STANLIB's Weekly Focus 04 August 2008

EXECUTIVE SUMMARY OF STANLIB’s WEEKLY FOCUS

AMIDST THE RESOURCES CORRECTION, ARE SOME BIG POSITIVES:

• Some key positives have emerged from the sharp correction in resources recently. Namely, the tremendous rally in the SA bond market, which has seen the 2017 RSA bond yield tumble from 10.9% in early July to 9.3% last week, having a positive effect on the much maligned interest-sensitive sectors, namely the listed property shares, retailers and banks.
• All 3 sectors are up 20% from their lows!
• Even the JSE Small Cap and JSE Mid Cap Indices are showing signs of turning. These sectors are typically also sensitive to changes in interest rates. They seem to offer great buying opportunities at present.
• As we’ve stated before, the time of maximum fear or pessimism is ironically also the time of maximum opportunity.

RESOURCES; BUBBLE OR NOT?

• The sharp declines in resource shares of late – and in the price of platinum and palladium (both down close to 20% in the past three weeks) – have heightened fears of the resource “bubble” bursting, similar to the TMT bubble bursting in 2000.
• Signs of further weakness in the US and European economies have emerged; although so far this seems to be more than offset by increased demand from the developing economies.
• However, the JSE Resources index has tumbled by 30% since its peak in May (see below) and is now negative for the year-to-date (-2.4%)!!

SNIPPETS OF INFO:

• The sudden sharp jump in the rand is hurting our resource shares too. The SA Rand (up 6.5%) was the best performing currency in July. Take that! Why? Partly because of the “carry trade” where one can borrow for 0.5% in Japan or 2% in the US and invest for 13% in SA and partly because of rumours of big corporate deals like Vodafone buying more shares in Vodacom.

• Although the JSE All Share Index lost 8.7% in July, the All Bond Index gained 8.5%, which was an exceptional return. Banks gained 21% in July, as did General Retailers, while Platinum’s lost 23%.

ECONOMIC WEEKLY REVIEW

• Last week proved to be as eventful as promised with a deluge of economic data released both locally and in the US.
• On home shores; the better than expected PPI (Producer inflation) combined with a small trade deficit in June, confirming the slowdown in consumer activity; as well as a further decline of the Investec PMI (Purchasing Managers Index) reflecting that our manufacturing activity is under significant pressure; adds more weighting to STANLIB current interest rate view that rates will remain on hold at the next August meeting.
• However, there still are pressures in the pipeline which would argue for another 50bps hike. These were strengthened by June CPI and CPIX (consumer inflation) coming out higher than expected, although hopefully we are nearing the peak of the inflation cycle; as well as credit growth and money supply which remained stubbornly high in June, therefore not showing a convincing slowdown that the Reserve Bank would need to keep rates on hold.
• In the US, although Q2 GDP (Gross domestic product) showed growth of 1.9%q/q after a fantastic pick up in exports, the broader economy remains under severe pressure. Unemployment worsened to 5.7%y/y after an additional 51 000 jobs were lost in July; and US house prices declined further in May, now down at 15.8%y/y with more bad news expected given the large inventory overhang. These releases were not received well by global markets.

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