STANLIB's Weekly Focus 02 June 2008
EXECUTIVE SUMMARY OF STANLIB’s WEEKLY FOCUS
SOARING OIL PRICES BEGINNING TO BITE HARD
* Things are much worse in SA than we had forecast last year or even earlier this year. Behind most of this is the fact that oil prices are obviously much higher than forecast and this has partly fed into much higher food prices too.
* Higher oil and food prices have fed into much higher-than-expected inflation and much higher interest rates. This has in turn hammered our bank shares (down 33% to late 2005 levels) and general retailers (down 45% to 2005 levels), as well as our small-cap shares (down 23%) and mid-cap shares (down 22%). So the cycle of rising interest rates that we originally thought would be a shallow one, has turned quite vicious.
* Brent oil is up 87% over the past year in dollar terms and 101% in rands.
* The key problem driving oil prices higher appears to be investment demand mostly by institutional investors in commodity index funds (up from $70bn two years ago to $235bn now) and speculation (by hedge funds and others gambling on rising oil prices). These players are keeping oil and other commodities off the market that would otherwise be available to genuine users. The US government is eyeballing all this and some changes will hopefully occur because these parties are in essence threatening the welfare of the global economy. After all, oil is the life-blood of most economies.
* Already so-called “demand destruction” is occurring in the US, where oil demand is down 3% from a year ago. BCA are expecting a correction in the oil market.
WHAT HAPPENED IN MAY?
* The same theme that we’ve seen all year continued in May, with the All Share Index up 3.7% on the back of a 6.7% jump in Resources, while Financials lost 6% (banks lost 7.8%) and listed property shares lost 7%. Large caps gained 4.6% and small caps lost 3.7%.
* It is difficult to envisage any change to this in the near future, unless Resources correct.
* But should investors be selling small caps with the JSE Small Cap Index PE ratio as low as 9.2 (lowest since 2003) and listed property shares on a forward dividend yield of over 10%? Rather it may make more sense to not only ride out the storm but to gradually buy these sectors over the next year or so.
SNIPPETS OF INFO
* Legendary ex Fund Manager from Fidelity, Anthony Bolton has been quoted in the UK recommending that UK investors begin to gradually switch from Resources to Financials.
* The Japanese Nikkei Index is up 22% from its low in March. With $6.5 trillion in net cash (US households have just $55 billion by comparison), Japanese households have plenty of firepower to buy equities in Japan as inflation begins to take root for the first time in many years.
ECONOMICS WEEKLY REVIEW
* The bad news on the SA economy continued last week, with growth slowing sharply, inflation much higher than expected and the trade deficit ballooning to R10bn.
* The good news was that private sector credit demand has slowed to less than 20% growth and producer food inflation has now slowed from 30% y/y to 6% y/y over the last 7 months.
* STANLIB has lowered the 2008 SA growth rate down to 2.7% from 3.2% due to higher interest rates.
* On the plus side, the maize crop may be as much as 50% higher than last year and construction activity is holding up well.
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