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Quarterly Commentary - Q2 2010

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Quarterly Commentary - Q2 2010 Powered By Docstoc
					Q2 2010
     Economic and
Market Commentary
Contents

Economic Commentary   3
Market Commentary     6
 Equity               6
 Fixed Income         9
 Property             10
 International        11
 Africa               12
Economic Commentary
Global economic conditions remain fragile and somewhat uncertain. The world
economic recovery is uneven across countries and regions. While growth
prospects for many emerging and developing countries are encouraging,
economic activity is subdued and below potential in many developed
economies. This applies especially to Western and Southern Europe.


Average real GDP growth during 2010-2011




In May 2010, the European sovereign debt crisis threatened to tip the global economy back towards recession.
Fortunately, a €750 billion rescue package from the EU and IMF, for debt-burdened European governments,
stabilised the situation, at least in the short-term. High-deficit countries including Greece, Spain and Portugal are
being forced to make massive deficit cuts. Less stringent deficit cuts in the better-off nations such as Germany
and France will most likely also follow. These tighter fiscal policies imposed could restrict growth in many
European economies.

Concerns over government fiscal balances are not confined to Europe. The average gross general government
debt to GDP ratio for advanced economies is projected to rise from almost 91% of GDP at the end of 2009
to 110% of GDP in 2015, bringing the increase from pre-crisis levels to 37 percentage points. Among the G7
countries, the government debt to GDP ratio is expected to rise to levels exceeding those prevailing in the
aftermath of the Second World War.




                                                                                                      Quarterly Review   3
    Economic Commentary (continued)
    In 2009, the South African economy declined by 1.8%y/y, but it clearly could have been a lot worse. Fortunately,
    the build-up of activity ahead of the Soccer World Cup, coupled with the lowest interest rates in more than 29
    years and a pick-up in global trade, meant that South Africa emerged from recession in the second half of 2009.
    The economy has since continued to expand, and in the first quarter of 2010 grew by a very encouraging, robust
    and respectable 4.6% quarter-on-quarter.

    The latest GDP numbers indicate clearly that economic activity is expanding within all major economic sectors,
    and not just due to infrastructural activity that is related to the World Cup. In particular, there has been continued
    strong growth in the manufacturing sector, while mining production improved sharply in the first few months of
    2010, helped by a healthy pick-up in global trade. Retail activity has also finally turned positive after lagging the
    recovery in the second half of 2009, while the financial, transport and communication sectors continued to expand.

    In terms of domestic consumer spending, while households remain under pressure there is a valid expectation
    that the pressure will systematically ease during the course of 2010/2011. This expectation is based on the
    current low interest rate environment being sustained for all of 2010, a further moderation in inflation (at least
    in the short-term), wage increases that are now rising above inflation (leading to a real increase in consumer
    income), less job losses as world growth improves and there is a natural boost that is associated with hosting
    the Soccer World Cup, and an improvement in consumer confidence, which seems to be reflected in the Q1 2010
    consumer confidence reading. There has also been a more positive wealth effect this year, with house prices
    turning firmly positive and equity market up, after a disastrous 2008. Growth in consumer bank credit also seems
    to be slowly improving.


             SA growth in consumer spending vs disposable income
             %, q/q

     13
     12                                                               Consumer confidence (lhs)
     11
     10
      9
      8
      7
      6
      5
      4
      3
      2
      1
      0
     -1
     -2
     -3
     -4                                                               Disposable Income
     -5
     -6
     -7
     -8
           2002




                             2003




                                            2004




                                                   2005




                                                           2006




                                                                       2007




                                                                                      2008




                                                                                                  2009




                                                                                                             2010




           Source: South African Reserve Bank




4         Quarterly Review
Economic Commentary (continued)
There is little doubt that many infrastructure projects ended ahead of the World Cup. This included the stadiums,
most of the airport upgrades, a portion of the Gautrain, some of the transport expansion, as well as the media
centre for the World Cup. However, there are many other public sector infrastructure projects that are scheduled
to either continue after the World Cup or only start after the World Cup ends.

In fact, the public sector’s current budget for infrastructure spending envisages that R261.9bn will be spent on
infrastructure in 2010/2011 (an increase of 11.3% relative to 2009/2010). This is then budgeted to rise by a further
8.2% in 2011/2012 and by 6.0% in 2012/2013. While these increases are not spectacular, and certainly not as
robust as the increases that took place over the years from 2005 to 2009 (which saw an average annual rise of
36%), they do suggest a continuation of the high level of public infrastructure spending that has emerged in the
past few years.

Economic growth in South Africa during 2010 is likely to be ‘front-loaded’ in the sense that the growth rate for
the first half of the year is likely to be stronger than the second half; that is relatively normal when hosting a
large sporting event such as the Soccer World Cup. However, the fall-off in activity in the second half of 2010 is
unlikely to be dramatic. Furthermore, the combination of a further improvement in world growth, the initiation of
new infrastructural related projects, sustained low interest rates, a favourable fiscal position, increased business
and consumer confidence, a more stable labour market, and the positive legacy effects of the Soccer World Cup
should ensure that South Africa enjoys sustained economic expansion for many years.


      Fixed investment as percentage of GDP
      % of GDP

 32
 31
 30
 29
 28
                                                                       Target is 25% of GDP
 27
 26
 25
 24
 23
 22
 21
 20
 19
 18
 17
 16
 15
 14
      60
      61
      62
      63
      64
      65
      66
      67
      68
      69
      70
      71
      72
      73
      74
      75
      76
      77
      78
      79
      80
      81
      82
      83
      84
      85
      86
      87
      88
      89
      90
      91
      92
      93
      94
      95
      96
      97
      98
      99
      2000
      2001
      2002
      2003
      2004
      2005
      2006
      2007
      2008
      2009
      2010




      Source:




                                                                                                     Quarterly Review   5
    Market Commentary (continued)
    Equity
    The start of the second quarter of 2010 saw the FTSE / JSE All Share Index continue to build on positive sentiment
    that began in March but the upward momentum came to a sudden end after the Index hit its highest level since
    June 2008 (29,565) on the 15th of April. We then saw the market slide by almost 12% before finding some support
    early in June. For the quarter as a whole the market was down 8.2% but was flat in April, down by 5.1% in May and
    down by a further 3.2% in June. Once again it was the mid-cap counters that produced the best returns for the
    quarter while many of the large cap counters struggled. Foreigners continued to buy into the weakness and were
    net buyers of R8.7bn worth of stock over the period.


             FTSE/JSE All Share Index
    30 000

    29 000

    28 000

    27 000

    26 000

    25 000

    24 000
             13 <ar



                          07 Apr



                                   14 Apr



                                            21 Apr



                                                       28 Apr



                                                                 05 May



                                                                          12 May



                                                                                      19 May



                                                                                                26 May



                                                                                                         2 Jun



                                                                                                                   9 Jun



                                                                                                                             16 Jun



                                                                                                                                      23 Jun



                                                                                                                                               30 Jun

             Source:




             Performance of Large, Mid and Small caps
      110

      105

      100

       95

       90

       85

       80
             13 <ar



                          07 Apr



                                   14 Apr



                                            21 Apr



                                                       28 Apr



                                                                 05 May



                                                                          12 May



                                                                                      19 May



                                                                                                26 May



                                                                                                         2 Jun



                                                                                                                   9 Jun



                                                                                                                             16 Jun



                                                                                                                                      23 Jun



                                                                                                                                               30 Jun




                                                     FTSE/JSE Top40                FTSE/JSE Mid Cap              FTSE/JSE Small Cap
             Source:




6      Quarterly Review
Market Commentary (continued)

Equity (continued)
The trigger for the change in sentiment in April was, yet again, the problems facing Greece and other indebted
European countries. Greece was offered aid and made a formal request for an IMF loan during April and this
saw the rating agencies downgrade its sovereign debt to junk status. Portugal’s credit rating was also cut two
notches but most of the focus was on the debt situation in Spain - a country that has to repay debt of €225bn this
year. Fortunately, along with rising sovereign debt concerns in Europe we also had a reasonably good earnings
reporting season in the US and this tempered any negative sentiment during April.

May was an awful month for equity markets globally. Austerity measures required in Greece in return for IMF and
European Union rescue packages led to violent protests in that country and this, in turn, made investors question
whether the austerity measures could actually be implemented. Spain and Portugal also announced further
budget cuts and this raised more concerns about social unrest. In the midst of this, EU countries announced that
they would lend €750bn to the most indebted countries but, while this initially found favour with the market,
disillusionment set in fairly quickly when the details of the package, and the lack of real money on the table,
became evident. The Australian government also did little to help already fragile markets when they proposed
a 40% tax on resource company super profits. Finally, efforts by China to cool the growth in its economy and
Germany’s somewhat surprising announcement that it was banning naked short selling on certain financial
counters also had a decidedly negative impact on market movements.

There were a few positives amongst the gloom in June. The month started off poorly with Spain being stripped
of its AAA credit rating and the European Central Bank warning of further bank write downs due to a weaker
property market. However, support for the markets came through economic releases in China, Japan and Australia
which all pointed towards accelerating growth, the Australian Prime Minister resigning and being replaced by
his deputy who immediately adopted a more cautious approach to the proposed 40% tax on resource company
profits, and the prospects for increased spending on technology. In South Africa retail sales figures showed that
consumer spending continued to improve, although somewhat sluggishly. Domestic Fixed investment spending
also recovered slowly but this is very clearly being driven by the public sector.

The Resources sector was down the most for the quarter as it felt the twin effects of the Australian tax proposal
and the attempts by the Chinese government to cool its property market. The only bright point within Resources
was the Gold sector which recovered from a poor first quarter and benefited from the debt problems in Europe
and the general volatility in financial assets during the period. The Gold spot price hit a new all time high
of $1265/oz late in June. Needless to say, the big three yellow metal counters, AnglogoldAshanti, Goldfields
and Harmony were all amongst the best performers for the quarter. The Financials sector barely managed to
outperform the broader market while Industrials were down 4.5%. Retailers continued their good first quarter
performance with Mr Price, Clicks and Shoprite all producing returns of 14% or better for the period and Spar and
Massmart also being amongst the best performers for the quarter.




                                                                                                   Quarterly Review   7
    Market Commentary (continued)

    Equity (continued)


              Cash Retailers continue to do well
    140
    135
    130
    125
    120
    115
    110
    105
    100
     95
    90
          31 Dec




                             31 Jan




                                             28 Feb




                                                         31 Mar




                                                                             30 Apr




                                                                                                 31 May




                                                                                                           30 Jun
            Source:                      Massmart                 Shoprite            Mr Price




    There was a fair amount of corporate activity in the last three months. Life Healthcare listed on the JSE while
    Liberty International split into two businesses - Capital Shopping Centres and Capital and Counties. MTN ended
    its talks with Orascom Telecom about a potential acquisition that would have created the third largest mobile
    operator in the world. Medi-Clinic announced a 10 for 1 rights offer to finance its Swiss expansion while Aspen
    made a bid for the Australian based Sigma Pharmaceuticals. Firstrand also made an offer to buy out the biggest
    domestically owned stockbrokerage Barnard Jacobs Mellet.




8         Quarterly Review
Market Commentary (continued)

Fixed Income
The bond market managed to produce a positive return for the 2nd quarter while under-performing cash. Bonds
at the shorter end of the yield curve outperformed the longer dated instruments with the 12 year plus category
producing a return of only a fraction over 0.5% for the period.

The yield on the RSA 2015 government paper ended the second quarter of 2010 at 8.03% which was marginally up
on the quarter one closing of 7.945%. Yields received most of their support from the continued benign inflation
trajectory with CPI inflation easing on an annual basis to 4.6% y/y in May from 4.8%y/y in April. The latest inflation
reading, coupled with a still firm Rand and declining employment data has re-ignited the debate over the
potential for a further 50 basis point cut in the repo rate by the South African Reserve Bank. The next Reserve
Bank Monetary Policy Committee meeting will be held in the third week of July and it is STANLIB’s view that rates
will be kept on hold at this meeting.



     SA Headline Inflation Forecast
     % y/y

16
14
12
10
 8
 6
 4
 2
 0
     1998



               1999



                      2000



                             2001



                                    2002



                                           2003



                                                  2004



                                                         2005



                                                                2006



                                                                       2007



                                                                              2008



                                                                                     2009



                                                                                            2010



                                                                                                    2011




     Source:




Despite government bond yields drifting slightly higher, the returns for the quarter remained positive as corporate
bonds outperformed. There was a fair amount of intra-quarter volatility, which saw yields at one stage touching
8.30%. This volatility was driven by wildly oscillating currencies, particularly in May, as sovereign risk concerns in
the Euro zone states, and Greece in particular, saw the Euro slip from $1.33/€ at the end of April to $1.22/€ at the
end of May and the Rand from R7.38/$ at end April to a worst level of R7.94/$ on the 20th of May. Greece at one
point was on the brink of possible debt restructuring, only to survive as the IMF and EU bailed them out.




                                                                                                           Quarterly Review   9
     Market Commentary (continued)

     Fixed Income (continued)
     Demand in the bond market is largely driven by offshore investors looking for RSA short and medium dated debt
     instruments. The yield curve ended the quarter steeper as the short end was anchored by a more accommodative
     monetary policy stance and the long end was pressured by continuous debt supply from the government and
     state owned enterprises. The global risk aversion trade is constantly changing, but foreigners seem to be better
     buyers of local debt into bouts of market weakness rather than sellers into strength. The search for yield in
     emerging markets continues as interest rates in developed markets remain at very low levels. Currently the view
     is that the major central banks will err on the side of caution and keep rates lower for longer as fragile economies
     take tentative steps towards recovery.

     Property
     The SA listed property market delivered a total return of +0.64% for the quarter, made up of an income return of
     +1.21% and a capital loss of -0.57%. The return was in line with the All Bonds’ +1.12% and well ahead of equities’
     sharply negative return for the period. SA listed property has been the best performing asset class year-to-date
     with a total return of 10.57%.

     Companies that reported during the quarter all posted positive distribution growth – Premium 16.8%, Vukile
     10.2%, Sycom 6.3%, Acucap 6.2%, Fountainhead 6.0% and Octodec 4.7%. We are expecting similar trends in
     the next reporting season in August. We believe that the physical property market is nearing the bottom. The
     recovery, however, will be a muted one.

     Redefine is looking to take over Hyprop. STANLIB is not in favour of this deal given that Redefine is a very
     diversified fund whereas Hyprop is a specialised, niche retail fund. There could be more choice in the sector by
     the end of the year as there are three companies that are looking to list. Each of these companies specialise in
     different sectors of the property market - residential, healthcare and retail.

     STANLIB is forecasting income to grow by 6.8% in the next 12 months resulting in a forward yield of 8.8%. This
     is ahead of bonds (8.6%) and cash (7%). The risk for the listed property market remains in the potential for bond
     yields to move up as a consequence of the continued increase in government bond supply and the potential
     inflationary impact of Eskom’s electricity price increases.




10      Quarterly Review
Market Commentary (continued)

International
Equity market gains in the first quarter in 2010 were overshadowed and undone by retracements in the second
quarter. The MSCI reached its year-to-date high in mid April only to lose all of the year’s gains, and then some, by
retracing 11.9% in US dollar terms and 7.2% in rand terms for the period to the end of the second quarter. Volatility,
as measured by the VIX, spiked back up in May-June to a year-to-date high of 46% (in May) after reaching a two year
low in April. Investors did appear to be pleased with the outcome of the earnings reporting season but this positive
sentiment waned as the quarter progressed with anxiety about Europe’s banking and fiscal problems and concerns
about the durability of the US recovery outweighing any good news. Emerging markets, where investors remain
more confident of continuing growth, did not fall as badly but were still down 8.2% in US dollar terms.

No sector managed to advance but defensive sectors such as food producers, tobacco and telecom utilities held
up best. Financials were down 13% in dollar terms and had to contend with a tough regulatory reform bill in the
US. A stronger dollar hurt global sectors such as healthcare. Despite the recent volatility and market fears, the
outlook for the future has not yet been reflected in any noticeable downgrading of earnings growth estimates for
2010 or 2011. The half year reporting season, due to kick off in the second week of July, may well prove critical in
setting the tone for global equity markets for the second half of the year.

The global bond market, as measured by the Barclays Global Aggregate, was down marginally in Dollar terms
but up 5% in rand terms. The sovereign debt crisis in some of the European countries, weighed heavily on the
markets and it had a particularly devastating effect on the Euro which lost 9.5% against the Dollar during the
three months to end June. Investors sought refuge in US bonds and in the process induced a strong rally in the
last two months of the quarter.


        US Government 10-Year Bond Yield
4.1

3.9

3.7

3.5

3.3

3.1

2.9
      31 Dec




                     31 Jan




                                      28 Feb




                                                       31 Mar




                                                                        30 Apr




                                                                                         31 May




                                                                                                            30 Jun




      Source:


Weak equity markets did have an influence on US corporate bonds and they underperformed US treasury bonds.
The downgraded perception of growth prospects globally caused investors to retreat to US sovereign debt. It
is for this same reason that some of the riskier currencies weakened relative to the US dollar.Emerging market
fixed interest markets are particularly sensitive to capital flows and as such, these markets underperformed
the developed markets. This was by no means due to fundamental changes in these economies but rather a
perception that these countries carry greater risk.


                                                                                                       Quarterly Review   11
     Market Commentary (continued)

     Africa
     The market recovery slowed down in the 2nd quarter compared to the 1st quarter with some market participants
     taking profits and waiting for further clarity on corporate results for the 1st quarter of 2010. The STANLIB Africa
     Equity Fund was down by 3.5% for the quarter which compares very favourably with returns that were available in
     the domestic market.

     STANLIB remains positive given the good macro news flow across the board. Kenya posted a first quarter GDP
     growth rate of 4.4%, with good contributions to this number coming from the agricultural sector, which was an up
     an impressive 4.5%, manufacturing, which was up 9.1% and financial intermediation which posted a growth rate
     of 11.9%. Kenya’s year-on-year inflation rate slowed to 3.2% in June from 3.9% a month earlier and this was mostly
     as a result of a good rainy season which bolstered crop harvests and lead to an easing of food price increases.

     Egypt’s Economic Development Minister, Osman Mohamed Osman, said that the Egyptian economy grew by an
     annualised 5.8% in the three months to the end of March, driven by improvements in manufacturing, tourism and
     Suez Canal revenues. Urban consumer inflation in Egypt was 10.7% in the 12 months to June, compared to 10.5%
     in May.

     STANLIB has increased its exposure to resources with the purchase of First Quantum which is a copper play with
     assets in the DRC, Zambia and Mauritania. Unfortunately, a long-standing dispute with the DRC Government over
     the initial awarding of their mining rights for a copper mine in the DRC has adversely affected the share price. First
     Quantum is now in arbitration with the Government of the DRC and any favourable outcome of this arbitration
     would have a positive effect on the share price.

     Resources exposure has been further augmented through our participation in the IPO of African Barrick Gold, which
     has an exclusively African portfolio of resource opportunities with a number of Gold projects in East Africa.
     STANLIB still believes that the recovery is under way in the Nigerian banking sector and that the Governor of the
     Central Bank of Nigeria’s initiatives to clean up the banking sector’s non-performing loans will have a strong impact
     on earnings recovery and support the growth of the loan books. Valuations remain attractive at below 1.2x Price to
     Book, on average, and we are comfortable that our exposure positions us well to benefit from any recovery.




12      Quarterly Review
Disclaimer and statutory disclosure
The price of each unit of a domestic money market portfolio is aimed at a constant value. The total return
to the investor is primarily made up of interest received but, may also include any gain or loss made on
any particular instrument. In most cases this will merely have the effect of increasing or decreasing the
daily yield, but in an extreme case it can have the effect of reducing the capital value of the portfolio.
Past performance is not necessarily a guide to future performance. An investment in the participations
of a collective investment scheme in securities is not the same as a deposit with a banking institution. A
schedule of fees and charges and maximum commissions is available on request from STANLIB Collective
Investments Limited (“the Manager”). CIS are traded at ruling prices and can engage in borrowing and
scrip lending. Commission and incentives may be paid and if so, would be included in the overall costs.
Liberty is a full member of the Association for Savings and Investments of South Africa. The manager is a
member of the Liberty Group of Companies.

As neither STANLIB Asset Management Limited nor its representatives did a full needs analysis in respect
of a particular investor, the investor understands that there may be limitations on the appropriateness
of any information in this document with regard to the investor’s unique objectives, financial situation
and particular needs. The information and content of this document are intended to be for information
purposes only and STANLIB does not guarantee the suitability or potential value of any information
contained herein. STANLIB Asset Management Limited does not expressly or by implication propose that
the products or services offered in this document are appropriate to the particular investment objectives
or needs of any existing or prospective client. Potential investors are advised to seek independent advice
from an authorised financial adviser in this regard.

STANLIB Asset Management Limited is an authorised Financial Services Provider in terms of the Financial
Advisory and Intermediary Services Act 37 of 2002 (Licence No. 26/10/719)




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                                                                                                                                         Quarterly Review         13
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