buoyancy only returned to markets after the Fed announced into a second round of bond purchases (QE2) in August.

The key difference between then and now appears to be that policy makers have run out of ammunition to fight economic malaise. QE2 is coming to an end, and Fed Chairman Ben Bernanke essentially ruled out a third round in a speech last week, though he emphasised interest rates will remain low for an extended period due to the uneven and fragile economic recovery. The European Central Bank has started hiking rates.

The space for further fiscal stimulus has also closed, with governments trying to outdo one another in their commitment to austerity. Ironically, the best performer over the next few months might be Japan, as rebuilding efforts get underway in earnest.

Not all new data has pointed to doom and gloom. The ISM services numbers for the US were positive, as were consumer credit numbers. In the eurozone, retail sales rose in April despite the interest rate hike. Moreover, softer commodity prices since May should ease inflation worries, even though OPEC oil producers failed to meaningfully increase production quotas. In several emerging markets, inflation might be peaking, allowing scope for central banks to cut rates later this year (definitely
not SA though).

BUSINESS CONFIDENCE DIPS

Business confidence declined in the second quarter, according to the quarterly RMB/BER Business Confidence Index. The index fell to 47 from 55 in the first quarter, indicating that a majority of survey respondents were dissatisfied with prevailing business conditions. This follows a period of increasing business confidence since the third quarter of 2009.

Confidence was down in three of the five sectors that make up the BCI, namely retail, wholesale and motor trade. Of these, the retail and wholesale sectors reported net negative sentiment (i.e. a majority of respondent were unhappy about business conditions). This reflects the increasing pressure faced by consumers due to higher fuel, food and electricity prices, compounded by heavy debt burdens and weak jobs growth.

Confidence remained unchanged in the manufacturing sector while it increased slightly in the building sector. However, confidence in the construction sector remains very low due to the weak recovery in residential property market, the lack of major new public infrastructure spending and reluctance on the part of firms to expand capacity. According to the BER, manufacturers geared towards the domestic market were more positive than those focused on exports.

While the high number of public holidays in April might have contributed to lower business activity and confidence in the second quarter, the lower BCI reading is consistent with other measures indicating a tougher overall economic environment.

THE WEEK AHEAD

• The quarterly FNB/BER Consumer Confidence Index for the second quarter will be released on Tuesday.

• StatsSA releases retail sales growth numbers for April on Wednesday. March's real retail sales growth numbers came in below expectations at 5.5% year-on-year.

• Local markets will be closed for the Youth Day public holiday on Thursday.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights