STANLIB's Weekly Focus 27 October 2008

EXECUTIVE SUMMARY OF STANLIB’s WEEKLY FOCUS

THE CRASH OF 2008 IS NOW ONE OF THE WORST

• With the JSE All Share Index down 46% from its record high five months ago, this crash is now the worst in 28 years (worse than the 42% in 1998 or the 44% in 1987).
• The current PE ratio of 8.4 is the lowest (cheapest) in 20 years.
• The dividend yield of 4.8% is the highest in twenty years and the earnings yield (earnings divided by the index) is now over 2% higher than the ten year government bond yield for the first time in 25 years. On average, the government bond has yielded 2.2% more than the earnings yield of shares over the past 42 years.
• So historically our stock market looks very cheap. However, it is caught between extremely high interest rates (amongst the highest in the world) and a global stock market meltdown that is dictating play. Calling the bottom is therefore hazardous.
• Japan’s Nikkei Index is 81.6% below its 1989 high and at similar levels to the early 1980’s.
• The MSCI World Index is trading at 1997 levels (down 48% from record).

BCA RECOMMENDS REMAINING DEFENSIVE

• Their view is that as long as policymakers like the European Central Bank continue to resist cutting interest rates aggressively, they will suffocate growth, add to the fragility of the financial sector and contribute to asset-price deflation.
• They note how world trade is stumbling as banks refuse to finance shipping costs by providing letters of credit (Baltic Dry Freight Index down 89%).
• Also “credit markets remain frozen across the globe, house prices are falling in many of the major economies and the adverse knock-on effects to employment and consumer spending are just developing. In short, the economic valley is still too wide for investors to see across.” (i.e. very little hope as yet).
• Bottom line: they recommend remaining defensive.

STANLIB DIVIDEND INCOME FUND, AS AMENDED, IS UP AND RUNNING

• STANLIB has revamped its Dividend Income Fund to the point where it is today highly competitive in both yield and defensive qualities.
• The net (after fees) yield on the portfolio is published daily in the major newspapers together with the “all-in” Net Asset Value (NAV) price, which includes the accrual for the monthly dividends and interest.

FALLING RAND HAS HURT BOND PRICES AND LISTED PROPERTY SHARES

• The 35% decline in the rand versus the US dollar in October alone is a potential negative for inflation because of the effect on petrol and food prices. As a result, bond yields have risen (prices/values have fallen).
• In turn this has hurt listed property share prices, which are down 16% so far in October.

ECONOMIC WEEKLY

• The market is expecting the US to cut rates further by 0.5% on Wednesday.
• So far eleven countries have announced specific bail-out and support packages for their banking sector, totaling $4.6 trillion. This excludes an estimated $4 trillion in FDIC (deposit insurance) guarantees in the US.
• The IMF has announced that it is ready to lend billions of dollars to support emerging market nations hit by the turmoil.
• The G20 leaders, including SA, will meet in November to attempt to reform the international financial system.
• The US leading economic indicator unexpectedly rose by 0.3% in September, after declining in 8 of the past 12 months. It is still down 3% over the past year, similar to previous recessions.
• Minister Manuel’s October Budget statement was notable for the 16% increase in government expenditure budgeted for 2009/10, which should support the economy while the private sector is under pressure.
• As a result of an expected deficit in 2009/10, government financing needs to increase quite sharply from +R15.2bn to –R6.6bn in 2008/9 and then to a substantial –R50.7bn in 2009/10. This is a negative for the bond market.

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