Inside Insights 6 April 2010

Investment Intelligence|Inside Insights

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

Added on 06 April 2010 @ 9:18 AM

Rand rockets

After depreciating against other currencies in the wake of the surprise cut in the repo rate, the rand rebounded last week as if on steroids. The catalyst for the rand’s surge – it closed the shortened week at R7.25/$ and R9.81/€ – seems to have been the announcement from National Treasury and SARS that tax collection for the fiscal year 2009/2010 was R8.1bn more than the revised estimate announced in the February 2010 budget (a total of R598.5bn). This pushes the projected budget deficit for the year down to 6.8% of gross domestic product (GDP) from the earlier estimate of 7.3% of GDP. At a time when investors are worried about government debts and sovereign solvency (with Greece’s problems top of mind, and global bond giant PIMCO saying it was avoiding UK gilts), fragile banking systems (the Irish government’s stake in its beleaguered banks could rise to 20% of GDP) and sluggish growth prospects in the developed world, South Africa’s fundamentals are looking increasingly rosy. Our fiscal house seems in order, banks strong and economic growth prospects positive (even more so after the interest rate cut). And while the deficit news (and the stronger rand) should also be good for the bond market, as it will reduce net new issuance of bonds by the government, our yields are still attractive to foreign investors. This potentially points to more rand strength in the short term and the possibility of a further interest rate cut. It is amazing how quickly things can change.

Globally, equity markets ended the month of March significantly up (6% on the S&P500 and 7% on the JSE All Share) following February’s dip. Positive economic news and good earnings results were the main reason, and the positive sentiment continued into the first day(s) of April. Chinese shares rallied on the positive PMI data (see below) and the confirmation from the People’s Bank of China that it would keep interest rates low, while trying to rein in excessive lending. This also supported commodity prices, with Brent crude oil moving above $80/barrel again, and gold above $1100/oz. US jobs data released on Friday also supported the economic recovery hopes. Non-farm payrolls increased by 162,000 in March, keeping the unemployment rate steady at 9.7% for the third consecutive month.

PMI dips locally, but surges in China

Credit data released by the Reserve Bank showed that credit extended to the private sector contracted for the fifth consecutive month in February, reflecting weak business conditions and high unemployment, and giving comfort that the recent 50 basis points cut in interest rates will not spur a borrowing and spending binge. Fortunately, the -0.57% year-on-year growth rate in February represents an improvement on January’s –0.7% slump, suggesting that the deleveraging cycle has bottomed out. It normally takes 12 – 18 months of credit extension growth before the interest rate cycle also turns. Rates could thus be low for an extended period locally. There were signs of life in certain segments, with mortgage advances, representing half of all credit extended, growing 3.88% year-on-year. This should be positive for the residential property market. Instalment credit, such as vehicle financing, contracted –0.92%, but this segment also appears to have bottomed out. The other loans and advances category, which is made up mostly of loans to the corporate sector, fell by –5.09% in February, slightly better than January’s number.

Turning to manufacturing, the local Kagiso purchasing managers’ index (PMI) fell to 55.6 in March from February’s strong showing of 60.4 (a level above 50 points to expansion). The reading was also well below the 62.1 consensus forecast. But, as the BER, the compilers of the survey, points out, the PMI averaged 56.5 during the first quarter of 2010, the best quarterly showing since early 2007. The new sales orders index of the PMI dropped, but the employment and expected business conditions indices picked up. Globally, manufacturing growth accelerated in March. China’s manufacturing PMI resumed its upward trend, rising to 55.1 in March from 52 in February. The eurozone’s manufacturing PMI rose to 56.6 from 54.2 in February, while the UK PMI rose to 57.2 from 56.5 in February, the fastest pace since October 1994. The US ISM PMI also picked up strongly in March, with large increases in new orders and production.

The Week Ahead

The National Association of Automobile Manufacturers (Naamsa) releases local new vehicle sales numbers for March on Tuesday.

The South African Chamber of Commerce and Industry releases the March business confidence index on Thursday.

The South African Reserve Bank releases March’s gold and foreign exchange reserves data.

Internationally, central banks in Australia, the UK and the eurozone will announce interest rate decisions. Global data releases of note this week will be US consumer credit data and revised fourth quarter GDP and producer price index data for the 13 eurozone countries on Wednesday. Germany, Europe’s leading economy, releases industrial production data on Thursday.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights