Stanlib's Weekly Focus 30 June 2008

EXECUTIVE SUMMARY OF STANLIB’s WEEKLY FOCUS

BLEAK PICTURE CONTINUES AS OIL HEADS FOR $150

• With the Brent oil price now over $140/oz (up 100% in the past year in dollars and up 123% in Rands), economies and markets are under increasing pressure.  
• The STANLIB US Dollar Bond Fund of Funds is up around 4.5% in dollar terms since October, so bonds and cash have provided some protection against the tumbling equity market.  
• Despite the squeeze on consumers and companies caused by soaring oil prices, it appears that the European Central Bank may raise interest rates this week, thereby aggravating an already fragile situation, similar in some ways to our SA situation.

HAVE BANK SHARES TUMBLED ENOUGH YET?

• After falling 40% in about eight months, the JSE Banks index is receiving some attention. Has it completed its decline?
• In 1998, when our prime rate rose to 25.5%, the banks index declined by almost 60%. So it all depends on how far the oil and food prices rise because this may cause our prime rate to continue to rise.
• The Price-to-earnings (PE) ratio of the index is now 6.5 and the dividend yield is 5.3%. In 1998 the PE ratio bottomed at 10+, while the dividend yield peaked at around 3%. So one could conclude that the credit crisis in the US, which has badly affected banks in the UK and Europe, is in fact creating a great buying opportunity in our banks.
• Buying a Financial unit trust on a weekly or monthly basis at this stage seems to offer a fantastic opportunity. Now may be the time to double-up on such a program, i.e. to make heavier contributions.

ECONOMICS WEEKLY REVIEW

• After the shock PPI (producer inflation) figure released last week, as well as the higher than expected (CPI) consumer inflation; the markets have priced in an additional 50bps hike in the repo rate at the August MPC (Monetary Policy Committee) meeting. Although money supply and private sector credit extensions slowed marginally in May, it probably will not be convincing enough for the Reserve Bank to feel that their tightening measures have done enough.
• With a further petrol price increase hitting consumers’ pockets this week, there is now a real risk of pushing the SA consumer into recession as the accumulative effects of the previous 10 interest rate hikes start to fully take effect.
• The US is also battling to avoid its oncoming recession; with June consumer confidence at its lowest level in 16 years! Their housing market also remains under pressure, with house prices declining further in April, now down 15.3%y/y. Prices are expected to decline by 25% at their worst, so we still have not reached the bottom of the housing recession.

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