Inside Insights 29 June 2009

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

Added on 29 June 2009 @ 12:00 PM

Running out of steam

The global equity rally seems to have paused to catch its breath, which is perhaps not an altogether bad thing as there are still real uncertainties about the current state of the world economy. After rallying strongly between early March and early June, equities have trended down slowly over the past two weeks. The JSE All Share index ended the week down 0.4%, and is down 5.7% since the most recent peak of 23662 points on 2 June. This is still significantly above the low of 18120 reached on the 3d of March and a consensus is slowly growing that the worst of the credit crisis is behind us. If this view is correct - and everyone hopes it is - markets should stay above those lows of early March. However, this doesn't mean that all is suddenly well. Indeed, the realisation also seems to be sinking in that the recovery will be slow and difficult. For instance, the World Bank's latest forecasts were released last week, and they suggest that the global economy will be worse off in 2009 than was expected earlier, and that recovery will be slow - only 2% in 2010. The world economy is now forecast to contract by 2.9% this year, (whereas the Bank expected -1.7% as recently as March). Worst hit are developed countries, which are expected to shrink by 4.2% this year and only grow by 1.3% in 2010. Unemployment, which keeps rising in the US (and is heading for 10% according to the White House) and Europe, is expected to mute the strength of the recovery in the developed world. The World Bank's projection for South Africa is for a 1.5% contraction in 2009, and for 2.6% growth in 2010. Only in 2011 does the Bank expect strong growth to return to South Africa, namely 4.2%. Developing countries as a group are expected to only grow by 1.2% this year, compared to 5.9% in 2008 and 8.1% the year before. This is much a much better outlook than for the rich countries, but perhaps insufficiently for ‘decoupling' to become more than just a buzzword.

Local consumers still under pressure

The Reserve Bank's Monetary Policy stunned markets by holding the Repo rate steady at 7.5%, after most analysts had expected a 50 basis point reduction to further stimulate the struggling economy. The Bank's Governor, Tito Mboweni said rising oil prices, the 31.3% electricity tariff increase granted to Eskom and above-inflation pay increases negatively impacted the inflation outlook. CPI, the targeted headline measure of inflation, has been outside the 3%-6% target range for two years. On Wednesday, data released showed that May CPI had increased by 8% compared to May 2008, down from 8.4% in April, but slightly above the market's consensus expectation for a 7.9% increase. PPI, or producer inflation, has slowed down very sharply, and has in fact gone into negative territory, -3% year-on-year in May. This is mostly due to the sharp drop in commodities prices, and the high base effect. However, the results of the BER's inflation expectations survey conducted amongst analysts, business and organised labour released prior to the MPC's announcement, showed an increase in the anticipated inflation rate this year and the next. The Bank's decision to keep rates on hold after reducing the repo rate by 450 basis points since December 2008, came as a shock to unions and business leaders, but it helped the rand firm as the interest rate differential between South Africa and other major economies remains at high levels. While the decision came as a surprise to many, it is worth remembering that the impact of monetary policy on the real economy always works with a lag, sometimes as long as 18 months. In other words, the impact of last year's hikes are probably still being felt, while the impact of the cuts since December will start to come through later this year and into the next. The Reserve Bank has already done a lot to stimulate the economy, and with inflation targeting its primary objective, it's not entirely fair to accuse it of taking its eye off the ball.

Fairbairn Capital | Old Mutual

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