STANLIB's Weekly Focus 11 August 2008

EXECUTIVE SUMMARY OF STANLIB’s WEEKLY FOCUS

IS IT AS BAD AS IT LOOKS?

• With all the negative economic releases abroad, it is not surprising that most offshore investment strategists are negative on economies and equities. Most are betting that equities are still in a bear (or downward moving) market and that bonds will continue to outperform equities. BUT there are some growing positives!
• Due to the gloomy news, some $3.3 trillion in the US is sitting in money markets earning 1-2% (with headline inflation at 5%). Somewhere along the line, this record mountain of cash will be itching to be put to work.
• So don’t be surprised if last week’s 2.9% rise in the US stock market is the start of a pretty good rally (global rally), just when most are expecting more doom and gloom. Doesn’t it often happy this way? After all, as I’ve said before, the US, UK, European and Japanese stock markets are 20% (35% in Japan’s case) below where they were in March 2000, over eight years ago.

BJM STOCKBROKERS BULLISH ON THE JSE:

• Herman van Papendorp, the number one rated Investment Strategist in SA from local stock broking firm, Barnard Jacobs Mellet, is “conservatively” looking for a 33% total return from the JSE over the next year.
• He notes that “forward valuations” (forward price-to-earnings ratios etc.) on the JSE are currently at five-year lows, so there is a big “margin of safety” built into overall SA equity valuations.
• BJM’s offshore partner on research, Lehman Bros, expects global equity markets to advance by 16% by year-end, with Japan leading the way (30%).

STANLIB’S VIEW:

• The big fall in the bond yield of late, despite a pickup on Friday on some rand weakness, is a sign that the big jump in inflation is mostly “yesterday’s news”, despite the electricity hikes feeding through to higher inflation in coming months.
• This is confirmed by the big rally in most of the interest-sensitive sectors on the JSE. The general retailers are up 33% already (after falling 52%);t he banks and the listed property shares are both up 23% from their lows. Even the JSE Small Caps have recently turned and are now up 7.7% after a big hit.
• STANLIB likes Resources, now that they’ve had a smack (down 30%).

ECONOMIC WEEKLY REVIEW

• Last week as expected, most central banks around the world left their interest rates on hold. The US Federal Reserve; the ECB (European Central Bank); BoE (Bank of England) and RBA (Reserve Bank of Australia) are all fighting to maintain a balance between slowing economic growth and soaring inflation.
• The good news is that the oil price has fallen, which should relieve some of the inflationary pressures; however this was not enough for the Bank of Indonesia and Korea who both hiked their interest rates last week.
• Back home the pressure is mounting before the MPC (Monetary Policy Committee) make their crucial decision regarding our South African Repo rate, later this week. STANLIB has been calling for rates to remain on hold for some time now, and market consensus agrees.
• As expected, July vehicle sales remained under pressure, especially light commercial vehicle sales. SA Manufacturing production staged a surprise rebound in June; however this was mostly due to the low base of activity established in June last year.

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