STANLIB's Weekly Focus 25 August 2008

EXECUTIVE SUMMARY OF STANLIB’s WEEKLY FOCUS

DIVERGENT VIEWS ON STOCK MARKETS

• Because of the huge uncertainties about big offshore economies, views on both offshore stock markets and our own market differ widely. Calling the future has seldom before been so cloudy, so difficult.
• When will US house prices, UK house prices, Irish and Spanish house prices (also our house prices) bottom, because this directly influences the credit crisis?
• What will happen to commodity prices if the dollar continues to strengthen?
• There are many more questions than answers. One thing is evident: negativity and pessimism are currently very high, so opportunity is also high and nigh, but…how will the above unknowns play out?

THEREFORE IT IS TRICKY TO GIVE ADVICE

· For example, Nedgroup Securities’ Mike Haworth is expecting another 20% fall in the JSE because of the precarious debt situation in the English speaking countries offshore. Lehman Bros, however, expect the US stock market to be 20% higher by year-end and BJM’s van Papendorp is expecting the JSE to rebound by 30% over the next 12 months.

• Garzarelli is more positive on shares, while Merrill Lynch’s US Economist expects the bear market to drag on for a while until US shares are down 40% (now down 17%).
• So who do you believe? The down-trend in markets is still intact, so clearly the risk is that it gets worse.
• Our market looks undervalued, with resource shares still down 27% from May’s record levels. If our interest rates have peaked, then BJM indicate that initially bonds outperform, which has been happening, then equities kick in (by November/December).
• All this is complicated by the MSCI Emerging Markets Index breaking its great uptrend. It is now down almost 30% in dollar terms and so is the JSE in dollar terms.

ECONOMIC REVIEW

· Wednesday is a big day for us as the CPI inflation number is announced and is expected to jump from 11.6% to 13% because of the big electricity hikes.

• The good news is that global food prices are down 15% from their peak, although they’re still up 35% from a year ago.
• US producer price inflation hit 9.8% in July, the highest in 27 years, because of food and fuel. Hopefully that is the peak, as reflected in the ten year bond yield being unchanged.
• US leading indicators were very weak, indicating a possible US recession later in 2008.
• A highly regarded UBS economist believes US unemployment will continue rising well into 2009, hitting consumer spending and the economy, but thinks the Fed will cut interest rates by another 50 basis points to 1.5% before year-end.

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