Category Economy
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The economy

18 August 2004 Angelo Coppola

Last month we focused on the recent strong performance of the rand, and explained in some depth the implications of rand strength on both our domestic economic indicators and investment assets.

While I run the risk of sounding like the proverbial broken record on this issue, it was once again the rand’s oscillation that led the market action in July.

Only this month it was a slightly weaker rand which saw rand hedge shares stage a mini recovery.

Equities bounced back from a series of losses over the last 3-months to record a “rare” positive month. The market was led by the resources sector which benefited from the marginally weaker rand/US$ exchange rate of –0.9% in the month.

The sector also received some positive comments from analysts who are suggesting that commodity prices are holding up better than originally thought, and may therefore improve earnings forecasts going forward.

Apart from the exchange rate, most other indicators continued to show stability.

June CPI edged forward as expected to 5% y-o-y, but the current rising inflation trend does not seem likely to breach the upper range of the SARB’s inflation target of 6% in this year, all things remaining equal.

Producer inflation (PPI) remained benign at 1.2% y-o-y even after the recent high international oil price increase and the concomitant rise in petrol prices. This seems amazing given how much the oil price (and hence imported energy costs) could have risen.

Had it not been for the strong rand offsetting these 40-something dollars per barrel oil prices, a current petrol price of around R8 per litre would not be impossible to imagine!

In fact, local export businesses are making their opinions heard, calling for a rate cut at the August MPC meeting. We believe a rate cut is highly unlikely and that the current 8% repo rate will be maintained.

The main reason for this stance by the SARB should be that while consumer demand is hot, throwing additional fuel onto the consumer demand fire is unwise.

While the JSE/FTSE All Share index returned 2.15% in July, it belied the large intra-sector differentials observed in the month. Resources led the way with a 4.71% return, mining and oils and gas being the biggest contributors, while IT (-8.76%) and basic industries (-2.35%) were the worst performers.

Financials were positive in the month, up 0.83%, led by insurance and real estate. As a result of the strong resource performances, the TOP40 (2.4%) was able to outperform the mid (0.37%) and small cap (1.74%) sectors. Equities have now recovered into positive territory for the year to date, although only just at 0.9%.

On the fixed interest side, positive inflation data paved the way for bonds to have a storming month, rising 1.98%.

Performance came across all the bond sectors, with the 3-7 year maturities just edging out the other durations. Bonds are now up 2.1% for the year to date.

Cash returned 0.68% in July and is up 4.8% for the year to date.

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