Inside Insigths 14 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 14 February 2011 @ 1:48 PM

Emerging markets looking less shiny

Emerging market equities have outperformed developed countries equities since the post-crisis equity recovery started in March 2009. Emerging market economies returned to rapid growth rates while developed countries were saddled with debt and high unemployment and a slow, grinding recovery, and investors allocated capital accordingly. The equity market gained new impetus after the US Federal Reserve announced additional monetary stimulus (the second round of quantitative easing) in mid-August 2010. Since the beginning of the year, however, investors seem to be favouring developed markets over emerging markets. This is probably a temporary phenomenon; very few people doubt that over the longer term, emerging markets will outpace developed markets in terms of economic growth. But asset managers are currently, apparently, seeing more value in developed markets. It also helps that the economies of Germany and the US are growing faster than was expected, while in China authorities are tightening policy to cool the economy. And of course sentiment towards emerging markets has not been helped by the uprisings in Tunisia and Egypt.

The implication for South Africa, at least for the moment, is less interest in our equity market from foreigners. January saw net equity outflows of R1.09bn. This is also a reason why the rand has gone from R6.61/$ at the end of December to $7.26/$ at the end of last week (even while the dollar was falling against other major currencies). The other reason has been that the Reserve Bank has significantly stepped up accumulation of foreign exchange in January, with an increase in gross gold and foreign exchange reserves by $1.6bn. Whether the Bank will want to continue pushing the rand weaker at a time when global food and oil price are surging remains to be seen.

Manufacturing output under pressure

Manufacturing output rose by much less than expected in December, according to StatsSA data released last week. Instead of the 4.1% year-on-year growth rate expected by analysts, production in South Africa's second largest sector only rose by 0.2% year-on-year. Analysts had based their optimistic view partly on the improvement in December's Kagiso purchasing managers' index (PMI) number. The rand lost 1% against the dollar when the disappointing numbers came out, as it suggested that the Reserve Bank would keep interest rates at present low levels for the foreseeable future. The positive contribution to December's production growth came from the motor vehicle division, petroleum, chemical products, rubber and plastic products division. For 2010 as a whole, manufacturing output grew by 4.9% - higher than 2009's 12.9% contraction but by no means a stellar performance.

Earlier in the week, StatsSA reported that the unemployment rate improved to 24% in the fourth quarter of 2010, from 25.4% in the third quarter. The big driver was an increase in ‘social and community services' employment, essentially the government sectors. Other sectors were still shedding jobs in the fourth quarter, but at a much slower rate. While the lower unemployment rate on the face of it is positive news, it is partly as a result of growth in the number of discouraged work-seekers. In other words, a person who has given up looking for work is not counted as unemployed, even though they might desperately want to work. Therefore, unemployment numbers in South Africa are always treated with a fair bit of scepticism. Local official unemployment numbers are also only released quarterly - unlike the US, for instance, where a range of weekly and monthly reports are available - which means the market does not end up paying too much attention to it.

The Week Ahead

• StatsSA releases January consumer price inflation (CPI) numbers on Wednesday. The consensus expectation is that CPI rose by 3.7% year-on-year in January, up from December's 3.5% reading. So far, the impact of rising global food prices has not been felt in South Africa, but higher fuel prices have. A petrol price hike in early January will contribute to higher CPI.

• The Bureau for Economic Research releases the RMB Business Confidence Index for the first quarter on Wednesday.

• Also on Wednesday, StatsSA releases December retail sales numbers. The consensus forecast is for a 7.3& real increase in December, from November's 7.8%.

• Global events and data releases of note this week: US President Obama delivers his budget request to Congress, the Federal Open Market Committee releases the minutes of its previous interest rate meeting, US January inflation, housing starts and industrial production; China January home prices, money supply and inflation; eurozone December industrial production, Q4 gross domestic product; UK consumer inflation.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights