Stanlib's Weekly Focus 20 October 2008

EXECUTIVE SUMMARY OF STANLIB’s WEEKLY FOCUS

FINANCIAL FEARS SWITCHING TO FEARS ABOUT THE GLOBAL ECONOMY

• Investor fears have switched to the rapidly weakening US, UK, Japanese and European economies.
• Central bank and government bailouts provided positive news about the financial sector, but the all-important US consumer seems to be buckling under all the pressures.
• Clearly the US, UK, Japan and Europe are either in recession or very close to recession.

OFFSHORE HEDGE FUNDS DRIVING THE COLLAPSE IN OFFSHORE SHARE PRICES

• The massive growth in hedge funds over the past few years is dramatically adding to the sell-off in global equity markets.
• Fears that hedge funds may need to sell a lot more equities as thousands of investors, particularly wealthy individuals, have thrown in the towel and demanded their money back.

BIG DEVELOPED STOCK MARKETS FINALLY HAVE AN UP-WEEK

• All the big developed stock markets gained during the week, with the Nikkei up 5%, the UK up 3.3%, France up 4.8%, Germany up 5.2% and the S&P 500 Index in the US up 4.6%.
• It is just possible that Friday October the 10^th may have been the bottom for these markets.
• When the “fear index”, namely the VIX (volatility index on the Chicago Board of Options Exchange) peaks it signals a bottom for shares. This happened in 2001 and 2003 and last week this index hit a record high of 82, up from 10 a few years ago.

JSE CONTINUES TO DECLINE AS INDUSTRIAL SHARES – AND SOME FINANCIALS - HIT THE SKIDS

• Unfortunately our own JSE All Share Index continued to decline last week as in particular the industrial shares tumbled.
• As of Friday’s close the JSE All Share Index is down 38.5% in rands (back at 2006 levels), or 58% in dollar terms (back at 2005 levels).
• The Resources Index is down 55% since its peak in May, while the Industrial Index is down just 27% from its record high last October.
• The JSE Financials Index is down 41% from its record high in May 2007.
• On the Industrial side, the biggest fallout of late has been in the Construction sector, down a whopping 30% so far in October and down 40% from their peak last October.

SO WHAT ON EARTH CAN INVESTORS DO?

• So historically the market does now look extremely cheap, even though of course it could get cheaper, especially if industrials continue to slide further.
• So all-in-all investors need to batten down the hatches and wait patiently. While there are no guarantees on the future, history indicates that selling when prices are down as badly as they are has not made sense.
• If anything, investors, where possible and where feasible, should be gradually accumulating equities and unit trusts during this huge sell-off. Patience and resilience have paid off for wise investors in the past and hopefully will continue to do so.
• By the way, this buy program could include offshore equities, although the current highly stressed (probably oversold) rand is a factor to consider.

ECONOMIC WEEKLY REVIEW

• South Africa is being massively and dramatically impacted by the increase in global risk aversion. The impact is unprecedented. It is therefore no surprise that the SA equity index has lost over 29% of its value year-to-date and the Rand is the worst performing emerging market currency by far!
• Within the emerging market context, South Africa is under extra pressure, as despite our generally favorable macro-economic fundamentals; we have a noticeably large current account deficit, a highly accessible and liquid financial market, ongoing domestic political turmoil, and a weakening domestic economy.
• Further evidence of the slowing economy was again seen last week by August retail spending remaining under severe pressure.
• At the recent October annual meeting of the Institute of International Finance (IIF) in Washington, updated data on private sector capital flows to emerging markets was released. This again highlighted the significant pressure placed on these flows, after record inflows in 2007. Further insights around the Global Financial Banking and Market Crisis will be discussed from both the IMF (International Monetary Fund) as well as the IIF, who held their annual conferences in Washington recently.

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