Inside Insights 8 March 2010

Investment Intelligence|Inside Insights

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

Added on 07 March 2010 @ 10:01 PM

Local seems lekker for foreigners

While the euro has steadily lost ground to the dollar since December over the fears of a Greek sovereign debt default (Greece has to roll over €20bn in debt which expires in the next two months, and €53bn for the year as a whole), last week was the turn of sterling to take a pounding against the greenback. The UK's fiscal situation is starting to resemble Greece's (although the need for resolution is nowhere near as urgent) and markets are particularly worried that the looming general election will result in a government (either Tory or Labour) with a weak mandate that is unable to decisively reign in the ballooning deficit. At least Greece's leaders seem to have finally sprung into action and has started implementing austerity measures such as cutting civil service bonuses and raising VAT rates. Hopefully this will impress fellow Eurozone members (especially Germany) enough to secure some sort of bailout. Greece also still has the option of turning to the IMF, but other European leaders could find this very unpalatable.

Once again, we have to point out how fortunate the current local situation is in many respects. South Africa sold $2bn in dollar-denominated bonds to offshore investors last week, at the lowest interest rate ever secured in the dollar market - 5.5%. According to National Treasury, this will take care of government's funding requirements for the remainder of the year. Clearly, there is no lack of foreign confidence in of our economy and the management of public finances, in stark contrast to Greece (and the UK?). Indeed, during February, foreginers bought R9.4bn worth of bonds and equities on local markets. This inflow of foreign exchange boosting the rand will also help suppress inflation.

There has to be a ‘but' though. While South Africans tend to focus on the rand-dollar exhange rate, Europe remains our biggest export destination, and the UK remains important too. The rand has strengthened from R15/₤ to R11.20/₤, while the rand-euro exchange rate is threatening to break through into single digits, having traded above R11/€ as recently as December. This is bad news for our exporters and businesses competing with imports, but for now they will have to live with is as government has made it clear that it will not intervene to push the rand lower (a statement confirmed by Friday's gold and foreign reserves data, showing a decline in forex reserves in February).

SA overtakes

The local Kagiso purchasing managers' index (PMI) jumped to the highest level since March 2007, namely 60.4 in February, from 53.6 in January. This is the fourth consecutive month in expansionary territory (in other words above 50 index points). Local industry is benefiting from increased export orders, while domestic demand is also slowly improving. Interestingly, the local PMI also exceeded the JP Morgan Global PMI, which fell back to 55.2 in February from 5-year high of 56.1 in January, due to declinxs in China and the US. The US manufacturing PMI, the ISM index, pulled back to 56.5 in February after January's sharp rise. China's PMI also fell back by more than expected, to 52 from 55.8 in January.

The Eurozone manufacturing PMI increased to 54.2 in February from 52.4 in January, the fifth consecutive month in positive territory. However, the divergence among countries increased: Germany, France and Italy continued to expand, while activity in Spain and Greece remained in negative territory (with the latter hitting a ten-month low of 44.2). The UK's manufacturing sector benefited from a weaker pound, leaping to 56.6, its highest level since October 1994. While the Chinese data was no doubt influenced by the week-long new year's celebrations, and the American data by the severe winter storms that shut down much of the US north east, one does get the sense that momentum loss is occurring in global growth, at the time when authorities seem to be pulling back stimulus measures (or at least are talking about doing it). Nonetheless, PMI's in the world's leading economies remain at levels above 50, pointing to continued economic growth, even if at lower growth rates. For South Africa, the surging PMI suggests economic growth could surprise on the upside this year. Especially if taken together with the latest new vehicle sales data from NAAMSA: new vehicle sales jumped 16.2% in February (this is off a very depressed base, of course, but car dealers certainly won't quibble after a two-year recession in the sector).

The Week Ahead

This week sees the release of January mining and manufacturing production data from StatsSA. Manufacturing production grew by 3.2% year-on-year in December, confirming the PMI data and snapping a 15 month declining trend. However, the contraction in local mining production continued in December, with output falling 2.5% year-on-year after falling by 1.5% year-on-year in November.

Local corporate results will be released from the JSE Ltd., AVI, Sasol, Old Mutual, Sanlam, MTN, Metropolitan, Basil Read and FirstRand.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights