STANLIB's Weekly Focus 24 November 2008

Executive Summary of Weekly Focus

Market weekly

A SOBER ASSESSMENT OF THE US SITUATION

• The US stock market was down 8.4% last week, despite the sharp jump on Friday. The low seen in October was surpassed by 11.4% and the S&P 500 Index fell to the 2002 low, similar to levels also seen in 1997, causing all global stock markets to fall to new lows for the year. The MSCI World Index fell to 1996 levels.
• The main problem in the US economy is the lack of lending from the private sector.
• The US is 15 months into the corrective process (deleveraging after the bursting of both property and credit bubbles) and it could take another one to two years for this process to be completed. This makes it impossible to call a stock market bottom.
• Some of the great US shares have tumbled shockingly, including General Electric (down 76% from its record high), Bristol Myers Squibb (down 74%), International Paper (down 81%) and AT&T (down 80%).
• The S&P 500 Index dividend yield of 3.5% is higher than the yield on the 10 year government bond for the first time in 50 years, indicating good value.
• One other piece of good news (for stock markets) is that many of the biggest hedge funds are reportedly now sitting on cash piles of as much as 50% of their assets, leaving them with a big cushion against year-end withdrawals and limiting future equity sales by the industry.

OBAMA SPEAKS

• US President-elect Barack Obama spoke on the radio on Saturday, indicating that he wants to get the US involved in the biggest public works program since the Great Depression, through investment in infrastructure (rebuilding crumbling roads and bridges, modernizing schools and building wind farms, solar panels and fuel-efficient cars).

PROPERTY SHARES BEHAVING WELL LOCALLY, BUT OFFSHORE IS A SHOCKER!

• While the SA listed property shares are behaving well in a gloomy stock market, offshore listed property shares have been absolutely hammered.
• Listed property shares offshore are down a whopping 47% in dollar terms since end September, even worse than the 35% decline of the MSCI World Index. The STANLIB International Property Fund is now down 67% in dollar terms from its February 2007 record high, far worse than anyone could remotely have anticipated, especially considering that offshore bond yields and official interest rates have tumbled-usually positive for property shares.

Economic weekly

· This week the focus will be on SA key economic data, including the Q3 GDP growth estimate, which is expected to record its first decline in many years; consumer and producer inflation, which should continue to ease off, opening-up the opportunity for an early interest rate cut; and the growth in SA money supply and bank credit, which is also expected to show a further moderation.

· Last week the market concentrated on key economic data out of the US.

· USA:

§ Leading indicator fell sharply in October. The Conference Board’s Leading Indicator has a good track record of forecasting GDP growth by up to one year, and is clearly pointing to a significant recession in the US.

§ US retail sector is in recession. On an annual basis, US retail sales fell by a hefty 4.1%y/y October, which is worst decline in decades and a clear reflection of the severe recession the US is currently experiencing.

§ US inflation has eased off. In October 2008, US consumer inflation fell by a significant 1.0%m/m, which was lower than expectations for a decrease of 0.8%m/m. Although US core consumer inflation has been relatively range-bound for a year and a half, there is now evidence to suggest that there is significantly less underlying inflationary pressure; mainly as a result of the severe recession. (This is despite the massive increase in liquidity within the US banking system). This data will, in general, encourage the FOMC when they meet to decide on interest rates in December.

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