Inside Insights 28 Feb 2011

Investment Intelligence|Inside Insights

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

Added on 28 February 2011 @ 10:37 AM

Libya burns, oil surges

The revolutions in Egypt and Tunisia caused appetite for emerging market assets to fall, while the threat to oil supplies in the broader Middle-East caused the price of crude to surge. Neither Egypt nor Tunisia are major oil producers; Libya, however, is a major producer, pumping around 1.6 million barrels a day. As a result of the turmoil there, world oil prices jumped to the highest level since September 2008. Equity markets fell back as risk aversion rose. In the unlikely event that the ‘Jasmine Revolution' spreads to Saudi Arabia or Iran, oil prices will shoot through the roof and a serious global crisis will result.

Surging oil prices will put central banks in a difficult position, as it could trigger an inflationary spiral. It could just as easily have the opposite effect, though choking off global growth and causing a return of deflation fears.

Fortunately, the turmoil in Libya has provided support for the rand which has benefited from the record price of gold and other precious metals. This will reduce the extent of the inevitable fuel price hikes. The rand staged a mild recovery against the US dollar, reaching a four-week high and ending the week at R7.01/$. Comments from Finance Minister Pravin Gordhan and Reserve Bank Governor Gill Marcus, indicated that they would not intervene in the near future in the rand's strength, adding further support for the rand. In fact, Gordhan stated that he would be more concerned over sharp depreciation of the rand, which would undermine the economy's stability and boost inflation.

Economic growth improves

The local economy bounced back in the fourth quarter, after a disappointing, strike-ridden third quarter. Gross domestic product expanded by 4.4% quarter-on-quarter (seasonally adjusted and annualised) in Q4, from 2.6% in Q3, according to new StatsSA data. For 2010 as a whole, the economy grew by 2.8%, after shrinking by 1.7% in 2009. The stronger fourth quarter is largely due to a recovery in the supply side of the economy. The mining sector grew by 17.1% over the quarter, and agriculture by 12.5%. After contracting by 4.9% in the third quarter, the manufacturing sector grew by 4.1% in the fourth. Consumer spending remained fairly healthy during the quarter, with the trade sector growing 3.5% up from 3.3% in the third quarter. However, the construction sector continues to tread water, barely growing by 0.2%. The finance and real estate sector is also still growing sluggishly, with credit demand subdued and the house price growth slowing. This sector, the economy's largest, only expanded by 1.7% in Q4 and 1.4% in Q3. Failing a nasty global shock, the local economy should continue to expand at a fair pace in 2011 as household finances improve and foreign demand picks up.

The other big event of the week was of course the Budget Speech. Most South Africans are probably interested in developments on the personal tax front, but from a macroeconomic point of view there were a number of interesting points. The budget deficit is expected to remain at 5.3% of GDP over the fiscal year, falling to 4.8% in 2013. This deficit is larger than expected but manageable by ‘new normal' global standards. Government bond yields jumped slightly on news of the larger than expected issuance of new bonds - government will have to borrow R154bn for the coming fiscal year. National Treasury revised their growth forecasts down slightly to 3.4% in 2011, 4.1% in 2012 and 4.4% in 2013. To counteract bracket creep, R8.1bn in tax relief was granted to individuals, mostly to those earning less than R270000 per year. Various job-creation support measures were announced, but probably more importantly, the Finance Minister set aside R800bn over three years to upgrade South Africa's creaking infrastructure.

The Week Ahead

• The Reserve Bank releases January money supply growth (M3) and credit extension (PSCE) numbers on Monday.

• SARS releases January trade account numbers on Monday.

• The petrol price will rise by 43c/l on Wednesday. This will take the price of ULP in Gauteng to R9.42c/l.

• The Bureau for Economic Research releases the February Kagiso purchasing managers index (PMI), a leading indicator for the local manufacturing sector, on Tuesday. In January, the PMI gained 2.9 points to 54.6, its highest level since April 2010. Global PMI numbers will also be released this week, as is customary for the first week of the month.

• Industry body Naamsa releases new vehicle sales numbers of February on Wednesday.

• SACCI business confidence index for February.

• Global events and data releases of note this week: Federal Reserve Chair Bernanke will appear before Congress to deliver testimony on the state of the US economy. The Fed will also release its ‘Beige Book' summary of economic conditions in the various Federal Reserve districts. Japan releases January retail sales, industrial production, household spending and unemployment; US January construction spending, February ADP employment report, non-farm payroll report and official unemployment rate; eurozone January retail sales and inflation numbers.

Fairbairn Capital | Old Mutual

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