Inside Insights 7 September 2009

Investment Intelligence|Inside Insights

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

Added on 07 September 2009 @ 10:08 AM

Spring or autumn for global equity markets?

September is traditionally the start of spring in the southern hemisphere and the start of autumn in the North. But is it spring or autumn for global equity markets? In other words, is the rally running out of steam, or is it getting ready for a further surge? Conventional wisdom holds that September is a bad month for equity investors. Indeed, the S&P500 has experienced a 1.3% loss on average for the month of September since 1929. Locally, however, September has on average been a positive month on the JSE All Share since 1960. June is the worst performing month returning -0.13% on average. December has historically been the best performing month, returning 3.42%, so maybe something to look forward to towards the end of the year.

In the meantime, however, global equities had another choppy week, with investors fretting over the sustainability of the economic recovery once government stimulus wears off and over whether markets had run too far, too fast. This lead to increased risk aversion, especially when the Shanghai Composite experienced another 6.7% drop on Monday due to liquidity concerns. Renewed worries also came from US bank's ongoing struggle to get rid of toxic assets. In the process, the gold price shot up to as high as $990/oz on safe-haven demand. One reason people are sceptical over the recovery is that unemployment remains high. Data released on Friday showed that the US unemployment rate jumped to 9.7% in August, a 26 year high, from 9.4% in July and more than the expected 9.5%. However, markets perked up on news that US employers cut ‘only' 216 000 jobs in August, less than the 225 000 expected job losses, meaning also that this was the smallest decline in monthly payrolls this year. Nonetheless, a bit of consolidation on global equity markets is not a bad thing, given how far markets have run since March.

Good news from global PMIs

Purchasing managers' indices (PMI) became one of the closest watched indicators of the global recession and now, the global recovery. PMIs are based on survey responses from manufacturing (sometimes non-manufacturing) firms on questions issues as stock levels, new orders and expected business conditions. Interpreting the index is simple and therefore comparisons can be made across countries: an index level of above 50 indicates expansion and below 50 indicates contraction. The oldest and most significant of these PMIs is the US ISM index, which rose to 52.9 in August from 48.9 in July. Not only did the index move into expansion territory for the first time in 1 1/2 years, but it also came in above expectations. The Eurozone's PMI also rose to a 14-month high of 48.2 in August from 46.3 in July. While the overall Eurozone PMI was still below 50, the new orders subcomponent was above 50, signalling that the manufacturing sector could soon move into expansion territory. China's PMI has been above 50 since January 2009.

The local PMI, sponsored by Kagiso, rose to 39.3 in August from 37.3 in July. The index has been below the key 50 points level for 16 consecutive months now, but at least the upward trend has resumed. South Africa's manufacturing sector is clearly lagging the global cycle, with a strong rand partly to blame along with weak local demand.

The rand strengthened further during the week as new data from the Reserve Bank's Quarterly Bulletin showed that the current account deficit narrowed to a five-year low of 3.2% of GDP in the second quarter, from 7% in the first quarter. The smaller current account deficit will help to soothe perceptions of South Africa as a risky investment destination - hence the stronger rand - but also reflects a weaker economy. Both imports and exports fell during the quarter, but imports fell more. The Bulletin also showed that household consumption fell by 5.8% during the second quarter, the fastest quarterly decline since 1985. It is clear that the local consumer is still struggling and that the full impact of the 500 basis points interest rate reduction has yet to be felt.

The Week Ahead

StatsSA will release manufacturing production data for July this week, the first major official data release on the third quarter. After nine consecutive monthly year-on-year declines (-17.1% in June), one would hope to finally see improvement in the sector, especially after the slight improvement in PMI data. However, with the rand gaining strength through July, any improvement is likely to be muted, even as manufacturing sectors elsewhere seem to be recovering nicely.

StatsSA will also release mining production data for July this week. Despite the stronger rand, the local mining sector seems to have started on the path to recovery, unlike the manufacturing sector. Stronger commodity prices amidst a weaker dollar, especially for platinum group metals, have given a boost to production.

The US Federal Reserve will release its closely-watched Beige Book survey of US economic conditions on Wednesday.

Local corporates announcing annual or interim financial results this week: Aspen, Dawn, Sasfin, Aveng, Metorex, WBHO, AVI and KAP.

The quarterly BER/RMB Business Confidence Index for the third quarter will be released on Wednesday.

Interest rate decisions from the UK, New Zealand and Canada are expected this week.

Fairbairn Capital | Old Mutual

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