Inside Insights 5 October 2009

Investment Intelligence|Inside Insights

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

Added on 05 October 2009 @ 9:41 AM

Rocky week for the rand

The rand dominated local news last week, initially because several commentators argued that the local currency was too strong, and then for sharply depreciating towards the end of the week. The rand has been strengthening since March, but had a particularly good September, averaging R7.49/$ compared to R7.93/$ in August. The rand hit a year-to-date best of R7.30/$ on the 16th of September. A weakening dollar and demand for higher-yielding emerging market currencies, along with the buoyant gold price further supported the rand. The expectation that the $24bn merger deal between MTN and India's Bharti Airtel - resulting in a considerable foreign capital inflow - would finally get the go-ahead on the 30th of September also boosted the local currency.

However, the rand weakened significantly immediately after it became known on Wednesday that the MTN/Bharti deal would not go ahead. Risk aversion also returned towards the end of the week, resulting in a firmer US dollar and the largest daily fall on Wall Street in 3 months due to very weak employment data. Rand weakness, which benefits mining companies did, however, help to limit losses on the JSE. Interestingly, Reserve Bank Governor Tito Mboweni told a meeting that SARB had been buying dollars to build reserves, something which would have contributed to a weaker rand. The latest foreign reserves data will be released later this week, so one will be able to see to what extent SARB has been accumulating dollars. Despite the sharp losses in the local currency over the past few days - with the rand closing at R7.75/$ - the local currency is still very strong from the perspective of local exporters. Motorists will be happier though as the combination of a stronger rand and lower world oil prices during September will result in a 39-40c/l petrol price cut on Wednesday.

PMI joins global party…almost

The local purchasing managers' index (PMI), sponsored by Kagiso, shot up to 48 points in September by its second biggest monthly increase on record (8.7 points). The PMI, which had been stuck below 40 points since February, is now very close to the 50 points neutral level above which the manufacturing sector is in expansion territory. It is a very encouraging sign that the manufacturing sector is finally joining the recovery underway globally, as evidenced by PMIs in other countries. For instance, the US's ISM PMI for September was 52.6, although slightly down from the previous month, while China's PMI rose to 54.3. JP Morgan's Global PMI, which covers 76% of global industrial output, is at 53 in September, also slightly down, but still above the key 50 level.

Another sign of stabilisation, albeit a less convincing one, came from September vehicle sales numbers. According to industry body Naamsa, sales of new vehicles rose 6.5% in September compared to August. On a year-on-year basis, sales were still a dismal -20%, but better than August's 26.2% year-on-year decline.Other local economic data out this week were less encouraging. Trade data for August showed a slump in exports, partly due to the stronger rand, with the overall trade balance recording a R1.9bn deficit. This follows three consecutive months of surpluses.

Growth in private sector credit extension (PSCE) fell to 2.34% year-on-year in August. This is the weakest level since 1966 and shows that, despite the 500 basis points interest rate reduction, households and business are unable or unwilling to borrow.

Lastly, the quarterly FNB/BER consumer confidence survey showed that slightly more than half of respondents felt confident in the current economic conditions. A majority feel confident about future economic conditions (in line with what most economists have been saying). However most respondents also felt that now is not the time to be buying durable goods, which suggests that the recovery in areas such as manufacturing and vehicle sales could be slow and drawn out, even amid the current signs of improvement.

The Week Ahead

The South African Chamber of Commerce and Industry releases its monthly Business Confidence Index for September. The BCI is a composite index of several indicators, including the prime rate, CPI, retail sales volumes, builing plans passed, import and export volumes, the rand-dollar exchange rate and the level of JSE All Share index.

The Reserve Bank releases gold and foreign exchange reserves data this week. After Governor Mboweni's comments that the Bank had been building its forex reserves (i.e. selling rands to buy dollars, pounds, euros etc.), the market will be very sensitive to this particular data release. The previous instance Governor Mboweni argued that the rand was too strong (he phoned Reuters and Bloomberg) there was no subsequent evidence of aggressive reserve accumulation by SARB. However, if it turns out that the Bank has been active, it could discourage speculative buyers of the rand and provide a floor through which the rand does not strengthen.

StatsSA releases manufacturing production data for August on Thursday. Manufacturing production improved in July, though on a year-on-year basis it was still 13.7% down. The improvement has been driven by increased global demand (with local demand still quite weak), though the stronger rand has counteracted much of this positive impact. The August number is expected to show further improvement in the sector, in line with the very positive PMI numbers (see above), though it is likely to still be negative on a year-on-year basis.

StatsSA will also release August mining production data on Thursday. Mining production was positive in July (4.8% year-on-year) for the first time in nine months, though on a month-on-month basis the recovery has been taking place since April. Even though production levels are improving in line with greater global demand, the impact on mining companies' bottom line is less positive due to the stronger rand.

Fairbairn Capital | Old Mutual

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