Inside Insights 7 Feb 2011

Investment Intelligence|Inside Insights

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

Added on 07 February 2011 @ 11:30 AM

Oil and equities up; rand weaker

For the year-to-date, the rand has already lost more than 9% against the dollar, making it one of the worst-performing currencies for 2011. Increased capital outflows and emerging market concerns have placed downward pressure on the rand. The Egyptian protest against the 30-year rule of President Hosni Mubarak has reduced the appetite for emerging market assets, though it is also widely reported that a tactical rotation away from emerging markets towards developed markets is underway for valuation reasons (i.e profit-taking on relatively pricey emerging market assets and investing in relatively cheap developed market assets). In the month of January, SA experienced approximately R12bn in outflows from the bond and equity markets.

The Egyptian crisis has affected more than just the rand. Fears that oil supply could be disrupted, especially the vital Suez shipping channel, pushed the price of crude oil broke through the $100/barrel level last week, the highest level since September 2008. The price of oil has rallied more than $7 since the turmoil in Egypt started two weeks ago.

The combination of higher oil prices and a weaker rand mean that last week's petrol price hike is unlikely to be the last. It is however a supportive environment for JSE-listed commodity exporters, and the JSE's All Share index rebounded strongly during the week, lead by the resources sector. Higher commodity prices have obviously sparked fears of inflation, and subsequent higher interest rates, at a time when economic recovery in the developed world is still fragile (in much of the developing world, economic growth is robust and inflation has already reared its ugly head). It was thus reassuring to hear that the European Central Bank kept rates on hold, with the view that medium-term inflation would remain under control.

Global PMIs telling a good story

The local Kagiso purchasing managers' index (PMI) surged to 54.6 points in January from 51.7 in December. A reading above 50 points to an expanding manufacturing sector, and the PMI has been above that level for three consecutive months. This suggests that the readings below 50 points in September and October were temporary dips due to strikes in the automotive and public sectors at the time. The PMI averaged 51.5 during the fourth quarter, suggesting a positive contribution from the manufacturing sector to overall gross domestic product growth in Q4. The improvement in the sector was confirmed by another data release last week. StatsSA reported that capacity utilisation rose to 81.6% in November. The less unutilised or spare capacity is available, the sooner manufacturing firms will invest in new capacity.

In terms of the sub-components of the PMI, new sales orders increased to 59 points. Expected business conditions rose to 67.1 points, suggesting a positive outlook on the part of local industry. Worryingly, though, the employment sub-component remains below 50 (47.8), meaning that the improved environment for the manufacturing sector has not translated into large-scale job creation yet. Also of concern, but certainly not unexpected, is that the prices sub-index increased to 71.3 from 63.1, largely due to rising fuel costs.

The JPMorgan Global PMI increased to 57.2 in January from 55.6 in December. The global improvement in the manufacturing sector can be seen as a key reason for the better state of our own industry. The US equivalent of the PMI, the ISM index, beat expectations by rising to 60.8 in January. The UK manufacturing PMI accelerated to 62.0 in January, the highest level on record. The eurozone PMI rose climbed to 57.3 in January from 57.1 in December. Japan's PMI rose above 50 for the first time in 5 months.

China's manufacturing PMI bucked the trend, dipping to 52.9 from 53.9, but remaining in positive territory. This comes as a result of as Chinese authorities' attempt to cool down the fast-growing economy and building inflationary pressures.

The Week Ahead

• The Reserve Bank will release a keenly awaited report on gold foreign exchange reserves on Monday. The reason for the interest is mounting speculation that the Bank was heavily involved in buying forex in January, in an attempt to prevent the rand from appreciating further and eroding export competitiveness.

• StatsSA releases the Labour Force Survey for the fourth quarter of 2010 on Tuesday.

• StatsSA will release mining and manufacturing production for December data on Thursday. Manufacturing production increased by 4.6% year-on-year in November, and mining production by 9.6%. The expansion in output of both these key sectors is expected to have accelerated in December.

• President Zuma will give the annual State of the Nation address in Parliament on Thursday evening, and is expected to shed more light on recent economic policy proposal.

• Global events and data releases of note this week: Japan December current account and leading indicator and January bank lending, new factory orders and consumer confidence; German new factory orders; US December foreign trade balance and federal budget balance and February consumer confidence ; China January new home prices, credit and money supply.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights