Inside Insights 31 August 2009

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

Added on 31 August 2009 @ 9:54 AM

JSE: good, but not the best

Global markets have had a strong run since early March. How does the JSE's performance compare to that of its international counterparts? On a year-to-date basis the All Share index gained 16% in rand terms. Impressive, but over the same period the Shanghai Composite and Brazil's Overall BVSP indices returned 60% and 79%, respectively, in dollar terms. The MSCI Emerging Market index returned 46% in dollars. However, when viewed in dollar terms, from the point of view of foreign investors, the All Share was up 37%, due to the stronger rand. Nonetheless, the JSE is lagging its emerging market counterparts.

To make up this ground, analysts have argued that the state of the local economy has to improve first, so that local businesses can boost their earnings. This will, however, take time as the local economy is lagging the global recovery underway (as discussed last week). A number of large local companies reported their earnings last week, with most reporting a decline in headline earnings per share of between 30%-60% (particularly the large mining groups), revealing the weak state of the economy. However, these corporate results did not affect sentiment much, as investors were more concerned about global issues (such as US new home sales rising for the fourth consecutive month). The JSE had a choppy week but managed close in the green on Friday, as a late resource rally at the end of the week shifted market momentum. Elsewhere, Chinese markets declined for the fourth consecutive week due to Chinese banks lending less in August. This reignited fears that China might be draining some of the liquidity that has been partly behind the surge in Chinese equity, commodity and property markets. Perhaps this is another reason the JSE is lagging behind its peers: they might simply have rallied to unsustainable levels.

JSE since January in rand and dollar terms

Inflation news somewhat disappointing

Hopes for further interest rate cuts were probably dashed, for the time being at least, by last week's July inflation numbers. Consumer inflation (CPI growth) continued to decline on a year-on-year basis for the fifth month in a row, but the 6.7% July number was slightly above expectations. Good news for households is that food price growth has slowed down to single digits for the first time since early 2007. However, food prices at the consumer level remain significantly higher than at the producer level. Nonetheless, most of the inflationary pressures are from services (up 8% in total), while goods inflation has slowed down (5.5% in total).

Producer inflation (as measured by growth in PPI) remains in negative territory, but increased to -3.8% year-on-year in July from the record low of -4.1% in June. The sharp fall-off in commodity prices compared to twelve months ago was largely responsible for continued producer price deflation. A 27.4% year-on-year rise in electricity prices (30.2% month-on-month) was the biggest contributor to the 2.9% rise in PPI from June to July. It was against this backdrop that Eskom released its annual financial statements, showing a funding shortfall of R80bn for its capacity expansion programme. It is clear that electricity prices will have to rise even further in order to finance the new power plants Eskom needs to build to secure South Africa's electricity supply. We don't need to be reminded how devastating load-shedding was for the economy, but higher electricity tariffs will increase inflationary pressures in the economy. Added to this will be the threat of double-digit wage increases and the rising oil price.

One piece of good news out of the local economy last week: the Reserve Bank's latest composite leading indicator rose to 109,7 points in June from 107,8 in May, the biggest monthly rise in 5½ years, taking the index to its highest level in eight months. The leading indicator is designed to predict trends in the economy in six to 12 months' time, confirming the view that the South African economy is slowly starting to make its way out of recession.

The Week Ahead

Industry body Naamsa releases new vehicle sales numbers for August on Tuesday. Year-on-year growth in new vehicle sales disappointed in July by falling to -27.4% from -23.7% in June. However, Inet reports that much of this decline can be attributed to statistical and seasonal factors (such as rental car companies bringing purchases of new vehicles forward to meet demand during the Confederations Cup and Lions tour in June). If these factors are ignored, there are fortunately signs of improvement in the car market, especially for commercial vehicles. However, compared to last year, sales are likely to have remained depressed in August. One area of concern remains exports, which continued to plummet in July, declining by -59.5% year-on-year after a -48.2% decline in June, possibly due to the impact of the strong rand, as global vehicle sales have recovered in the past few months.

The Kagiso purchasing managers' index (PMI) for August will be released on Tuesday. The index broke a three-month upward trend in July by falling back to 36.9 points from 37.9 in June (50 points is the index neutral value above which the manufacturing sector is expanding). This coincided with the steep 31.4% electricity tariff increase, and of course the strong rand remains a problem for the export competitiveness of the manufacturing sector. There were, however, a number of positive signs in PMI survey's subcomponents in July: the backlog in sales orders and purchasing commitments, as well as the employment subcomponent rose. Expected business conditions increased to 55.1 points, the fifth consecutive rise, meaning that the medium term outlook for the sector looks a bit more positive.

Motorists are advised to fill up before Wednesday, as the retail price of petrol and diesel will rise by around 36c/l. During the period under review (31 July 2009 to 27 August 2009), average international petroleum prices were higher than the month before, while the rand-dollar exchange rate was slightly weaker at R7.99/$ from R7.98/$.

Fairbairn Capital | Old Mutual

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