STANLIB's Weekly Focus 14 July 2008

EXECUTIVE SUMMARY OF STANLIB’s WEEKLY FOCUS

USA CONTINUES TO MESS UP:

• It is really not surprising that most stock markets around the world have entered bear market territory (down 20% or more), with the biggest country, the USA, going from one disaster to another.
• The S&P 500 Index is now 21% below its record high and trading at 2005 levels, the German Dax Index is 23% below its high, the FTSE 100 Index is 22% below its high and the MSCI Emerging Markets Index (of which we comprise 6.4%) is 23% below its high.
• The JSE All Share Index is down about 17%, so is not in a bear market as yet because of the big resource component. However, 25% of the JSE shares are down 40% or more and the median share is down over 30%, so the damage has been extensive.
• Between US house prices (and all their other issues) and the soaring oil prices, it seems as if global stock markets will remain under pressure for the foreseeable future.

SNIPPETS OF INFO:

• Although the STANLIB Small Cap Fund has fallen 40% from its record high last year; the fund is now trading on a forward PE (price-to-earnings) ratio of 5.8 (excluding exploration shares in the portfolio) and the average expected earnings growth of the shares in the portfolio is 52%. So the fund does seem to be offering a fantastic value buying opportunity, assuming the earnings of the companies do come through.

• One of the all-time legends of the global investment world, Sir John M Templeton, died last week at the ripe old age of 95. Templeton was famous for his value investing approach and for his superb perspective on the world.

ECONOMIC WEEKLY REVIEW

• Last week, as expected, the BoE (Bank of England) voted to keep their interest rate on hold at 5%. This maintains their position with the highest interest rate of the G7, Group of Seven Nations, while Japan still holds the lowest rate among the same group at 0.5%. The UK MPC (Monetary Policy Committee) is fighting to balance a rapidly slowing economy with a high and rising inflation scenario.
• Back home, SA manufacturing activity fell sharply in May; following the technical improvement in April. Overall however, manufacturing activity is still clearly under significant pressure.
• The SA Rand has been the worst performing emerging market currency year-to-date. Can foreign buying and selling of SA equities help explain why?
• The acute slowdown in the economy coupled with the high base effect for many commodity and food prices as well as the re-weighting of the inflation index in 2009 makes a rate hike in August increasing unlikely; and if there was a hike it would be only 50bps and the last in the rate hiking cycle. The market is very much pricing-in at least one further rate hike, with many analysts still talking about two further hikes.

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