Inside Insights 29 March 2010

Investment Intelligence|Inside Insights

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

Added on 29 March 2010 @ 10:43 AM

Marcus springs surprise

There has finally been some movement on the Greece debt saga, with the announcement of a joint EU-IMF ‘safety net.’ However, the support package can only to be invoked “as a last resort” and is thus not really a bail-out. The numbers are also still vague and the deal is subject to a German veto (Germany has become increasingly hostile, leading even serious commentators to wonder aloud whether the euro project will survive), and Greece still has had to make painful spending cuts. However, coming after ratings agency Fitch’s decision to downgrade the sovereign debt rating of Portugal, the Greece deal helped ease pressure on the euro, which had fallen to a 10-month low against the dollar. Equity markets were choppy, after the recent rally, pushed down by weaker US housing data and the increasing ructions over China’s currency policy, with fears over a potential China/US trade war.

The big news locally was the Monetary Policy Committee’s surprise announcement of a 50 basis points cut in the repo rate, taking it to 6.5% and the prime lending rate to 10%.. The MPC noted that the economy had shown signs of “moderate improvement” since its previous meeting (see below), but that it was concerned over the sustainability of the consumer recovery. The Committee also noted that the inflation outlook had improved given the greater certainty over electricity tariff increases and the strong rand. In fact, many will see the cut as a deliberate ploy to weaken the rand, but remember that local rates are still significantly higher than rates available elsewhere. The rand did lose ground on the announcement, but even after falling to R9.95/€ (from as high as R9.83/€) and to R7.42/$, it is still strong.

The MPC was also encouraged by the latest inflation data. CPI (consumer price index) growth fell to 5.7% year-on-year in February, within the 3% - 6% target range. The MPC noted that the moderation in inflation was broad-based, and that it expected CPI to remain within this range for the next 12 to 18 months. The main drivers of inflation were a 24% year-on-year increase in electricity costs, a 22% increase in fuel, an 11% increase in insurance and recreation and cultural services. Food inflation, on the other hand, has decreased significantly, to only 1%. Producer prices rose by less-than-expected in February. PPI increased by 3.5% year-on-year in February, from 2.7% in January, helped by a decline in the prices of base metals, food, chemical products and rubber and plastic products.

Economic recovery confirmed

The Reserve Bank released its composite leading indicator during the week. It jumped to 125.1 in January, from 120.9 in December, pointing to an accelerating recovery. The Bank also released its Quarterly Bulletin the fourth quarter of 2009, which contains a feast (for economists at least) of data on the economy. The Bulletin showed that household consumption expenditure grew by 1.4% in Q4 2009 following five consecutive quarterly contractions in line with improved consumer confidence, lower interest rates and inflation, and increased disposable income. Spending on durable goods - motor vehicles, fridges, TVs, cellphones, etc. – grew by 15.2% (seasonally adjusted) over the quarter, its fastest growth rate since Q1 2006. Spending on non-durable and semi-durable goods continued to decline over the fourth quarter, but at a more moderate rate. Despite the 500 basis points reduction in interest rates (before last week) since late 2008 and a 2.7% increase of real household income, the household debt to disposable income ratio increased to 79.8% in Q4 from 78.4% in Q3. The cost of servicing debt fell slightly to 8.2% from 8.4% of disposable income over the quarter. One would expect this ratio to fall further before seeing a significant broad-based recovery in consumer spending.

The deficit on the current account narrowed further in Q4 to 2.8% of gross domestic product (GDP). This is the smallest deficit since Q2 2005, due to an increase in the trade surplus and lower net service, income and transfer payments (including lower dividend payments). The improved export performance also suggests that the strong rand did not do as much harm as was generally believed. For 2009 as a whole, the deficit was 4.0% of GDP, down from 7.1% in 2008. It was financed by net capital flows of R113.4bn into South Africa in 2009, including R92bn of net portfolio inflows to our equity and bond markets.

The Week Ahead

The Reserve Bank releases private sector credit extension (PSCE) and money supply (M3) growth numbers for February. Credit extension fell 1.12% year-on-year in January, the fourth consecutive negative month, but appears to have bottomed out. Given the high household debt burdens discussed above, a strong recovery in lending is not to be expected.
The retail price of petrol price will rise on Tuesday at midnight as the increased fuel and road accident fund (RAF) levies become effective, accounting for about 25c/l. There will also be an additional increase as a result of the under-recovery on the basic fuel price due to higher global petroleum prices during the past month.
SARS releases trade data for February on Wednesday.
The Kagiso purchasing managers’ index (PMI) for March will be released on Thursday. The PMI jumped to 60.4 in February, from 53.6 in January, the highest level since March 2007. This was the fourth consecutive month in expansionary territory (in other words above 50 index points). Several global PMIs are also released on the first of every month.
Don’t get caught by April Fool’s jokes on Thursday!

Fairbairn Capital | Old Mutual

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