Inside Insights 2 November 2009

Investment Intelligence|Inside Insights

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

Added on 02 November 2009 @ 9:31 AM

More gyrations on markets

It was a very volatile week on global markets, and local investors were not spared. At the beginning of the week, weak US consumer confidence and housing numbers raised questions about the strength of economic recovery, and caused a worldwide equity sell-off, the dollar to strengthen off its 14-month lows, commodity prices to fall, and the rand to pull back.

The surprise announcement on Tuesday by Finance Minister Pravin Gordhan during the Medium-Term Budget Policy Statement that exchange control regulations would be relaxed, further weakened the rand. The Minister's decision is aimed at reducing the cost of doing business in South Africa and promote direct foreign investment, and also contribute to a more ‘competitive' (i.e. weaker) exchange rate. A weaker rand would boost export sectors, especially the battered manufacturing sector. Other announcements - including the R70.3bn revenue shortfall and projected 7.6% of GDP budget deficit for the current fiscal year, and the forecast of a 1.9% contraction for the local economy in 2009 - were in broadly in line with market expectations. The rand traded as low as R7.82/$, during the week, and closed the week at R7.78/$.

The release of positive US GDP data on Thursday boosted the market temporarily before risk appetite slumped on Friday again on worries about the US financial sector. The American economy grew by 3.5% at an annual rate during the third quarter - the fastest pace since 2007 - beating the 3.3% expected by analysts. The US government's stimulus package played an important role in supporting consumer spending and pulling the word's largest economy out of recession. However, it remains to be seen how the economy will perform when government stimulus is withdrawn, as it inevitably will have to be. And even though the US economy is now growing again, unemployment - already at 9.7% - is likely to keep rising.

Joblessness rises, inflation slows

While the US is now out of recession, the South African economy is struggling. StatsSA revealed that almost a million jobs had been lost in South Africa this year, with the unemployment rate (excluding discouraged job seekers) rising to 24.5% in the third quarter, from 23.6% in previous quarter. As could be expected, the manufacturing sector was hardest hit, losing 150 000 jobs, a reduction of 8%. The trade sector lost 110 000 jobs. Unemployment typically lags the economic cycle, meaning that joblessness could climb higher even as the economy starts to recover.

Credit growth in South Africa is still slowing down, according to the latest figures by the Reserve Bank, largely due to a substantial reduction in corporate borrowing. Private sector credit extension (PSCE) slowed to 1.5% year-on-year in September, the slowest rate in over 40 years. The number was below analyst expectations and down from August's 2.3% rise. Inflation data released week was broadly in line with expectations. Growth in the consumer price index (CPI) slowed to 6.1% year-on-year in September, down from 6.4% in August. CPI is now slightly outside the Reserve Bank's 3%-6% target range, and could dip into that range in October due to the substantial petrol price cut last month, before drifting higher again as a result of the low statistical base formed in the last months of 2008. Producer inflation, as measured by the year-on-year change in the producer price index (PPI) came in negative for the fifth consecutive month, at -3.7%.

What should the Reserve Bank will make of all this? Clearly the 500 basis points reduction in the repo rate thus far has not impacted the economy sufficiently, but it is widely understood that monetary policy works with a lag. With no sign of credit growth bottoming out, there is also little fear of demand-pull inflation over the medium term. But it is the pressure on inflation that will come in the form of administered price increases, notably electricity tariffs, that the Bank will keep a close eye on. The Bank's role, after all, is to look forward at the future trends of inflation, not backwards at historical data.

The Week Ahead

The monthly Kagiso purchasing managers' index (PMI) for October will be released today. The local PMI, which had long lagged behind its global peers, surged to 48 points in September. Investors will be watching to see if the PMI can move above the 50 points level, which indicates an expansion in the manufacturing sector. However, with the rand strengthening throughout most of October, and with local demand clearly still weak, there is a possibility that the PMI could remain below 50 for the 18th consecutive month.

Local industry body NAAMSA releases new vehicle sales data for October on Tuesday. While the improving trend is expected to continue, year-on-year growth will probably still be negative, especially given the weak credit numbers out last week (see above). New vehicle sales in September fell by 22.4% year-on-year, compared to August's 26.2%.

The retail petrol price will remain unchanged this week, but the price of diesel will be increased by 10c/l on Wednesday. The average rand/dollar exchange rate during the period when the over/under recovery was calculated - October 2 to October 29 - was R7.48/$ compared to R7.57 during the previous measurement period. This offset the rise in global petroleum prices.

Fairbairn Capital | Old Mutual

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