Inside Insights 28 March 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 March 2011 @ 11:35 AM

RETURN OF THE PIGS

Last week saw the eurozone sovereign debt crisis resurface as another one of the "PIGS" is in trouble. This time it is Portugal, whose borrowing costs soared to record levels as the bond market doubts the ability of the country to honour its debt obligations. As Portuguese bonds are sold, their prices fall and yields rise, meaning any future borrowing - necessary for a country running a deficit - will be at punitively high rates. Ratings agency Standard & Poors downgraded Portugal's debt rating to BBB. Adding further pressure, José Socrates, Portugal's prime minister resigned after failing to obtain parliamentary support for a package for austerity measures. This raises the concern that Portugal may be without a government for months in the face of an inevitable bail-out.

However, equity markets reacted positively, somewhat contrary to what might be expected, as investors bet that a larger, permanent EU bail-out package replacing the temporary one that expires in 2013 would contain the sovereign debt crisis. Portuguese equities rose more than 1%, amid the Europe-wide rally. This is in stark contrast to how markets reacted following the Greek and Irish crisis where the euro plunged below $1.30/€ and global equity markets lost $5bn and $2bn respectively, according to the Financial Times. Investors are either much more relaxed about Portugal, or distracted by events elsewhere.

The continued unrest in the Middle East and North Africa (specifically in Libya), Japanese radiation concerns (following two additional earthquakes on Thursday) and eurozone debt contagion fears have supported precious metals with gold rallying briefly to a new record high and silver reaching a 31-year peak. However, on the whole, risk appetite seems to be returning, metal prices provided supporting the rand, which steadied against the US dollar on Friday and closed just shy of a one-week high.

NO CHANGE IN INTEREST RATES

It was a busy week on the local economic scene too. As expected, the Reserve Bank's Monetary Policy Committee (MPC) left the repo rate unchanged at 5.5%. The MPC highlighted that inflation risks were to the upside, but also that inflationary pressure was mainly the result of supply-side factors such as higher oil prices and that there were few signs of demand-pull inflation. The MPC lifted its growth forecast for 2011 to 3.7% from 3.4%, while it increased its inflation outlook slightly to an average of 4.7% in 2011 from 4.6%. The latest inflation numbers from StatsSA showed no change in year-on-year consumer inflation in February (3.7%), while month-on-month, consumer prices rose by 0.7% from January.

The Reserve Bank also released its Quarterly Bulletin for the fourth quarter of 2010 last week. According to the Bulletin, the current account deficit narrowed substantially in fourth quarter to 0.6% of gross domestic product from 3.0% in third quarter due to a large trade surplus (stronger exports and weaker imports). Imports are particularly sensitive to fixed investment spending, which rose by a disappointing 1.5% over the quarter, following 1% growth in the previous quarter. For 2010 as a whole, fixed investment spending shrank by 3.7%.

Growth in household consumption expenditure slowed to 5.1% in the fourth quarter from 5.7% in third. Household debt levels continue to improve, albeit slowly, falling from 78.7% of personal disposable income. The cost of servicing debt also continued receding thanks to sustained low interest rates. Household debt service costs fell to 7.2% of disposable income, from 7.8% in the third quarter. The gross savings rate of households remained at a low 1.5%.

THE WEEK AHEAD

• The Reserve Bank releases February money supply and credit growth numbers on Thursday. Growth in private sector credit extension (PSCE) fell to 5.0% year-on-year in January 2011 from 5.6% the previous month. This largely reflects a lack of credit demand for business investment. Credit extension to consumers has been on a modest upward trend, rising to 7.5% year-on-year from 6.9% in December 2010.

• The Bureau for Economic Research releases the Kagiso manufacturing purchasing managers' index for March on Friday. The PMI improved marginally to 54.8 index points in February, from 54.6 index points in January. The improvement would probably have been better, if it was not for the surge in input prices (particularly fuel), reflected in the input price index rising to 81.7 points. Global PMI's will also be released this week. The impact of the Japan earthquake on manufacturing supply chains - particularly in the motor and high-tech industries - should begin to reflect in March's PMI.

• Other global events and data releases of note this week: US January Case-Shiller home price index, February pending home sales, March consumer confidence, private sector employment and non-farm payrolls; Japan February retail sales and unemployment rate.

Fairbairn Capital | Old Mutual

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