Market and Economic Report

Transcription

1 Market and Economic Report April 2011 Market Data Total returns in ZAR as at March 2011 South African Market Equities Mar months 6 months 12 months Year-to-date All Share 0,5% 1,1% 10,7% 15,2% 1,1% Top 40 0,6% 2,2% 12,3% 15,4% 2,2% Mid Cap 0,2% -4,5% 1,8% 14,4% -4,5% Small Cap -0,8% -5,3% 5,4% 11,9% -5,3% Financials 2,7% 0,7% 0,6% 6,9% 0,7% All Share Industrials 2,1% -0,3% 7,5% 21,6% -0,3% All Share Resources -1,9% 2,8% 19,7% 13,0% 2,8% Property and Fixed Interest Mar months 6 months 12 months Year-to-date SA Listed Property 3,4% -2,2% 0,9% 15,4% -2,2% All Bond 0,5% -1,6% -0,8% 8,3% -1,6% Bonds 1-3 Years 0,5% 1,3% 3,1% 7,4% 1,3% Bonds 3-7 Years 0,4% 0,1% 1,9% 8,5% 0,1% Bonds 7-12 Years 0,6% -1,4% -0,6% 8,3% -1,4% Bonds 12+ Years 0,4% -3,9% -4,5% 7,4% -3,9% Cash 0,5% 1,4% 3,0% 6,5% 1,4% Longer Term Returns 2 years 3 years 5 years 10 years All Share 28,8% 5,8% 12,6% 18,1% Resources 24,0% -1,6% 13,0% 19,1% Financials 27,2% 8,4% 6,3% 13,3% Industrials 35,1% 14,1% 15,5% 19,2% Property Unit Trusts 22,2% 15,0% 9,4% 21,3% All Bond 8,7% 10,1% 7,2% 10,9% Cash 7,2% 8,9% 9,1% 9,5% Headline CPI (using last available figures) 4,7% 6,0% 6,9% 5,7% Global Market - Return in Base Currency Developed Market Mar months 6 months 12 months Year-to-date Cac 40-0,3% 10,9% 12,3% 9,5% 10,9% Dax 30-0,5% 7,7% 17,5% 20,0% 7,7% Hang Seng 1,3% 2,4% 5,6% 14,1% 2,4% Nikkei 225 (not TR) -9,2% -6,7% 4,9% -0,8% -6,7% FTSE 100-2,4% 3,5% 9,9% 13,5% 3,5% S&P 500 0,0% 5,9% 17,3% 15,6% 5,9% Emerging Markets Mar months 6 months 12 months Year-to-date Bovespa 3,8% 1,0% 2,9% 6,9% 1,0% MSCI China 5,3% 2,9% 3,6% 9,6% 2,9% MSCI India 11,1% -5,1% -3,0% 9,5% -5,1% MSCI Russia 5,2% 16,3% 35,5% 30,1% 16,3% Foreign Exchange Mar months 6 months 12 months Year-to-date ZAR / USD 3,1% -2,0% 3,0% 8,0% -2,0% ZAR / GBP 4,4% -4,9% 0,8% 1,9% -4,9% ZAR / EUR 0,4% -7,7% -1,1% 2,7% -7,7% USD / EUR Source: Deutsche Bank / I-Net Bridge 1

2 Global Economics y US GDP growth is expected to average around 3% over the next two years. The US consumer sector has improved noticeably in the past 20 months, showing up in consumer confidence levels, increased vehicle sales growth, an increase in personal savings, a reduction in household debt servicing costs and debt to disposable income ratios, as well as a rise in personal income and expenditure. Partnering the Exceptional y The noticeable recovery in the labour market has put the economy on firmer footing relative to our last quarterly update. During 2010, the US economy created an average of jobs per month. That is below the estimated increase in the number of people entering the job market every month. However, in the past three months the job gains have averaged a month, and appear to be on a sustainable upward trend. y Consumer activity remains constrained by lower levels of credit growth, slow employment, the recent spike in oil and food prices and the housing sector, which remains depressed. y Key indicators of activity in the housing sector, home sales, home building, and home prices are either still declining or running at very depressed levels, with no clear sign of an upturn yet in sight. In total, the average US house price remains more than 31% below the peak achieved in 2006; and has declined in each of the past six months. y US real GDP growth was recorded at 2.9% in 2010 (-2.6% in 2009) and is expected to come out at 3.2% in 2011 and 3.0% in US consumer activity is expected to continue to show a steady improvement, with the growth in employment dictating the overall pace of growth in household spending. Forecasts for Europe and the UK in 2011 are 1.5% and 1.7%, respectively. y The Federal Funds rate is expected to remain at 0.25% by end 2011 rising to 1.75% end This is in response to a declining unemployment rate, mounting core inflation and rising inflation. The ECB is expected to raise rates by 25bps as soon as this week to 1.25%. This will be the first change in EU interest rates since May The reason for the increase is the ECB s concerns about inflation and maintaining their inflation-fighting credibility. The inflation rate in the EU is up at 2.6%y/y versus a target rate of 2%y/y; and inflation has now been above the target for four consecutive months. y The prospect of an ECB rate hike in April has seen the Euro rally against the US Dollar. A significant overshoot of 1.40 is unlikely as further ECB rate hikes for 2011 are already well priced. Moreover, broader capital flows to the Euro-area remain weak and also event risk for sovereign concerns is relatively high. One factor that could support the Euro, at least initially, is high oil prices thanks to the ECB s focus on headline inflation and possible Middle-East capital flows to the Euro-area. y Japan GDP growth will be negatively affected by the devastating impacts of the tsunami with GDP growth forecast at 0.5% for GDP growth will clearly be lower as a result of the negative impact on productivity, output and logistics. The Japanese recovery was already fragile prior to the earthquake and, in particular, a severe leakage of nuclear radiation could lead to a more prolonged economic downturn. As the rebuild begins, however, this should reflect in positive GDP performance, as infrastructure investment and production resumes and businesses reopen. While the disaster will likely have a significant impact on growth in Japan this year, the impact on the rest of the world is currently thought likely to be quite modest, and there is some upside risk down the road as rebuilding gets under way in Japan. y Recent geopolitical developments in Libya and elsewhere in the Middle East, as well as the shock to energy supply in Japan have indicated a growing and now substantial upside risk to oil price projections. The fact that global monetary policy is extremely accommodative at this point, should help to offset a substantial portion of the drag from higher energy costs. Deutsche Bank s commodities team have raised its forward expectations for the crude oil price which now stands at c$ /bbl through 2015 against a previous $95-100/bbl. y 2

3 International market summary y The resulting effects of geopolitical tensions and natural disasters tended to dominate news headlines and investor strategies during March rather than the usual market specific news and economic releases. Volatility in most asset classes rose sharply towards the end of Q as investors tried to come to grips with the costs of the devastating earthquake and tsunami that hit Japan. Unrest in the Middle East continues unabated, yet getting less and less media attention. Inflationary fears have been exacerbated with the spike in the oil price. Many market commentators are also speculating that QE2 could come to an end sooner than many expect. Partnering the Exceptional y With uncertainty, comes volatility and the risk-on / risk-off trades are being placed in a matter of days. The overdue correction to equity markets hit hard at the beginning of March but the underlying strength in demand for this asset class became evident by the end of the month with most markets recovering the vast majority of their earlier losses, and some markets such as the Korean Kospi reaching new highs. y Waren Buffet has been bullish on equities since the financial crisis and he publically stated that he believed that the earthquake in Japan presented a good buying opportunity and that he will not be selling assets in the panic. Presumably he stuck to his belief and would have been well rewarded with keeping a level head in the time of crisis. The US markets ended the month flat but were comfortably higher for Q1 with the DJIA and S&P 500 Indices up 6.41% and 5.42% respectively. The financial sector recovered well with the Federal Reserve saying that some firms are expected to increase or restart dividend payments, buy-back shares, or repay government capital in the wake of the latest round of stress test. JP Morgan is particularly comfortable with their capital adequacy levels and is the sole underwriter on the bridge loan to AT&T in its $39bn bid for Deutsche Telekom AG s U.S. wireless unit T-Mobile USA Inc. This merger in itself has led to growing optimising amongst mobile players and there has definitely been a global re-rating of the sector. y Turning attention to the tsunami and earthquake that struck the northern parts of Japan: as was expected there was immediate panic and on the first day of trading the Topix was at one stage down over 15%. The greatest fear was not the damage to ports, railways and roads, or manufacturing plants, but rather the destruction to certain nuclear power plants and the risk of radiation leaks. There will obviously be some sectors such as building and construction that will benefit in the clean-up efforts, but significant manufacturing capability has been affected and this must be understood in the context that Japan contributed 8.7% of world GDP in y Looking back at Q1, one cannot help but wonder what else is needed to bring these markets lower. There are such strong headwinds, as mentioned, yet the equity markets grind higher and must be discounting good future conditions. Without a doubt the stimulus packages and easy monetary policies have been working and have managed to inflate asset prices from cotton, to corn to copper, but the ultimate question is at what future cost. 3

4 Local Economic Review y The domestic growth outlook has improved, and the recovery is expected to be sustained, although not at rates sufficient to make a noticeable dent into the unemployment situation in South Africa. SA consumer spending has driven most of this growth, rising by 5.1%q/q annualised in Q (4.4% for 2010 as a whole). y Consumer activity has improved due to a range of factors including rising incomes, lower debt servicing costs (due to lower interest rates), less job losses (most of the job losses occurred in 2009), stable and relatively elevated confidence levels (especially among mid to upper income earners), slightly easier access to credit, an improvement in house prices (albeit modest) and a rise in wealth levels (mainly due to a higher equity market and hence a positive wealth effect). Overall, retail spending remains reasonably buoyant, up an impressive 6.4%y/y in January. y Disposable income grew by 5.3%q/q, annaulised in Q4 2010, compared with an increase of 4.5% for 2010 as a whole. Surveys by labour consultants estimate that salary increases averaged around 8.5% in 2010, while consumer inflation averaged only 4.3%; leading to a real (inflation-adjusted) increase in household income. Furthermore, the Quarterly Employment Survey data released in March by Stats SA reported that gross earnings (including bonuses and overtime) within the formal sector rose by 11.4% over the year to November y Concerns still remain regarding the impact on consumer spending from the high level of household indebtedness, the rise in the fuel price and the impact on transport costs, increasing administered prices; further electricity price hikes, education inflation, the increase in medical service fees, other service costs and toll roads costs. International food prices have risen dramatically since the middle of 2010 and according to the Economist food prices index, are up a staggering 40%y/y over the past year; in US Dollar terms. In February 2011, headline CPI inflation came out at 3.7%y/y, unchanged from January. We believe that SA has moved past the low point in the current inflation cycle and will move higher in 2011/2012, driven mostly by cost push factors. y The SA Reserve Bank also revised up their inflation forecast at its March MPC meeting. Mostly due to a higher international oil price, the SARB expects inflation to average 4.7% in 2011 and 5.7% in 2012 (from 4.3% and 4.8% in November 2010). We expect inflation to average 5.1% in 2011 and 5.7% in y The SARB opted left the Repo rate unchanged at 5.50% in March, which leave the prime interest rate at 9.0%, the lowest prime rate South Africa has experienced since April Based on the latest inflation data as well as the most recent MPC statement, we expect interest rates to remain on hold for most of 2011, with the first rate hike possible in the final quarter of y Recent data shows that investment spending by private business on computers and related equipment fell by 4.5% in 2010 (in real terms) and has declined by 11.8% since the peak level of spending in Similarly, investment spending by private business on machinery and other equipment declined by a substantial 12.2% in 2010 and has fallen by a massive 29.6% since the peak in All of this despite the fact that during that time interest rate fell to their lowest level since This clearly reflects that the current lack of investment spending by the private sector is clearly not related to the cost of capital or a lack of profitability, but rather reflects a range of other factors including still slack demand (spare capacity) coupled with concerns around policy direction and worries about future electricity supply. The current lack of investment spending by the business sector is obviously restraining the growth dynamic of the economy and restricting job creation. y The private sector labour force took all the pain of the recent recession, losing roughly 6% of their total employment. In contrast, public sector employment continued to rise through the entire recession and is currently at a record high. The Government has announced ambitious plans to create 5 million jobs in 10 years ( new jobs per year) but ultimately it s the growth in private sector jobs that expand the tax base and fund the public sector jobs. Over the past year, the formal sector has gained jobs. Overall, the employment situation in South Africa is showing tentative signs of improvement y The current account recorded a deficit of 0.6% of GDP in Q (2.8% of GDP for 2010 as a whole). This was helped by a strong trade account, as exports were supported by rising commodity prices and improved exports of coal and iron ore, while imports fell off due to less imports of capital equipment. Interestingly, the travel account on the services account showed that travel receipts continue to decline and that there has not been a noticeable uplift in foreign tourism. y GDP growth is expected to come out at 3.5%y/y in 2011 rising to 3.8%y/y in The SARB have their forecasts at 3.7% and 3.9% in 2011 and 2012 respectively.gdp growth will continue to supported by consumer spending although no major acceleration in activity is expected. Higher inflation in many categories is likely to erode much of the gain in income during 2011, putting pressure on discretionary spending power in A meaningful increase in consumer credit and employment will be required to lift GDP growth rates to a much higher level. An uptick in the level investment spending by business will also have a meaningful impact on the growth dynamic of the country as well as job creation. y Although consumption expenditure growth will remain relatively robust, it is unlikely to accelerate without an increase in employment. This requires increased fixed investment spending especially from the private sector. The growth in fixed capital formation has been weak. 4

5 Domestic Market Summary y There were two distinct halves to March the 1st half characterised by strong selling in the wake of global events and then a strong recovery in the 2nd half taking us back to where we started. The Top40 index closed almost perfectly flat for the month, down a meager 0.14%. The change in risk appetite from February and January was most apparent in the cyclical mining stocks. The resource heavyweights in Anglo American and Billiton retraced approximately 20% from their February highs and this presented a fantastic buying opportunity for the brave investor. Many of the underlying commodities also retraced as investors wanted to get liquid in this time of uncertainty. The PGM s, notably platinum and palladium were sold off as it was feared that the disruptions to the motor manufacturing plants in Japan from the earthquake could dampen future demand. y The sector that fund managers would like to have been overweight during the month was the Mobile Telecoms sector, gaining 10.25% during March. MTN and Vodacom brought out some pleasing results and in an uncertain macro environment investors obviously find comfort in a high degree of transparency in earnings. The AT&T $39bn merger with T-Mobile USA also acted as a catalyst in the re-rating of this sector globally. y The local banking industry hasn t recovered with the rest of the market. Standard Bank in particular has been in the doldrums with concerns about its cost base and management structure. The banking stocks however seemed to find support where eventually buyers dominated sellers and the Banking Index rebounded 4.91% by the end of the month. In company specific news, Standard Bank sold its 36.4% stake in Russian Bank, Troika Dialog to Sberbank for $372m. Brait on the other hand plans to raise R6bn through a capital raising exercise at the same time restructuring its business. y The Rand strengthened 3.1% against the US$ and strengthened 0.4% against the EUR in March JP Morgan forecasts the USD/ZAR at 7.70 year-end. STANLIB have their forecast of USD/ZAR at 7.70 and 8.20 end 2011 and 2012 respectively. The EUR/ZAR is forecast at and end 2011 and 2012 respectively. Source: SARB, Stats SA, See More Markets, Peresys, JP Morgan and Deutsche Bank and Kevin Lings, STANLIB. y On the other side of the scale, the long awaited bounce in the building and construction stocks failed to materialise. The Construction and Materials index lost a further 5.57% in March taking the loss to over 25% since the beginning of the year. PPC released a further negative trading update during the month and has now lost over one third of its value during the first three months of y The Platinium Index ended well of its low for the month but nevertheless has lost 11.18% of its value for the quarter. There are several factors affecting the sector, many of which do not appear to be leaving soon. Despite labour unrest, higher input costs and the firm Rand, the Zimbabwean government has now gazetted a notice effectively implementing the Indigenisation Act whereby the Zimbabwean shares have to be 51% controlled by indigenous Zimbabweans at a price effectively determined by the government. The companies with exposure to PGM deposits in Zimbabwe (Impala Platinium, Aquarius and Anglo Platinium) have a 45 day period in which to submit an indigenisation plan and an addition six months in which to implement the plan. It goes without saying that this plan is not investor friendly and is bound to enrich a few of the elite. 5

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