Inside Insights 23 May 2011

Investment Intelligence|Inside Insights

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

Added on 23 May 2011 @ 11:27 AM

EVERYTHING BUT THE KITCHEN SINK

So far this year, it seems that investors have had almost every possible extreme scenario thrown at them, from the tragic to the bizarre. This includes a range of natural disasters (floods, earthquakes, and tsunamis), political turmoil in North Africa and the Middle East, the killing of Osama Bin Laden and further eurozone debt woes, and now the arrest of the head of the International Monetary Fund (IMF). Normally a very dull organization, the IMF gained fresh visibility in its key role in arranging bail-outs for Greece, Ireland and Portugal. But these recipients of the bailouts do not have much to show for their austerity efforts - indeed, Greece's credit rating was downgraded again last week - and now want to renegotiate terms. It is here where Dominique Strauss-Kahn's impact will be missed, according to several prominent analysts. German and French taxpayers are even less keen on bailing out neighbours than they were initially; softer terms will not go down well with them.

And now there is a new scenario investors have to face: a new technology bubble seems to be forming. The social networking site LinkedIn listed in New York last week. Its share price soon doubled, valuing the company at close to $9bn. This is for a company that generated only $15m in profits from $243m revenue in 2010. At least the LinkedIn listing helped support sentiment on global markets towards the end of the week. For the year to date, it should come as no surprise that equity markets have been very volatile, mostly moving sideways.

Back in the ‘real' world, the latest set of US economic data were mostly weak, confirming that the Federal Reserve will not be any hurry to raise interest rates. Data also showed that the earthquake-hit Japanese economy contracted 0.9% quarter-on-quarter in the first quarter. Since the Japanese economy contracted in the last quarter of 2010, the country is now back in recession. According to the Bank of Japan, the world's third largest economy will only recover in the first quarter of 2012.

LOCAL INFLATION CLIMBING

Consumer inflation rose by 4.2% year-on-year in April, from 4.1% in March. This was slightly lower than market expectations of a 4.4% rise. The big driver of consumer inflation continues to be administered prices, which increased by 10.7% year-on-year. Administered prices are those prices that are consciously set by producers (as opposed to set by the market) or prices determined by government (such as petrol, electricity, water, municipal rates, motor licences etc.). As the graph shows, if administered prices were excluded, consumer inflation would have been a low 3.0% year-on-year, which is at the bottom of the Reserve Bank's 3% - 6% target range.

StatsSA also released retail trade numbers for March last week. Retail sales growth remained firm in real terms, increasing by 5.5% year-on-year, unchanged from February's growth rate. Consumer spending continues to be supported by lower debt service costs and growth in disposable income in excess of inflation. However, with the jobs market still weak, consumer debt burdens still high, credit growth weak and the cost of living rising, the outlook for retail sales for the remainder of the year is subdued. At least the firm retail sales figures bode well for first quarter economic growth.

The latest inflation and retail sales numbers are unlikely to change the Reserve Bank's interest rate approach. Although inflation is expected to rise above the 6% target in the final quarter of 2011, the increase is forecast to be temporary and mainly driven by cost-push pressures. As a result, the most economists expect an interest rate hike in early 2012. However, as always, the Reserve Bank will look at the data in front of it, and make decisions accordingly.

THE WEEK AHEAD

• It will be a quiet week ahead, with the main local data release being producer inflation for April, which Statistics South Africa will release on Thursday. The producer price index (PPI) grew by 7.3% year-on-year in March, with elevated global commodity prices the main reason. While commodity prices remain high, a high PPI reading in April 2010 means the annual inflation rate probably moderated slightly. The consensus forecast is for 7% year-on-year. Producer inflation is not as good a leading indicator of consumer inflation as it was, but price pressures on the producer level do tend to have an impact on consumer prices.

• SARB releases its leading economic indicator for March on Tuesday.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights