STANLIB's Weekly Focus 10 November 2008

EXECUTIVE SUMMARY OF STANLIB’s WEEKLY FOCUS

COMPARISONS WITH HISTORY

• The FT (Financial Times) notes that there are only four periods in the last 100 years (two of them in the 1930’s) that match the 46% slide seen by the S&P 500 Index since October 2007. After the initial crash of 1929, anybody buying when the market started to stabilize would have lost more than 75% of their money over the next two years (the market eventually fell 86% in total).
• In the past two weeks, the S&P 500 Index rallied by 20% and then lost half of that. So far its low was 848 on the 27^th of October, previously seen in March 2003 and before that 1997. So the current long market consolidation, so to speak, is already 11 years old.
• Some technical analysts, like Murray Morrison, are warning that we may now be in a bear market that could last a few more years, i.e. could after a likely period of rallying still move lower than the 848 seen on October 27^th.
• The unknown is how bad the recession in the US, UK, Europe and Japan will be, or how long it will last, because this will directly influence company earnings, which will influence PE ratios and share prices. One assumes that the response by governments this time round will be much better than during the Great Depression because of the harsh lessons learned then and because of the far better means of communication from country to country now.
• However, the challenge this time is that the world is grappling with deleveraging (cutting back on debt or borrowings), meaning that there is a big overhang of debt and banks in countries like the UK and Europe have ceased lending.

MEANWHILE, SOME SIGNS OF HOPE

• The election of Obama in the US is a fantastic event that could inspire the people of that country to greater heights than under any president since Kennedy in the early 1960’s. Obama could also inspire much of the world as he hopefully turns around the hugely negative global sentiment towards his country.

SA MARKETS PERK UP

• The sharp fall in SA government bond yields is a good sign that inflation is set to decline more sharply than forecast and that interest rates in SA may be (should be) cut sooner rather than later. The so-called “FRA” curve of futures on interest rates is currently forecasting a 90% probability of a 50 basis point cut in SA interest rates in December.
• Our resource shares are benefiting strongly this Monday morning from the huge Chinese infrastructural spending package announced over the weekend. About time too! We are overdue for a good rally going into the Xmas season.

ECONOMIC WEEKLY REVIEW

• On the back of a slowing global economy, resulting in a dramatic downward revision to world growth estimates by the IMF (International Monetary Fund); various measures have been implemented by predominantly developed countries, in order to get the economies back up and running. These include further interest rate cuts; during the week the ECB (European Central Bank) cut their rate by 50bps, and the BoE (Bank of England) cut by a massive 150bps; rate cuts were also experienced by other countries.
• Early this morning China announced their unprecedented stimulus package that will come into effect early next year. The 4 trillion Renminbi package, roughly $586bn, will see new spending implemented. This is equivalent to 15% of Chinese GDP over the next 2 years. The package will cover 10 key areas such as affordable housing, rural infrastructure, railways and the national power grid. These measures will boost domestic consumption, and benefit resource companies globally, evidence of which can already be seen by the strong start to our market this week.
• The US still finds itself in the midst of a severe recession, with October manufacturing numbers, and light motor vehicle sales down worse than expected, with its lowest volume of sales in more than 25 years. Non-farm payrolls fell by a very substantial 240 000 in October, and in addition the September payroll change was revised down to a decline of 284 000. Thus, the US economy has lost 524 000 jobs in 2 months!
• Back home South African October vehicle sale numbers recorded a shock decline, and retail sales figures released later this week are expected to remain under pressure.

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