Inside Insights 9 May 2011

Investment Intelligence|Inside Insights

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

Added on 09 May 2011 @ 9:29 AM

FALLING OIL PRICES CREATE BREATHING ROOM

Global markets hit a bad patch over the past few days, punctuated only by short-lived euphoria when news of Osama Bin Laden's death. Quite why his death at the hands of American soldiers would cause equity prices to rise is unclear. It certainly changes nothing about companies' earnings - the true long-term driver of equity returns - but it does suggest once again that we are living in an uncertain post-recession world where news-flow can move markets. Elevated volatility remains something investors will have to live with. The good news, once again, is that volatility diminishes over time and is not something long-term investors need to pay much attention to.

Worries over the strength of the US economic recovery and the spectre of global inflation unnerved investors last week. This, along with a surge in US crude oil inventories caused a plunge in the price of oil, including the biggest ever daily fall in crude oil prices. This would also confirm the suspicions of many that oil prices had moved out of sync with the demand and supply reality, despite ongoing turmoil in the Middle East. Commodity prices also reacted negatively to a slightly stronger dollar after the president of the European Central Bank appeared to soften his views on inflation and interest rates. The rand tracked the euro lower, having traded at R6.54/$ earlier in the week. But even with the rand slightly weaker at R6.69/$, we know that local motorists would be much more comfortable with oil at $112/barrel.

GLOBAL MANUFACTURING LOSING SOME STEAM

The first week of the month sees the release of manufacturing and new vehicle sales data. Local new vehicle sales growth was significantly lower in April following strong increases in the first quarter. According to Naamsa, new vehicle sales grew by 8% year-on-year in April. This was mainly due the fact that April had more public holidays than the same month last year, but also reflected a cooling off in the vehicle market following several months of strong growth. Sales of passenger vehicles were 25.1% lower compared to March, falling from a four-year high, but rose by 11.7% year-on-year. Commercial vehicle sales fell 33.3% month-on-month, but only fell 0.7% year-on-year.

The Kagiso manufacturing purchasing managers' index (PMI) slipped to 56.4 in April from March's 13-month high of 57.2. However, since an index level above 50 indicates that the sector is expanding based on the responses of the firms surveyed, manufacturing conditions can be said to remain favourable. New sales orders remain high amid gradually improving domestic demand conditions. Business expectations are positive, and growth in inventories point to positive sentiment.

The prices index fell to 82.9 from March's 32-month high, but remained high due to high commodity prices. These higher input prices are likely to eventually feed through to increased producer and consumer inflation. Unfortunately, the employment sub-index remained below the 50 index level, suggesting that the sector - South Africa's second largest employer - is still shedding jobs, despite improving conditions. All in all, there is also little evidence that the Japan's natural disasters have had a severe impact on our manufacturing sector.

In Japan itself however, the PMI continues to decline (45.7 in April from 46.4 in March),, with the manufacturing sector still heavily disrupted. Japan's PMI dragged down the JPMorgan global manufacturing PMI to 55.0 in April from 55.7 in March. However, several other countries also experienced lower output, employment and new orders.

THE WEEK AHEAD

• The Reserve Bank's Monetary Policy Committee (MPC) meets on Wednesday and Thursday, with an interest rate announcement expected on Thursday afternoon. Most economists expect the MPC to keep the repo rate at 5.5%. Though inflation climbed to 4.1% in March, it remains comfortably within the 3% - 6% target range, while the economic recovery is still uneven and hesitant. What will be of greater interest is whether the MPC's statement contains any hints as to when interest rates could be hiked.

• The Reserve Bank releases gold and foreign exchange reserves data for April.

• Statistics South Africa releases March manufacturing production numbers on Wednesday.

Manufacturing production rose by 6% year-on-year in February, though this growth rate was largely due to a surge in vehicle production that is unlikely to have been sustained.

• StatsSA also release s mining output data for March on Thursday. Mining output grew by 2.8% year-on-year in February, slightly down from January's 3.2%. The strong recovery in 2010 is creating a high base off which growth rates are calculated. However, commodity prices remain very high, meaning mining firms will be looking to ramp up production as much as possible.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights