STANLIB's Weekly Focus 06 October 2008

EXECUTIVE SUMMARY OF STANLIB’s WEEKLY FOCUS

BEAR MARKET REMAINS INTACT, UNFORTUNATELY

• The hoped for recovery once the $700bn bailout plan was approved faded rapidly amidst gloomy economic news, such as the loss of 159,000 jobs in the US in September (105,000 expected) and the knowledge that the US property market remains weak.
• The US bailout plan, in conjunction with further potential rate cuts by the US Federal Reserve, will likely only provide some floor under the financial markets over the next few months to prevent a more serious meltdown.
• The ongoing refusal by the European Central Bank to reduce interest rates remains a serious problem. Their fixation on inflation, which declined to 3.6%, seems crazy, even more so considering that deflation is now the biggest threat as European economies slide ever deeper into the mud. This is a problem for SA exports because Europe is our biggest trading partner.
• The JSE All Share Index in US dollar terms is down 48% from its high last October and is trading at late 2005 levels. In rand terms, the All Share Index is down 35% from the May record high.

ARE THERE ANY POSITIVES OUT THERE?

• What is sorely needed is concerted central bank action to reduce interest rates in Europe, the UK, the US and elsewhere, including SA, to attempt to restore some confidence.
• Two big offshore value investors have stepped up to the plate to invest. Warren Buffett has spent at least $28bn this year investing in companies, including of late General Electric and Goldman Sachs. Anthony Bolton, Britain’s most high-profile fund manager (now retired from fund management, but still employed by Fidelity in London), has begun investing his own money in shares, buying for the first time in several years.
• Meanwhile the huge British mining group Rio Tinto remains upbeat about the demand for its commodities. “…the outlook remains that constrained supply conditions and firm demand from China and other developing countries should establish the basis for higher-than-average prices through 2009.” CEO Tom Albanese.

US DOLLAR GAINS TRACTION

• The US dollar has rapidly gained 15% against the ever-weaker euro (from $1.60 to 1.355), thereby breaking its big seven year down-trend. Against the Aussie dollar, the US dollar has gained a whopping 24% in under three months (back at 2004-2006 levels).
• This dollar strength continues to place more pressure on dollar commodity prices, with falling oil prices the one bright spot for us South Africans (down 41% since July, or 34% in rand terms).
• The reason why the US currency is strengthening when the country itself is such an unholy mess, is due to the fact that currency traders are betting that the US will eventually emerge from its mess before these other countries and will then raise interest rates.

WHAT CAN INVESTORS DO?

• One fully acknowledges the huge pain being experienced by most investors, especially those close to retirement. We would much rather that we’d warned investors to sell four months ago, but it was not the case. All we knew was that the risks relating to the US threat were high.
• The only one small measure of comfort is that the other three asset classes of bonds, property funds and cash have done well over the past few months. So well diversified portfolios will have some cushioning.
• There does appear to be plenty of panic selling going on at present and history indicates that one should not sell during times of heavy emotion and panic selling. There is no other way out other than pain, patience, resilience.
• For those investors who are underweight equities, this represents an attractive opportunity to gradually and quietly accumulate equities (buy while others are despondently selling)

ECONOMIC WEEKLY REVIEW

• On Thursday 9 October, the South African MPC (Monetary Policy Committee) is expected to keep our Repo rate on hold at 12%, with Prime at 15.5%. Inflation is still well outside the 3 – 6% target range; however we believe we are either at, or very near to, the peak of the current cycle.
• The real economy has definitely responded to the previous hikes, further evidence of which was released last week. Private sector credit extension as well as money supply slowed noticeably in August, car sales remained under pressure during September, and our trade deficit improved during August.
• Offshore, the Bank of Japan is expected to keep rates unchanged this week, however at least a 25bps cut is expected by the Bank of England as their economy is under severe strain across the board.
• Emerging Markets also remain under pressure. Increased global risk aversion has impacted both equity and bond flows resulting in weakening emerging market currencies. The US was dealt another blow with worse than expected payroll figures released on Friday. During September the US economy lost an additional 159 000 jobs, with further weakening anticipated.

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