STANLIB's Weekly Focus 23 June 2008

EXECUTIVE SUMMARY OF STANLIB’s WEEKLY FOCUS

RISK AVERSION RISING ONCE AGAIN

• Fears of rising inflation and interest rates in many countries around the world, coupled with the ongoing housing and credit crisis in the US, are once again causing investors to switch out of riskier assets like equities into cash.
• The MSCI World Index has fallen by 8% in the past five weeks; the US S&P 500 Index is now 13% below where it was at the peak in 2000, over eight years ago and the German Xetra Dax Index is 14% below its peak in March 2000.
• The bottom line is that the bad news has been expanding, while the good news is hard to find. Yes, that is quite well reflected in lower share prices, but of course if oil and food prices keep on rising then shares may well fall further.

SA INTEREST RATE SENSITIVE SECTORS TAKE MORE PAIN

• The STANLIB Small Cap Fund is now down 33% from its record high last year and is looking cheaper and cheaper (low price-to-earnings ratios).
• The listed property index is down a whopping 36% (forward dividend yield of 10.8% one year out) as bond yields have shot up and banks have continued to slide sharply. However, the STANLIB Resources Fund is still up 26% this year and is 34.5% higher than it was twelve months ago.
• What can investors do in this situation? Possibly one good option is to gradually accumulate those sectors that are down the most, such as a monthly buy program in small caps, financials, select industrials and listed property. Certainly they are offering their best value in years. It could get worse, but that should cheer investors because of the wonderful opportunity to buy in at lower and lower prices.
• There is a massive “sale” underway in these sectors.

ECONOMICS WEEKLY REVIEW

• On Thursday last week the Quarterly Bulletin was released by the South African Reserve Bank. Surprisingly, in Q1 2008 fixed investment remained robust, despite the electricity outages and ongoing skills shortage; however consumer debt levels continued to rise, savings fell further and personal income growth slumped. Clearly the consumer is under pressure, which could very likely lead to a rise in debt defaults over the next 18 months.
• Adding to the inflationary pressures was the decision last week by the National Energy Regulator (NERSA) to allow Eskom an additional tariff increase. This approval amounts to a 13.3% average increase additional to the 14.2% already approved on 20 December 2007 resulting in a 27.5% average increase year on year.
• The May inflation figures will be released later this week, as will the announcement of an additional petrol price increase estimated to be in the region of 70c/l.
• The South African current account deficit increased to 9% of GDP in Q1 2008, due to a massive increase in the trade deficit. FDI (foreign direct investment) inflows from China into Standard Bank as well as the increased carry-trade saved the Rand, however the currency is likely to remain volatile and under pressure.
  
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