Inside Insights 24 August 2009

Investment Intelligence|Inside Insights

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

Added on 24 August 2009 @ 9:52 AM

SA still in recession

According to a new IMF report, the global recovery has started.

Moreover, second quarter data shows a number of large economies have excited recession. No such luck yet for South Africa, according to the latest gross domestic product (GDP) growth numbers. GDP contracted 3% quarter-on-quarter in the second quarter, the third consecutive quarter of negative growth. The biggest detraction from growth during the second quarter came from the manufacturing sector; of the -3% overall GDP number, the manufacturing sector was responsible for -1.6%, more than half. However, the -10.9% performance from the manufacturing sector was an improvement on -22.1% during the first quarter. As has been pointed out before, our manufacturing sector is lagging the recovery in global manufacturing, partly due to the strengthening of the rand.

Agriculture also had a terrible quarter, declining 17% after a 2.9% first quarter decline. The quarterly performance of the trade sectors also worsened from -2.5% in the first quarter to -4.5%, underlining the continued pressure faced by consumers. The economy's biggest sector, finance, real estate and business services, accounting for 20.5% of GDP, also had a negative quarter and declined 2.4%. Construction once again had a solid positive quarter. Its 12.2% growth was supported by the run-up to the 2010 World Cup and other infrastructure-related spending. The mining sector rebounded by 5.5% after the first quarter's -32% nightmare number, helped by firmer commodity prices.

There are a couple of things to bear in mind, though. Firstly, GDP numbers are rear-view mirrors; we are already deep into the third quarter. Secondly, it is clear that the biggest hit to the economy came during the first quarter (-6.4%) and that things are slowly getting better, or at least not getting worst. Thirdly, most of the monetary stimulus - 300 basis points out of 500 cut so far - came during the second quarter and would have had little impact on the quarter's growth numbers. This impact will come towards the end of the year. As the local GDP numbers were broadly in-line with analyst expectations, the JSE and the rand took their lead from global markets (see below).

Chinese obstacles fail to derail global markets

The week started of with a huge sell-off in Chinese shares, resulting in the Shanghai Composite index falling 18% from its 14th month peak on Monday, and sparking risk aversion globally. US markets, for instance suffered their worst loss in seven weeks. Tuesday saw further losses in Shanghai after large sell-offs by large institutions on worries that China would be tightening its monetary policies and restricting stimulus. The Nikkei was also brought down on this news; by mid-week the Nikkei 225 fell to 3-week closing lows in line with Chinese markets despite Japan producing positive second quarter GDP growth figures (3.7% annualised).

Good news out of the US turned the tide, though, encouraging investors back into the market. US housing starts rose for the fifth consecutive month in July, up 1.7% from the previous month. Large retailers like Home Depot and Target produced better than expected results following their bleak forecasts at the beginning of the week. There was also a huge drop in crude oil inventories which suggested an improving demand outlook, which further fuelled risk appetite. US markets helped other major bourses to reverse their losses from previous sessions, with China rebounding 4.5% and 1.7% Thursday and Friday respectively. Resource counters rose, as did investor demand for riskier emerging market stocks. By the end of the week, US stocks rallied on positive manufacturing data from the Federal Reserve Bank of Philadelphia which offset the market's disappointment that weekly jobless claims rose for second consecutive week. The Asian markets rebound coupled with heightened optimism from US investors lead the JSE's All Share index to close in the green at 24878.71

The Week Ahead

StatsSA will release data on liquidations and insolvencies in July on Monday. This is expected to show the continued strain faced by businesses and consumers as a result of the recession. Civil summonses issued for non-payment of debt grew by 11.5% in June compared to the same month in the previous year, as rising unemployment hampered people's ability to service debt. This in turn places pressure on businesses already struggling with lower sales volumes and depressed prices.

The most eagerly awaited data release of the week will be July's inflation numbers. Year-on-year growth in the consumer price index (CPI) slowed to 6.9% in June, lower than expected for the first time in many months. The consensus forecast is for CPI to slow further in July to 6.6%. Analysts will keep a particularly close eye on food prices which have been stubbornly high on the consumer side over the past few months, but have actually started falling at the farm gate. Indeed, producer inflation (PPI) was negative in June for the second consecutive month for the whole basket of measured goods, hitting an all-time low of -4.1% year-on-year. This was mostly as a result of the sharp fall-off in commodity prices since the same month last year. For this reason, year-on-year PPI growth in July is expected to remain negative.

Globally, it will be a busy week in terms of US data releases, including: consumer sentiment, July durable goods sales, new home sales, savings and income data, and Q2 GDP numbers. Germany's closely-watched Ifo index, as well as CPI numbers will also be released during the week. Japan's important July trade numbers will also be released. In other words, plenty of news for markets to digest and many opportunities for positive or negative surprises.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights