STANLIB's Weekly Focus 14 April 2008
EXECUTIVE SUMMARY OF STANLIB’s WEEKLY FOCUS
RATE HIKE BAD FOR ECONOMY AND NON-MINING SHARES
* Disappointingly and unfortunately, the 9th rate hike in two years, during which time the prime rate has risen by 43% from 10.5% to 15%, is likely to damage the growth rate of both our economy and our non-mining company earnings (by a couple of percent for this year and more for next year).
* Also, the PE ratio is usually negatively affected by rising interest rates (inverse relationship to rising interest rates); so with the PE and the EPS (earnings per share) both under pressure, share prices will do less well and may even revisit the lows of January/February.
* Bond yields hit four year highs today so property shares are also negatively impacted.
* The good news is investors should be able to accumulate good quality shares and funds at lower prices.
* Because the Reserve Bank is harpooning a chunk of our growth story, foreign investors may send their funds to other more attractive emerging markets, which implies we won’t attract enough funds to offset our current account deficit, which means the rand may weaken further…which in turn could cause higher inflation…and guess what, higher interest rates (the vicious circle).
* Thank goodness half our stock market comprises resource shares, which are largely unaffected by SA interest rate shenanigans.
SNIPPETS OF INFO
* The credit crisis remains alive and well, as long as US house prices keep falling and homeowner keep handing back their house keys.
* The credit markets are still in crisis mode, with banks unwilling to lend to one another out of fear. So the risks remain high and analysts are over-estimating earnings growth, putting shares under pressure.
ECONOMIC UPDATE
* Inflation expectations have deteriorated (risen) in the past month or two, hence last week’s rate hike. However, more than 60% of current inflation is due to food and fuel costs (and the rand) upon which interest rate hikes have no impact whatsoever.
* There is now an increased risk of a consumer recession. Motor car, furniture and appliance sales are already experiencing negative growth, while house prices are also turning negative.
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