Inside Insights 6 June 2011

Investment Intelligence|Inside Insights

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

Added on 06 June 2011 @ 11:38 AM

CARRYING ON

Concerns are rising that the world economy is running out of steam. The US ISM manufacturing index slid for the fourth consecutive month to 53.5 in May. The Chinese manufacturing purchasing managers' index (PMI) slid to 52.0 in May from 52.9 in April, while the JPMorgan global PMI slipped back to 52.9 in May from 55 in April. Though they are still above 50 index points, these indices suggest a loss of growth momentum. US consumer confidence numbers for May fell below expectations, while US housing remains in the doldrums. Finally on Friday afternoon (SA time), a very bleak US jobs report capped a week of losses on global equity markets. The world's largest economy created only 54,000 non-farm jobs in May, well below the 150,000 new jobs expected. The unemployment rate rose to 9.1%. The gloomier economic outlook caused the 10-year US Treasury yield to fall below 3% for the first time since December, on the expectation that the Fed will have to wait longer before raising interest rates from their present record low levels.

With developed market yields plunging, South Africa looks more attractive by the day from a carry trade perspective, supporting the rand to a four-week low of R6.70 against the dollar. The graph below shows the appealing difference (from an American point of view) between the yield on a 10-year US and SA government bond.

The rand was also supported by Competition Tribunal approval of Wal-Mart's $2.4bn takeover of Massmart. The entire amount won't necessarily flow into South Africa. But the deal will still result in a significant inflow of foreign exchange, while at the same time raising South Africa's profile as a destination of foreign direct investment. Don't be surprised to see further deals such as this, especially given that companies from developed markets are not seeing much growth at home.

GOOD FIRST QUARTER, WHAT LIES AHEAD?

Last week saw a host of important local economic data releases. First up was gross domestic product (GDP) growth data for the first quarter, which surprised on the upside. The local economy got the year off to a brisk start, growing by 4.8% quarter-on-quarter (on a seasonally adjusted and annualised basis). This compares to 4.5% growth rate of the fourth quarter of 2010. The trade sectors grew by 4.4% and the transport sector by 3.6%. Mining grew by only 1.8%, while the construction sector did not grow at all. The manufacturing sector contributed almost half the overall GDP growth, expanding by 14.5% over the quarter.

The surge in manufacturing activity might not last into the second and third quarters, though. The Kagiso manufacturing PMI eased for the second month in May, to 55.1 from 56.4 in April. An index level above 50 indicates that the sector is growing, but the pace of growth seems to be slowing. Three of the nine subcomponents of the PMI were below 50 - backlog of sales, suppliers' performance (Japanese suppliers in particular, one suspects) and employment - compared to only two the previous month. Fortunately, the prices component continues to recede from very high levels, reflecting the slightly softer commodity prices.

New vehicle sales growth also slowed down in May (the vehicles and parts sector is a major component of overall manufacturing). Naamsa data shows 6.1% year-on-year growth in sales, down from 8% in April, due largely to a 5.3% annual contraction in commercial vehicle sales. When combined with very weak credit growth compared to similar stages in previous cycles (only 6.18% year-on-year in April, 30 months after the Reserve Bank started cutting rates), and the global picture sketched above, the suggestion once again is that the Bank will probably be careful not to raise interest rate too soon or by too much.

THE WEEK AHEAD

• The Reserve Bank releases May foreign exchange and gold reserves data on Tuesday.

• The quarterly BER/RMB Business Confidence Index for the second quarter will be released on Tuesday.

• The SA Chamber of Commerce and Industry releases its monthly business confidence index for May on Wednesday.

• StatsSA release April manufacturing production data on Thursday. The factory sector grew by 4.6% year-on-year in March, and is expected to have grown by around 5% in April.

• Also on Thursday, StatsSA releases April mining production data. Mining production fell 1.4% year-on-year in March due largely to a high statistical base formed in early 2010. However, commodity prices remain well supported.

• Global events and data releases this week: Greece is expected to access a further tranche of EU/IMF bail-out funding, which should soothe some nerves around the eurozone debt crisis (without solving the crisis); the Federal Reserve releases the ‘Beige Book' of US economic conditions; the monetary policy committee's of the Australian, New Zealand and European central banks meet to decide on interest rates this week; OPEC meets in Vienna this week.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights