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11 November 2013 - Weekly Focus

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The Economic Focus Weekly Wrap video with Kevin Lings can be downloaded by clicking on the following link:  http://www.stanlib.com/EconomicFocus/Pages/EconomicFocusWeeklyWrap.aspx Kevin discusses what is happening both globally and domestically on the economic front.

 

Market Comment

·         Although stock markets may possibly be due for a pullback or correction - or broad sideways move, known as a ‘consolidation’ - simply because the elastic could be a little stretched at the moment after a big run so far in 2013, it is unlikely that the bull market is about to end, despite its longevity (4 years and 8 months to-date).

·         So far in 2013 the global equity MSCI World Index total return (including dividends) is 22% in dollars, or a whopping 50% in rands, which probably exceeds any forecasts made at the beginning of 2013.

·         Even our JSE All Share Index has an impressive total return of 19.1% so far in 2013, while the Financial & Industrial Index’s total return is still superb at 25.5%.

·         The JSE Resources Index, including Sasol, has a 5% total return, while the JSE Mining Index, excluding Sasol, is still negative on -1.2%, including dividends and despite the biggest share, Billiton, hitting an all-time record high in rands last week of 330 rand (now 322).  Billiton comprises 52% of this JSE Mining Index, while Anglo American is 24% of the index.  Next is Impala Platinum at 5.3%!

·         If one looks at the JSE Resources Index since the crash of 2008 (see graph in main report), it does seem to be breaking its lengthy 5-plus year down-trend.  Yes, it is in rands, but we’ll take it.  Charts are not cast in stone (i.e. no guarantees), but this looks promising so far.  We’ll certainly be keeping a close eye on it!

·         If the break of trend works - as it often does (not always), then it implies a reasonable amount of upside ahead.  Apart from Sasol and Billiton, both of which have done quite well, the tide of news does seem to be improving for Anglo and to a lesser extent the platinum shares.

·         So far in 2013 Billiton is up 10.5% in rands - but still down 8% in dollars - while Sasol is up 39% in rand terms.  Anglo American is still down almost 6% in rands, so has a lot of catching-up to do.

·         Getting back to the reason why the bull market is unlikely, on balance, to end in the near future despite its long duration.

·         The great, late Sir John Templeton famously stated (19 years ago):  “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria”.

·         Firstly, we tend to follow the big offshore developed markets.  If they soar, we tend to rise, if they crash, we tend to do likewise. At this stage, after the big run in 2013, there is some optimism building in the US and other big markets, but it is also still tinged with a fair amount of fear and scepticism.  In other words, the “optimism” that Templeton was referring to has not quite let go of the “scepticism” yet!  So we have not advanced to the final state of “euphoria” that typically spells the end of the bull market.  Cash flows in the US have certainly been positive towards equities in 2013, but nothing compared with the massive amounts that went into bonds over the past years.

·         Also the big offshore developed markets are by no means expensive or overpriced. The MSCI World Index is trading at 14.5 earnings expected 12 months out versus the average over the past 25 years of 17.  With both inflation and short-term interest rates staying low, the environment remains good for property and equities.

·         The MSCI South Africa Index is trading at 13.7 times earnings expected 12 months out, which does not look that extended at all (assumes 12% earnings growth in 2014).  Our dividend yield of 2.9% is also superior to the 2.5% of the MSCI World Index or 2.7% of the US.

·         A lot of the gains in offshore developed markets so far in 2013 (as well as our JSE) reflect a lower risk premium attached to equities because the risk of recession in the world (in particular the Eurozone and the US) seems to have receded somewhat, compared with, say, one year ago.  This is a big factor.

·         What about the rand and its latest renewed weakening, after 5 months of moving more-or-less sideways?

·         The chart in our main report shows that the rand has been trading at a similar level to its lows in the crash of 2008/9 for the past 5 months.

·         Essentially, it has completed the so-called “saucer” pattern, moving from 10.50 or so in 2008/9 to 6.60 in 2011 - and  now back to 10.35 – 10.50.  Usually after a saucer pattern is completed, there follows a period of consolidation, which has happened in the past 5 months; after that the chart usually continues upwards. 

 

Other Commentators

US market analyst, Elaine Garzarelli

·         Garza’s proprietary stock market indicator composite (on her quantitative program) declined last week to 76.5% from 82% the previous week, partly due to investment advisors in the US becoming more bullish about the stock market. 

·         This is a contrarian indicator, since the more bullish advisors are, the worse it is for shares (the implication is there is less cash left on the sidelines to further fuel shares). The number of bulls currently stands at 55.2%, up from 52.6% last week, so Garza’s quants system downgraded this indicator to bearish.  Sometimes this can lead to a stock market correction.  Garza continues to expect any correction to be limited to 4-7%.  Overall her quants system remains bullish.

·         She notes that with 75% of US companies in the S&P 500 Index having reported 3rd quarter earnings, on average the earnings are up 11.5% year-on-year, which seems quite good, especially considering that the US economy is only growing at about 4% in nominal terms, even taking into account that approximately 34% of earnings are from offshore.

·         She says that based on recent economic releases, the US economy is neither slowing down, nor is it steaming ahead.  However, the chances of a tapering in December or January have increased over the past week, perhaps to as high as 50%.

 

Snippets

·         The Financial Times headline today reports that a number of Germans are upset at Mario Draghi’s lowering last week of the European Central Bank’s official interest rate from 0.5% to 0.25%.  This illustrates the clumsiness of the Eurozone, because many of the 17 countries probably need lower interest rates, but not Germany.

·         The FT says Glencore Xstrata, due to list next week on the JSE, is the 2nd biggest independent oil trader in the world, something that is not widely known.  Glencore is seeking to up its ownership of oil wells.  While the prices of coal and zinc are 60% and 55% respectively below their record highs, the oil price is just 25% below its record high.

·         Glencore’s biggest oil interests are in a cluster of countries in West Africa (Equatorial Guinea, Cameroon and Chad).

Economic Weekly                                                                           

·         Locally last week, SA manufacturing production fell by a substantial 4.7%m/m in September, after falling by a revised 3.8%m/m in August 2013 (monthly data is seasonally adjusted).

·         Offshore, the ECB decided to cut the interest rate on its main refinancing operations by a further 25 basis points to a record low of 0.25%.

·         In Q3 2013 US GDP rose by 2.8%q/q, annualised. This compares with growth of 2.5%q/q in Q2 2013 and 1.1%q/q in Q1 2013.

·         In October 2013, the US unemployment rate increased to 7.3% from 7.2% in September 2013.

·         In the emerging markets last week, Brazil’s Instituto Brasileiro de Geografia e Estatistica (IBGE) reported that inflation in Brazil in October was 5.84% y/y down from the 5.86% recorded in September.

·         The Central Bank of Kenya announced on 5 November 2013 that it will keep its repo rate on hold at 8.5%.

 

Please follow our regular economic updates on twitter @lingskevin

 

 

 

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