Inside Insights 14 March 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 March 2011 @ 10:02 AM

EARTHQUAKES AND ECONOMIC AFTERSHOCKS

Global markets were hammered from all angles last week, with risk aversion rising and money flowing to safe-haven US Treasuries. Violence in Libya has escalated and the first signs of unrest have appeared in Saudi Arabia, the world's largest oil exporter. In Europe, debt worries resurfaced when ratings agency Moody's downgraded Spain's credit rating on Thursday, Portugal's bond auction disappointed, and a key eurozone summit kicked off on Friday. US weekly jobless claims, a volatile but closely-watched indicator of the state of employment in the world's largest economy, disappointed. Chinese inflation remained at 4.9% in February, raising expectations for further tightening of monetary policy. And then, compounding the tremors on financial markets, a massive earthquake rocked the coast of Japan, setting off tsunamis that devastated large parts of Japan's eastern seaboard. Economic activity has ground to halt in large parts of the country while shares traded on the Tokyo exchange fell. It is clearly too early to determine what the longer-term impact on the Japanese economy will be.

While oil prices remained at elevated levels during the week, the prices of other commodities fell, reflecting a stronger dollar, and fears that global growth will slow down. Japan is the third biggest market for commodities. Equity indices tumbled around the world.

All in all then, a week investors will want to forget. However, while it might be tempting to ‘run for the hills' at times like these, nothing fundamental has changed in the world economy yet. The recovery continues, but volatility is something we all need to get used to. Fortunately for long-term investors, history shows that volatility diminishes the longer one remains invested.

BUSINESSES MORE CONFIDENT

Confidence among local businesses jumped in the first quarter of 2011, according to the RMB/BER business confidence index (BCI). The BCI increased to a three-year high of 55 index points from 44 in the fourth quarter of 2010. This means more than half of firms surveyed are optimistic about current business conditions, as demand improves from local and global customers. Firms' ability to raise prices has also improved (which is good for profitability, but has implications for consumer inflation down the line). Having hit the bottom of the cycle in the third quarter of 2009, business confidence remains in an upward trend which should continue into 2011. However, at a sector level, business confidence varied (the BCI considers five sectors).

Confidence among new vehicle dealers is at the highest level in 5 years at 84 points. Sentiment among retailers and wholesalers also remains high, at 58 and 65 index points respectively. The construction sector, however, remains bombed out with confidence slipping from an already-low 20 points in Q4 to 18 points (the sad state of the building industry was confirmed by new statistics showing cement sales falling for the third consecutive month). Confidence in the manufacturing sector improved to a net positive level in the quarter (51 from 41 in Q4). But as the latest manufacturing production numbers from StatsSA show, the recovery in sector remains modest, certainly relative to the consumption side of the economy. Factory output rose by 1.3% year-on-year in January, compared to 0.2% in December. Analysts expected an increase of 2.2%.

The uneven recovery across various economic sectors and high unemployment will make it difficult for the Reserve Bank to start hiking interest rates even if oil-fuelled inflation takes off.

THE WEEK AHEAD

• All eyes will be on Japan this week, as a clearer picture slowly emerges over the extent of damage and the likely cost of repair. As an illustration, the 1995 Kobe earthquake caused a reported $100bn in damage to economic infrastructure.

• StatsSA releases retail sales numbers for January on Wednesday. As noted above, the consumption side of the economy has performed considerably better than the production side in recent months as households benefit from lower inflation, low debt servicing costs and above-inflation wage increases. In December 2010, real retail sales grew by 8.3% year-on-year, and growth rates are expected to remain healthy throughout the year, especially as a strong rand keeps the prices of durable goods subdued. However, as we've said previously, high household debt levels mean that growth will be slower than in similar points in earlier cycles.

• Other global events and data releases of note: central banks from Japan, the eurozone, America, Norway and Switzerland will hold monetary policy meetings to decide on interest rates for their respective jurisdictions. Japan releases industrial production data for January; US February housing starts index and Empire State manufacturing index for March; eurozone February inflation and January industrial production; Germany ZEW confidence index for March.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights