Executive summary of Stanlib's Weekly focus

EXECUTIVE SUMMARY OF STANLIB’s WEEKLY FOCUS

MARKETS

·          The US Fed has now lowered the Fed Funds rate by 62% since September. Historically this has usually meant an end to a bear market in equities and to declining company profits, meaning that asset allocators switch from bonds into equities. 

·          US equities were up 4.8% in April and bonds lost value, so it appears that such a switch is occurring. Germany was up 6.3% in April (always more volatile) and the broader Japanese Topix Index was up a whopping 12.2%.

·          BCA Research are recommending that global equity investors place as much as 37% of their portfolios in emerging markets, compared with just 12% in the MSCI World (all countries) Index. This is because of superior wealth generation in emerging markets over the next many years.

·          BCA are negative on UK property, partly because homeowners are deep in debt and partly because it is currently difficult to borrow money. They expect houses to fall at least 20% before bottoming and are also concerned about the commercial property market.

WHAT DOES THE PAST 20 YEARS TELL US ABOUT RESOURCE SHARES?

·          They have outperformed financial & industrial shares dramatically, especially over the past ten years.

·          Taking the STANLIB Resources Fund as a proxy for resource shares, this fund has generated an average compound return of around 25% for the past twenty years, compared with the 19.4% return of the JSE All Share Index (which itself is heavily resource oriented).

·          This translates into over 56 times your money in the STANLIB Resources Fund over twenty years versus over 22 times your money in the JSE All Share Index over the same period.

·          This is especially intriguing considering that most fund managers are continually heavily underweight resources owing to their greater uncertainty.

ECONOMIC UPDATE

·          CPIX inflation rose to 10.1% in February, worse than expected once again because of food and petrol.

·          Assuming Eskom gets a 30% increase in tariffs for this year and next year, this will keep CPIX inflation between 8.5% and 10.5% for the rest of this year and well above target for the whole of 2009, unless food and petrol prices decline dramatically.

·          Also, private sector credit extension has surprisingly stayed above 20% growth.  Although company borrowings played a big role here, mortgage lending is still growing at 23.2%. Credit card growth is 19% year-on-year, which is still quite high.

·          Despite increasing evidence that consumers are struggling, the inflation numbers and the growth in credit may mean yet another interest rate hike in June.