Inside Insights 15 March 2010

Investment Intelligence|Inside Insights

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

Added on 15 March 2010 @ 7:59 AM

Some anniversaries are best forgotten

Firstly, a bit of history. About a year ago - 9 March 2008 - most equity markets hit bottom following the post-Lehman collapse. Since then, of course, we have seen a fantastic rally (maybe too fantastic, some would say). And it was ten years ago last week that the dotcom bubble burst. On 10 March 2000, the Nasdaq Composite reached the dizzying intra-day level of 5132.52 points, a level it has not seen since. A decade later, the tech-heavy index was only at 2360 - although at an 18-month high it sets a very clear example of how things can go wrong when investors get swept along by the hype.

Back in the present, Greece remained in the spotlight, but it appears as if we are closer to a workable solution to the crisis. Certainly the market seems more relaxed. Markets were also buoyed by the better than expected US employment numbers, as well as credit, retail and wholesale sales data. The unemployment rate in the world's largest economy stabilised at 9.7% in February. US Consumer confidence numbers disappointed, but the mood on global equity markets was mostly positive. This spilled over to the JSE, where the All Share traded above the 28000 points level. The rand, however, lost some ground towards the end of the week. The British pound continued to slide against the dollar (and the rand) after ratings agency Fitch noted that they were "uncomfortable" with the public debt situation in the UK. There are fears that the country could lose its coveted AAA rating.

By contrast, the visiting Managing Director of the International Monetary Fund (IMF), Dominique Strauss-Khan, praised South Africa's macroeconomic policies and well-supervised banking system. Interestingly, he weighed in on the debate over the strength of the rand. Strauss-Khan noted that it would be short-sighted to try to weaken the currency, as doing so could be a deterrent to the capital inflows required to fund our (still large) current account deficit. Lastly, economic data out of China continues to astound. Latest data shows that vehicle sales rose 55% year-on-year in February, following a 116% increase in January. The value of imports rose 44.7% year-on-year in February, reflecting strong demand emanating from China. Exports rose by 45.7%. However, fears of overheating were stoked by the latest inflation data, showing that consumer prices rose 2.7% year-on-year in February, much higher than expected. Gradual policy tightening can thus be expected to continue.

Local businesses more confident

Confidence among local businesses increased across all sectors surveyed in the first quarter, according to the RMB/BER Business Confidence Index (BCI). The BCI improved from 28 points to 43. Despite the 15 points jump, the index remains below the 50 mark (i.e. a majority of respondents see prevailing business conditions as unsatisfactory rather than satisfactory), and below the 30-year average of 47, suggesting that while the economy is recovering, many businesses still find their environment challenging. Looking at a sector level, confidence among vehicle dealers showed the largest increase (off a very depressed base, off course). Sentiment among wholesalers improved on a net basis, but the BER points out that this might have more to do with expectations of future conditions than the current environment (with sales volumes still falling). Confidence among retailers also improved on a net basis, with sales of durables and semi-durables - in other words non-essential spending - improving. In the construction sector, conditions remain very tough with only a slight increase from 23 points to 26. Confidence among manufacturers rose strongly by 9 points, but also off a very low base.

The improvement in confidence among manufacturers was confirmed by manufacturing production data for January from StatsSA. It showed a 3.7% year-on-year increase in factory output, up from December's 3.2% rise, with motor vehicles and parts the main contributor. The reading was lower than expected, though. Perhaps more encouraging was that mining production showed a year-on-year increase for the first time since July 2008, rising by 7.7% in January. Increased output of platinum group metals was the key contributor. If these trends continue, supported by inventory rebuilding and improved global demand, economic recovery should accelerate. Now we just need the consumer to bounce back.

The Week Ahead

StatsSA releases real retail sales data for January on Wednesday. Year-on-year retail sales growth (excluding the impact of inflation) has been in negative territory every month since February 2009, and very weak even before that since February 2008) as consumers faced the headwinds of high debt levels, stricter bank lending criteria and reduced real disposable income. The latter was itself a consequence of high interest rates, inflation, reduced variable pay and rising unemployment. With unemployment having stabilised in the fourth quarter, interest rates low and inflation trending downwards, the situation is likely to reverse itself over the coming months. However, due to high household debt levels, the consumer recovery is expected to be far milder than previous cycles. December's number was -3.7% year-on-year, up from November's -6.6%.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights