Inside Insights 4 April 2011

Investment Intelligence|Inside Insights

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

Added on 04 April 2011 @ 10:11 AM

QUARTER MAKES LATE RECOVERY

As an extremely volatile first quarter of 2011 came to an end, markets have calmed somewhat but remain nervous. During the quarter, global investors have had to deal with floods in Australia, political turmoil in the Middle East and North Africa (pushing the oil price to two-year highs), fresh concerns over eurozone sovereign debt (with the focus now on Portugal and Spain), Japan's devastating earthquake and nuclear crisis, and uncertainty over the outlook for interest rates. No surprise then that gold posted its eleventh consecutive quarter of gains. However, it's not all bad news. The S&P 500 recovered over the last two weeks to end the month of March flat and the quarter 5.9% up. The JSE All share index gained only 1.1% over the quarter. Japanese equities are still in the red, though. Other commodities also performed, with silver gaining 21.8%. Brent crude finished the quarter 23.88% higher, rising by $22.63/barrel to $117.38/barrel.

The rand rallied to fresh 3-month highs against the dollar, supported by the return of global risk appetite over the last two weeks. The rand gained approximately 11% against the dollar in 2010 supported largely by foreign inflows into South Africa's bond and equity markets. However, most of the gains were wiped out within the first two months of 2011 as appetite for emerging market assets diminished. Nonetheless, it appears that after an unpredictable first quarter, concerns about emerging market growth have eased somewhat, allowing the rand to offset some of the pain of higher oil prices for local consumers.

GOOD NEWS FROM THE PMI, EXCEPT FOR PRICES

The Kagiso purchasing managers' index (PMI), a key measure of the health of the local manufacturing sector, showed a strong performance in March. The index rose to 57.2 points from 54.8 in February. A reading above 50 points tells us conditions in the sector are improving). The PMI is comprised of nine sub-indices. Of these, the business activity index showed a strong performance, rising from 51.6 to 59.7 points. New sales orders (the biggest sub-index in the PMI) rose to 62 points from 59 previously. Disappointingly, the employment index fell back below 50, meaning manufacturing jobs are being lost. Also of concern is that the prices index has followed global oil prices sharply higher, rising to 88 in March from 81.7 previously. The pressure of rising input prices was also reflected in the latest producer inflation numbers released by StatsSA. Producer inflation rose to 6.5% in February, from 5.5% in January. The big question from a consumer inflation point of view is to what extent - and how fast - these costs will be passed on.

The American ISM PMI slipped slightly in March, from 61.4 to 61.2, but remains in expansionary territory. However, the index also reflects rising price pressures. China's official PMI rebounded encouragingly to 53.8 in March, after having fallen to a six-month low of 52.2 in February. Importantly, the input prices sub-index fell to 68.3 in March from 70.1 in February. This eases concerns that prices are rising too fast in China.

Japan's PMI, however, reflects the devastating impact of the earthquake and tsunami on the country's key manufacturing sector. The PMI sank to a two-year low of 46.4 in March from 52.9 in February, the largest one-month fall on record. This reflects not only destroyed production capacity on the North-eastern coast, but also disruption to supply chains for all Japanese industry.

THE WEEK AHEAD

• Fuel prices will rise substantially on Wednesday. The petrol price will rise by around 53c/l due to higher global petroleum prices (despite a stronger rand), a 10c/l fuel levy and 8c/l Road Accident Fund levy hike, and a 6c/l increase in the pipeline tariff. Adding to the squeeze on households and businesses, Eskom's electricity tariffs were increased by 25.5% on Friday, while consumers who buy electricity from their municipalities will feel the increase on the 1st of July.

• Naamsa releases local new vehicle sales numbers for March on Monday.

• The South African Chamber of Commerce and Industry (SACCI) releases its Business Confidence Index for March on Tuesday.

• StatsSA releases manufacturing production data for February on Thursday. Year-on-year growth in manufacturing production in January was a disappointed 1.3%, but the reading for February should be better, certainly if the PMI is anything to go by.

• The Reserve Bank releases gross gold and foreign exchange reserves for March on Thursday. The data is likely to reflect an increase in reserves, following the strength of the rand and the Bank and National Treasury's intention to accumulate reserves to dampen the volatility of the local currency.

• Key global events this week include interest rate decisions from the central banks of Australia, Japan, the UK and the eurozone.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights