Inside Insights 30 November 2009

Investment Intelligence|Inside Insights

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

Added on 30 November 2009 @ 9:59 AM

Recession finally over

South Africa exited recession in the third quarter, according to the latest data from StatsSA. Gross domestic product grew by 0.9% quarter-on-quarter (measured at a seasonally adjusted and annualised rate) in the third quarter, after contracting by a revised 2,8% in second and 7.4% in the first quarter. Manufacturing contributed 1.1% to overall GDP growth, growing by 7.6% in the quarter, while the finance, real estate and business services sector, the economy's largest, detracted -0.3% from GDP growth by shrinking 1.5% over the quarter.

GDP numbers are, by nature, backward-looking; we are already deep into the fourth quarter. So perhaps a more useful piece of data released last week was the Reserve Bank's composite lead indicator. The index increased for the sixth consecutive month in September to 114.6, from a low point of 105.3 in March. It generally leads the economic cycle by 9-12 months, suggesting that the economy's upward momentum will continue. However, the lead indicator is a directional indicator only; it does not tell us anything about the strength of growth going forward. Much depends on the state of the global recovery, to which the fortunes of our mining and manufacturing sectors are tied. The local consumer will continue to be under pressure for the next few months, as households grapple with rising unemployment and high debt burdens. Recovery, then, is likely to be uneven and slow.

CPI growth in October slowed to 5.9% year-on-year, according to StatsSA, and within the Reserve Bank's 3%-6% target range for the first time in 31 months. Administered prices increased by 11% over the year to October, with the single biggest contribution to the 5.9% headline number coming from housing and utilities (due to electricity prices), which added 1.7%. Transport detracted 0.3% due to the petrol price cut in the beginning of October. The low statistical base created by the sharp decline in fuel prices towards the end of last year will probably see inflation pick up over the next few months, before drifting back into the target range.

With the economy recovering and inflation in line with both the market's expectations and the Reserve Bank's own forecast, the Bank is unlikely to cut rates again in the current cycle, although a dramatic strengthening of the rand, for instance, could still change the outlook. The market will probably start looking for the fist rate hike in 12-18 months time.

Dubai World unsettles markets

It was a very eventful week on global markets even though trading volumes were low due to the Muslim holiday Eid al-Adha and holidays in Japan and the US. For one thing, South Africa was not the only country to release GDP growth numbers for the third quarter. The combined Q3 growth rate for for members of the Organisation for Economic Co-operation and Development (OECD), a club of the 30 most developed nations, was 0.8%. Revised US GDP numbers were slightly worse than expected, though.

A key item last week was the release of the minutes of the Federal Reserve's FOMC (their equivalent of our MPC). Apart from a renewed commitment to keeping rates low, the minutes included an unusual comment on the dollar (the Fed traditionally doesn't comment on the dollar), indicating that the decline was considered ‘orderly'. The dollar fell further on this news, breaking through $1.50 per euro and hitting a 14-year low against the Japanese yen. Gold predictably rose to further record levels (see graph).

Then on Thursday, investor confidence was shaken and world markets plunged after Dubai World announced that it was seeking a temporary deferral of repayments on its debt. The govenrment-owned company racked up liabilities of around $60bn in the process of building some of the most ambitious projects in Dubai, including The Palm artificial islands. Markets were shocked not only because of the concern of a new wave of debt defaults across the world, particularly in emerging markets, but also because investors were quite recently reassured that Dubai World would be able to meet its obligations. Anything linked to the emirate, bank shares in particular, were sold off. The JSE fell below 27,000 and the rand fell back to the R7.58/$ level, although it subsequently recovered somewhat. Other emerging market currencies fell even further. The Dubai World debacle suggests that there could still reason for uncertainty, and probably a few skeletons remain lurking in debt-filled closets around the world.

The Week Ahead

The focus of world markets this week will be on the fall-out of the Dubai World debt default. A big part of the problem last week was the uncertainty and lack of information around how Dubai World plans to manage its debt-load. Will it sell its assets abroad (including those in SA) for instance? Clarity could go a long way to soothing market nerves. Dubai's neighbouring emirate, the much wealthier Abu Dhabi, could also play a key role if it steps in with further guarantees of Dubai's debt.

On Monday, the Reserve Bank will release money supply (M3) and private sector credit extension (PSCE) growth numbers for October. Both these numbers have been trending downwards on a year-on-year basis, and the latest data is expected to show a continuation of this trend, and PSCE might even have moved into contraction (negative year-on-year growth) territory.

Tuesday sees the release of the November Kagiso purchasing managers' index (PMI), a key indicator of activity in the local manufacturing sector. The index has been moving steadily towards the 50 points level, above which the sector can be said to be expanding. The October reading rose to 47.6 point, but lagging PMI's for other countries such as China and the US which have been above 50 points for a number of months now (several countries will also released PMI data this week).

On Wednesday, industry body NAAMSA will release new vehicle sales figures for the month of November. October's -16.9% year-on-year number gave the impression that conditions in the sector are improving, following -21.8% in September and -26.2% in August. However, given that vehicle sales started plummeting globally in October 2008, it means year-on-year numbers are now being calculated from a much lower statistical base. Given weak credit extension numbers, we should not expect a strong recovery in vehicle sales, although the export sector's performance has been encouraging (despite the strong rand).

The retail price of petrol will increase by 27c/l on Wednesday.

Fairbairn Capital | Old Mutual

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