Inside Insights 14 September 2009

Investment Intelligence|Inside Insights

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

Added on 14 September 2009 @ 11:01 AM

Gold Shines Again

Investors rushed to gold last week, resulting in the spot price of gold crossing the $1000/oz mark for only the third time in history. Gold closed at $1006.60 on Friday and is up 14.8% for the year. Interestingly, equity markets also had a good week - traditionally gold does well in periods of greater risk aversion, when investors move away from equities (hence gold's safe haven status). Traditionally gold is also seen as an inflation hedge, and thus moves along with the oil price. But the price of Brent crude oil stayed below $70/barrel for most of the week, as doubts resurfaced over the strength of future demand. The main reason behind gold's surge is probably fears of a weak dollar. The dollar fell to 2009 lows against a basket of major currencies, as measured by the dollar index (see graph), this week as investors continue to fear that all the monetary and fiscal stimulus being pumped into the US economy will eventually erode the value of the dollar. Chinese authorities are particularly concerned about the value of their enormous pile of dollar reserves. The weaker dollar, along better-than expected reserves and current account data which have reduced perceptions of the rand as a risky currency, saw the rand hit levels as strong as R7.40/$ during the week. The ongoing MTN Bharti-Airtel merger talks also added fuel to the fire. While the stronger rand is helpful from an inflation point of view, it will hold back the recovery in the export-orientated sectors (see below).

The weaker dollar also pushed up the S&P500 to 2009 highs, as mining and technological shares will benefit from higher exports revenues, the opposite of what SA firms experience. Nonetheless, the JSE All Share ended the week up 3.4%. Asian shares were also buoyed by strong commodity prices and China's positive industrial output, investment and credit growth in August. Further abroad, the UK's FTSE 100 touched an 11th month high above the 5000 mark.

Business still depressed locally

According to the latest RMB/BER Business Confidence Index, levels of business confidence fell to a ten-year low in the third quarter. However, the index decline was marginal, falling by 3 points to 23, mainly driven by declining confidence in the retail and wholesale sectors. The compilers of the report interpreted their findings as follows: "the recession, having hit its worst point in the first quarter, continued to moderate in the third quarter." One very encouraging point in the report was that confidence in the battered manufacturing sector increased markedly from 11 to 22 points over the quarter. This confirms the tentative signs of manufacturing rebound contained in the August PMI numbers, which showed that expected business conditions had improved. The StatsSA manufacturing production numbers released last week were for the month of July, and thus a lagging indicator. Nonetheless, they showed a better-than-expected performance from the manufacturing sector, with production declining 13.7% year-on-year instead of the anticipated -16.2%. June's year-on-year figure was -17.2%, so further signs of the contraction bottoming out. The month-on-month increase (June to July) was 3.3%.

Mining production increased 4.8% year-on-year in July. Gold production, however, fell 7.6% year-on-year. Local gold production is in long-term decline, which has seen South Africa fall back to the world's third largest producer (after China and the US) after having been the world's number one producer for decades. Without the ability to ramp up production, and with a stronger rand eating away at revenues, the local gold mining industry will not benefit as handsomely from the surging dollar gold price as international counterparts.

SA mining and manufacturing production indices, rebased to 100

The Week Ahead

It will be a quiet week in terms of local data releases, so markets will probably take their cue from Wall Street.
StatsSA will release selected July building statistics next week. On Wednesday, July Building Plans Passed is expected to be released at 13:00, following a decline of -24.7%y/y in June. With house prices still on the decline, it is expected that residential building plans passed will record weak figures again in July.
Local corporate results out this week: Sasol, Pinnacle Technology, FirstRand, Comair, Super Group, Cashbuild and Jasco Electronics.

Market	Index	Closing Value @ 11/09/2009	% Change 1 week	% Change Year to Date
Currency	Rand/US$	R7.42/$	+2.8%	+20.1%
	Rand/GBP	R12.37/£	+0.8%	+8.4%
	Rand/Euro	R10.84/€	+0.3%	+16.4%
	US$/GBP	$1.67/£	-1.8%	-14.8%
	US$/Euro	$1.46/€	-2.8%	-4.9%
	Yen/US$	¥90.36/$	+2.4%	+1.6%
JSE	All Share	25567	+3.4%	+17.5%
	Top 40	23005	+3.5%	+16.9%
	Financial 15	6985	+2.0%	+17.2%
	Resources 20	46980	+5.5%	+17.0%
Bonds	All bond	299.18	+0.6%	-1.0%
	R153 (yield)	7.43	+0.1%	+1.8%
US	S&P 500	1046.13	+4.0%	+12.3%
	NASDAQ	2086.69	+4.8%	+27.8%
Japan	Nikkei 225	10444.33	+2.5%	+17.9%
UK	FTSE 100	5011.47	+3.3%	+9.9%
Emerging Markets	MSCI	879.94	+5.9%	+51.5%
Brent Crude Oil	Spot $/barrel	69.24	+5.1%	+59.0%
Gold	Spot $/oz	1006.6	+1.7%	+14.8%
Platinum	Spot $/oz	1311.5	+5.6%	+38.3%

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights