Stanlib's Weekly Focus 15 September 2008

EXECUTIVE SUMMARY OF STANLIB’s WEEKLY FOCUS

CREDIT CRISIS BITES AGAIN

• The credit crisis on Wall Street intensified as Lehman Bros potentially ‘hits the wall’, Merrill Lynch is sold to the Bank of America and the insurer AIG seeks to raise cash ($10-$20bn). By the close last Friday, Lehman’s shares were already down 95%.In the end, the cleanup and consolidation will lead to stronger companies and that is the way of free markets/capitalism, although there may be plenty of pain from Lehman’s unsecured liabilities and of course the loss of jobs.
•  It all comes down to leadership. Both Lehman Bros and Bear Stearns had CEO’s in place for fifteen years who became more and more autocratic and ended up makinga string of bad decisions.

EMERGING MARKETS INCUR SHARP FALL

• While the STANLIB Resources Fund is down 38% in dollars (35% in Rands) since the peak in May, the MSCI Emerging Markets Index (of which the JSE comprises about 6.5%) is down 32% over the same period and 38% since its peak last October.
• Russia has declined more sharply (around 40%) partly because of its military aggression in Georgia. China’s stock market is down 63% since October 2007, back at 2006 levels, while Taiwan, S.Korea, Malaysia and Hong Kong have fallen sharply too.
• All in all, both resource shares and the Emerging Markets are looking great value. The only cautionary on Emerging Markets is that the downtrend remains firmly in place for now and also Brazil, the biggest constituent in the index, has broken its six year uptrend.
• So it’s a mixed bag for the JSE, which has tended to follow this index over the past five years or so. It all looks cheap, but downtrends have not turned as yet.
• The JSE All Share Index is on an historic price-to-earnings (PE) ratio of just 11.6, well below the 14.5 average of the past thirteen years. The Financial & Industrial Index is even cheaper, on an historic PE of 11.3, the lowest since 2003 and well below its thirteen year average of 14.7.

ECONOMIC REVIEW

• The bleak South African business environment continued last week, with more figures released highlighting the slowdown being experienced within industries across many sectors. SA business confidence declined sharply during the third quarter and manufacturing activity slowed in July.
• Recently, most emerging market currencies have come under significant pressure, reflecting an increase in global risk aversion as the global economic slowdown spreads. So far this year the Rand is the worst performing emerging market currency! However out of 37 emerging market economies that have an international credit rating, only 5 have a better credit rating than South Africa, namely China, Korea, Malaysia, Poland and Chile. Thus we are still an attractive and stable investment destination.

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