FAIRBAIRN CAPITAL INVESTMENT INTELLIGENCE
6 September 2010
Sentiment picks up
Equities since January, rebased to
Global investor sentiment improved last week, largely due to better-than-expected economic data.
Revised eurozone second quarter economic growth came in at 1% quarter-on-quarter. US pending home
sales and weekly jobless claims numbers also surprised on the upside. Manufacturing data from a number
of major economies were also positive (see below). And on Friday afternoon, key US payrolls numbers
showed that “only” 55,000 jobs were lost in August, against the consensus expectation of 110,000.
However, 14.86 million Americans are still jobless (9.6% of the labour force).
The result was a mini-rally on stock markets, which surely came as a relief following the torrid
performance in August. The S&P 500 lost 4.5% in August, the CAC was down 6.3%, the MSCI World Index
lost 3.7% and the Emerging Markets Index lost 1.9%. Locally, the JSE All Share Index lost 3.58%, which
contrasts with the bond market’s 2.99% return. The JSE ended August exactly where it began the year,
with a strong performance from Industrials and Financials (7.5% and 8.1% respectively) being offset by
Resources’ 10.9% decline. The S&P 500 lost a more substantial 3.5% in the year to end August, but
essentially equity markets have moved sideways over the past 12 months while bond markets, benefiting
from the flight-to-safety (in the developed world) and chase-for-yield (in emerging markets), have rallied.
The improved risk appetite of the first days of September supported the euro and high-yielding currencies
such as the rand against the dollar. The rand had a particularly volatile week, moving from R7.33/$ to
R7.16/$ on Friday, tracking moves in the dollar and largely ignoring local issues such as the prolonged
public sector strike. It almost seems to have been a case of “heads you lose, tails you also lose” for the
dollar recently: improved risk appetite raises demand for emerging market assets, while lower risk
appetite is associated with more quantitative easing by the Fed, which is seen as dollar negative.
While September signifies springtime to South Africans, in the Northern Hemisphere it means the end of
Source: I-Net, FCII. summer holidays. Trading volumes should pick up over the next few weeks and a clearer indication of the
direction of world markets might emerge over the next few weeks.
Global manufacturing: some good news
Purchasing Managers’ Indices
Given all the negativity around future global economic growth, manufacturing purchasing managers’
indices (PMI) from around the world were surprisingly strong in August. These indices are designed with 50
index points being the cut-off between contraction and expansion. The JPMorgan Global PMI slipped to
53.8 from 54.3 in July, but remains in positive territory. The key US ISM index was particularly surprising,
as earlier manufacturing surveys from regional Federal Reserve banks pointed to a slowdown, causing
much distress on financial markets. The ISM index, though, increased to 56.3 from 55.5 in July.
Encouragingly, the employment sub-index increased strongly, from 58.6 in July to 60.4. The eurozone PMI
slipped from 56.7 in July to 55.1 in August, but also remains in growth territory. France’s PMI improved,
but those of Germany, Italy, Spain and Ireland slowed. Greece’s manufacturing sector continues to
contract. China’s PMI rose to 51.7 from 51.2, boosting confidence that the economy would not suffer as a
result of the restraints on bank lending aimed at cooling off the property market.
The local Kagiso PMI also increased to 50.3, from July’s 49.5. This suggests that the manufacturing sector
was hit by a general decline in productivity during the Word Cup months of June and July when the index
fell below 50 points. However, while the 50.3 reading does point to growth in the sector, South Africa’s
second largest, it will probably be subdued growth, with a strong rand not helping exporters and import-
competing businesses. Vehicle sales surged in August, by 36.9% compared to the same month last year.
This can partly be attributed to ongoing improvement in demand for vehicles, the low base, and also
purchases being brought forward to escape the ‘green tax’ that took effect on the first of September.
Neither the stronger PMI nor the vehicle sales numbers really change the case for a rate cut. The rand is
as strong as it was in March when the MPC made a surprise cut, and the inflow of yield-seeking foreign
Source: I-Net, FCII. capital seems to have no end (a record R70bn net purchases of bonds so far this year). In real terms, the
repo rate has also increased substantially over the past few months.
The Week Ahead
• The Reserve Bank’s Monetary Policy Committee (MPC) meets this week on Wednesday and Thursday to determine interest rates.
The consensus view is that the MPC will reduce the repo rate by 50 basis points to record low 6%. Some economists are even
calling for further rate cuts later in the year based on the sluggish economic recovery, low inflation and the strong rand. Most,
though, believe this will be the last cut in the cycle, leaving interest rates steady until late next year. However, speaking at a
seminar last week, SARB Governor Marcus reminded markets that the Bank takes a forward-looking approach and would not be
fixated on historical data, implying a rate cut was not necessarily the done deal currently priced in by markets. She emphasised
that the MPC would take high unemployment into account in its deliberations, but also that she was worried over the impact of
above-inflation wage increases.
• The BER/RMB Business Confidence Index (BCI) for the third quarter will be released on Monday, while the South African Chamber
of Commerce and Industry (SACCI) releases its latest monthly BCI on Tuesday. The difference between the two is that the
BER/RMB BCI is based on survey data and reflects sentiment ‘on the ground’, while the SACCI BCI combines a number of
indicators (such as interest rates, exchange rates, share prices, sales numbers etc.) into a composite index.
• The Reserve Bank will release gold and foreign exchange reserves on Tuesday, giving the market an indication of how active the
central bank has been in purchasing forex in order to prevent an appreciation of the rand.
• StatsSA releases manufacturing production numbers for July on Wednesday, and economists will closely scrutinise the data for an
indication of how the country’s second largest sector is likely to perform towards the end of the year. Manufacturing production
increased by 8.8% year-on-year in June despite the fact that the PMI – normally a reliable leading indicator - slumped to 48.8.
The PMI picked up slightly to 49.5 in July. The consensus forecast according to I-Net is for 6.6% year-on-year growth in July.
• Stats SA will also publish July’s mining production data on Thursday.
• Global events and data releases of note this week: US markets are closed on Monday for a public holiday; the Fed releases its
Beige Book of economic conditions; July US consumer credit and trade balance data; Japan BoJ interest rate meeting, July
leading indicator, revised Q2 GDP data; UK trade balance, BoE interest rate meeting, July industrial production numbers.
Key Indicators – Please visit our website for up-to-date indicators
Closing Value @
Market Index % Change 1 week % Change Year to Date
R7.16/$ 1.77% 3.15%
R11.08/£ 1.96% 6.55%
R9.26/€ 0.37% 11.77%
JSE All Share
27942.89 4.50% 1.00%
24825.46 4.99% 0.69%
7892.01 4.79% 6.91%
46586.32 4.85% 8.81%
23393.37 4.86% 8.22%
SA Listed Property
369.87 0.56% 14.36%
Bonds All Bond Index
338.74 0.39% 13.28%
US S&P 500
1104.51 3.75% 0.95%
Japan Nikkei 225
9114.13 1.37% 13.58%
UK FTSE 100
5428.15 4.36% 0.28%
Emerging Markets MSCI
1003.75 3.47% 1.44%
Brent Crude Oil Spot $/barrel
$75.98 0.18% 1.58%
Gold Spot $/oz
$1,246.95 0.71% 13.68%
Platinum Spot $/oz
$1,553.50 1.24% 5.72%
Please note that while care has been taken to ensure that the information provided in this article is correct, it represents an overview of the topic under
discussion and as such does not constitute advice. We suggest that you contact your professional adviser before taking any decisions based on the
information herein. Fairbairn Capital is an elite service offering brought to you by Old Mutual Investment Services (Pty) Ltd and Old Mutual Life Assurance
Company (South Africa), Licensed Financial Services Providers.