STANLIB's Weekly Focus 21 January 2008
EXECUTIVE SUMMARY OF STANLIB’s WEEKLY FOCUS
1. US DRAGGING THE WORLD DOWN
* What an ugly way to start a year, unless you’re short equities or long cash! We knew the risks had risen late last year, but didn’t expect this sort of panic and certainly not before we’d even settled in after the holidays.
* The big bastion of free markets and capitalism, the US, is ironically threatening to drag the world into an economic slump…or at least the dramatic fall in global share prices is now discounting the worst.
* So far the Dow is down 9% in ’08, the Nikkei is down 13% and Hong Kong’s Hang Seng Index is down 24% in under three months.
* US market analyst, Elaine Garzarelli, expects the US economy to be flat to down in the first half of ’08 and company earnings to decline 3% in ’08, which is a big deterioration from her previous number of up 7%.
2. SA STOCK MARKET LOOKS CHEAP AND METAL PRICES HAVE SO FAR HELD UP REMARKABLY WELL
* The JSE is down almost 20% from its October record high, the worst fall since the bull market began, with Anglo and Billiton down over 28%, Absa down 33% and on a forward PE of 6.7, div yield of 6.3% one year out. All three shares look cheap.
* STANLIB forecasts 4% growth for SA this year and 19% earnings growth, with an expectation of a 16% return for the JSE twelve months out, similar to a couple of the big international stock broking houses.
* But the risks are to the downside, what with electricity cuts adding to costs, the NCA hurting car and house sales, rising petrol costs and high interest rates…not to mention the US economic slow-down.
* Commodity prices remain the one big positive, with most prices up so far in 2008 (rhodium up 17%, copper and gold up 5.5%, nickel up 7%).
* The JSE now looks cheap on a forward PE of 11.5, well below the average of 14.5 of the past 12 years. Investors with cash could phase in purchases over the next few weeks. It looks to be a good buying opportunity.
3. BONDS A HAVEN OF PEACE AND TRANQUILITY, BUT PROPERTY SHARES WEAK
* Offshore government bonds have gained in value as yields have fallen sharply in anticipation of recession or a slow-down. STANLIB has up-weighted global bonds to neutral and down-weighted global shares to neutral.
* SA bond yields have been quite steady around 8.5% (ten year bond). STANLIB has up-weighted local bonds to just below neutral.
* Yet property shares have been pummeled, down 20% in SA and another 14% in dollars in the past six weeks offshore on the back of credit woes.
* STANLIB remains moderately overweight both offshore and locally, expecting a 14% return over the next year in SA.
4. SNIPPETS OF INFO
* Quietly, almost unobtrusively, the once beleaguered US dollar may have bottomed recently at $1.49 to the Euro, having gained 2.8% over the past week. It has fallen from 84 US cents seven years ago to 149 US cents and may finally have hit rock bottom, or at least for a while.
* So far the powerful uptrend of the MSCI Emerging Markets Index remains intact, despite falling 15% in dollars from its record high. This is one positive for the JSE (so far), which comprises about 6.5% of this index.
* The rand has weakened lately, on the back of some foreign selling of our shares, although this has occurred frequently over the past few years, followed by a firming when buying has returned. Will buying return again this time to cover the R10 billion monthly deficit caused by our big import bill? No-one knows. Therein lies the rand’s risk.
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