Inside Insights 20 July 2009

Investment Intelligence|Inside Insights

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

Added on 20 July 2009 @ 12:21 PM

Return of risk appetite

After a month of doubt, disquiet and apprehension over the projected weakness of the global economy's recovery, all of a sudden, everything seemed rosy again. Equity markets rallied on better-than-expected earnings updates from key US sectors, including banks and high tech. With US corporate results season in full swing, macroeconomic data (such as US industrial production falling to 1998 levels) takes a back seat as the focus turns to income statements and balance sheets. Better-than-expected results mean that either that the company genuinely improved its performance markedly, or that the forecasts were too pessimistic. The latter is not impossible, since analysts who might've been too optimistic in the boom, became too negative in the bear market. It seems to be a bit of both. In the process, the JSE All Share came close to its year-to-date high of 23 622, set in early June. The rand, interestingly, did not respond as strongly as other similar currencies to the surge in global risk appetite, but then again the rand also stayed fairly stable during June when risk appetite waned. The Moody's upgrade also had a limited impact.

Economists are also slowly upgrading their forecasts here and there, particularly where China is concerned. The world's third largest economy grew by 7.9% in the second quarter, compared to the second quarter of 2008. This follows GDP growth of ‘only' 6.1% in the first quarter. Projections for 2009 growth have now been increased across the board, and China is now expected to expand by more than 8% this year. The Shanghai stock exchange greeted this news by reaching the highest levels in 13 years. To what extent China's strong growth can support growth in other countries remains to be seen. Thus far the impact has been mostly limited to the commodity markets, which doesn't help the likes of Germany or Japan terribly much. South Africa benefits since it is a commodity producer, but most of our exports go to the European Union. Recovery in these countries is thus remains key to our own fortunes.

Global equity markets since January 2009, on 20 July 2009

Tills still quiet

US retail sales jumped by 0.6% in June compared to May, higher than the expected 0.4%. Since consumer spending accounts for 70% of US GDP, and since the US is by far the world's biggest economy (accounting for around 20% of world GDP), this is important data even for us here in SA. Optimism over the outlook for consumer spending increased further when US credit card companies said delinquencies were lower in June and American Express forecast improved business in the second half of 2009. However, if you strip out higher fuel sales (included in the US data, but not in SA data) due to the higher fuel price, and car sales, US retail sales were -0.2% month-on-month. Thus it was hardly a broad-based recovery in consumer sentiment. With inflation falling fast - year-on-year CPI inflation in America was negative in June for the fourth consecutive month - real incomes should be rising in America, except for the fact that unemployment and underemployment are also shooting up.

South African retail sales data were also released this past week. Sales fell for the fourth month in a row in May, but the pace of decline has slowed. May retail sales were 4.2% lower than in May 2008, from a revised -6.9% year-on-year in April. The month-on-month improvement was due partly to the impact of several public holidays in April, but is the 450 basis points cut in interest rates since December starting to have an impact? Probably, but the full impact of the cuts, along with lower inflation and double-digit wage increases (for some) will support retail sales towards the end of the year only. This is especially since our inflation rate, unlike in the US, is declining only slowly. Food prices are sticky, while administered prices such as electricity tariffs are rising much faster than the 6% upper limit of the Reserve Bank's inflation target. The data also showed that purchases of durable goods declined the most (-21% for hardware, paint and glass), suggesting that consumer sentiment is still very negative.

The Week Ahead

In a quiet week in terms of local data releases, attention is likely to turn to the appointment of Gil Marcus to succeed Tito Mboweni as Reserve Bank governor. The move came as a bit of a surprise, as Mboweni hinted recently that he would be staying on after expiry of his contract at the end of August. However, Marcus is highly respected, having served as deputy governor of the Bank before between 1999 and 2004, and also doing a stint as deputy Finance Minister. She also has extensive private sector experience, her most recent position being independent chair of the Absa board (which she has resigned). While the debate about Mboweni's successor is likely to be framed in terms of the policy of inflation targeting, it is worth remembering that the Bank's governor has a far wider responsibility than monetary policy, including supervision of banks. Also, monetary policy decisions are made by a committee (the MPC) where the governor only has one vote (unless there is a tie, in which case the governor's vote decides). Lastly, the inflation targeting policy, including the 3-6% range, was set by National Treasury, not the Reserve Bank. The Bank merely acts in fulfillment of this mandate.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights