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Market and Economic Update

·         There is plenty of action on markets this Monday morning, after Larry Summers, Obama’s favourite for the post, decided to withdraw from the race to be the next US Fed governor when Bernanke retires in January.


·         Summers was not as keen on quantitative easing, so markets are relieved and are rallying on the news.

·         Also the US dollar has weakened against most currencies, including the rand (9.76 this Monday morning), because Summers was considered more likely to raise interest rates sooner.

·         A stronger rand and lower US bond yields - US 10-year down at 2.8% from 3% recently - on the Summers news is helping our bond yields move lower (meaning prices are rising), with our RSA 10-year bond yield now down at 7.8% from a recent high of 8.45%.  As bond yields decline, bond prices and bond unit trust prices rise.

·         A stronger bond market (lower yields) is in turn good for property shares, which have gained about 3% in the past week in response.  Property yields are always being compared with bond yields, even though property dividends tend to increase every year, whereas bond interest is fixed.

·         The STANLIB Bond Fund has gained over 3% in the past 3 weeks, while the STANLIB Aggressive Income Fund has gained 1.8%, both from the lows of the year.

·         Meanwhile most European and Asian equity markets are up 1% or more today on the Summers news.  Last week we saw the MSCI Emerging Markets Index gain 3.3% in dollars, outperforming the MSCI World Index’s 2% gain.

·         The JSE All Share Index has gained 2.2% in rands in the past week, but 4.5% in dollars as the rand bounces back from its big sell-off, along with many other emerging market currencies.

·         The JSE Industrial Index has risen to a new record high, up 3% last week, while the Financial Index gained 2.4% to its highest level in 4 months.

·         So far in 2013, total returns, including dividends, are 13.6% for the All Share Index, 24.4% for the JSE Industrial Index, 9.9% for the JSE Financials Index and -1.1% for the Resources Index.

·         By comparison, SA Listed Property has done 4.1% in 2013 to-date and the All Bond Index has done -0.9%.

·         STANLIB Global Property Fund is bouncing back from its 16% decline. So far in September the fund is up 5.5% in dollar terms.

·         Relief in medium-to-long-term bond yields (lower yields) is helping retail, banking and property shares bounce back from big knocks, with a stronger rand contributing.

·         It seems that 70% of forecasters expect the US Fed to announce a beginning to tapering on Wednesday, with a small $5 to $10 billion cut-back in their monthly purchase of bonds, from the current $85bn.  However, as much as 30% think that tapering may be delayed because of recent softer numbers on the US economy.

·         The stronger rand is dampening mining shares a little, plus metal prices declined last week. We are seeing a small bounce in platinum and copper prices this morning.


Other Commentators

Elaine Garzarelli

·         Garza says markets have come to realize that tapering does not mean an end to quantitative easing, as it was with QE1, which went from +95 billion dollars a month to zero, and QE2, which went from +75 billion dollars a month to zero.

·         This time we will likely see QE taper from $85 billion a month to possibly $75 billion.

·         Garza does not anticipate stock market damage from the tapering and believes that the impact on long-term interest rates will be minimal since financial markets have already anticipated the tapering.

·         She continues to recommend buying shares on dips.  Based on her P/E model (price-to-earnings), she is looking for a 15% gain to a level of 1943 for the S&P 500 Index over the next 6 to 12 months (on her model’s projection of a 17.5 PE).

·         Garza’s proprietary stock market indicator composite actually rose to 90% from 83.5% last week. This is a bullish signal since a level below 30% is a bear market warning.

·         On the international front, Garza notes that it has been a while since we have seen as much evidence of economic improvement abroad.  Most recently the UK is turning the corner, Taiwan’s export sector has accelerated, Japan’s GDP growth is up 3.8%, Australia’s consumer confidence is up, South Korea’s unemployment rate fell and Malaysia’s industrial production in July increased to a an all-time high.

·         Garza believes the US economy is expanding slowly.  The progress on the budget deficit is a positive, with tax receipts continuing to rise in August as government spending declines.  The budget deficit has been cut in half over the last 3 years from $1.4 trillion to $0.74 trillion (4.4% of GDP from a high of 9%).


BCA Research

·         BCA’S house view continues to be neutral on equities, expecting equities to take a break after the surge in PE ratios over the past year;  they continue to expect a period of consolidation or modest correction to allow earnings to catch up a bit.  They would upgrade to overweight equities on a 5-10% correction.

·         Chen Zhao has revisited his view about a market correction in the light of recent buoyancy in stock markets, saying that clearly if global growth turns out to be much stronger than most anticipate, then PE multiples could continue to expand.

·         The most recent data have confirmed that the Chinese economy has entered a broad-based rebound.  There is still much skepticism toward the Chinese economy, but Beijing’s new leaders are confident that the economy has turned the corner.

·         Chen notes that the combined manufacturing PMI (purchasing managers index - a leading indicator for manufacturing) in the US and Europe, which accounts for about 40% of world GDP, is rising sharply.  This usually predicts a sharp rebound in global trade.  For example, major exporter Korea has seen a 22% surge in its equity market since June, in dollar terms.

·         So Chen says risk-takers should remove the cautious bias and lift equity exposure.


Snippets of Info

·         Per the Financial times of 9th September: While the FTSE 100 Index (of the 100 biggest London shares) has risen just over 11% in pounds so far in 2013, the FTSE All Share has returned about 13%.  However, the FTSE’s small  cap index has risen more than 23%, reaching its highest level since June 2007.   Why?  Well, the UK economy grew at its fastest rate in more than 3 years in the 3 months to end August and consumer confidence has risen more in the past 4 months than at any time since 1982  (just 31 years ago!!!)….

·         Retail companies such as electronics chain Dixons, up over 60% so far in 2013 (in pounds) and clothing retailer Next, up 39%, are leading the rally.  Travel company Thomas Cook is up 275%

·         Global equities (MSCI World Index) have risen to a new post-recession high (up over 7% in this quarter) and have a total dollar return so far in 2013 of 16.8% (including dividends).  This equates to 37.9% in rand terms, with the rand at 9.77 today.

·         UBS notes that the MSCI World Index is now 8% below all-time record highs, in dollar terms and is trading at 13.5 times earnings expected over the next 12 months, which is in line with 10-year averages.

·         The US is due to hit its legal borrowing limit some time after mid-October (in about a month’s time).  At this stage, Republicans and Democrats seem far from agreeing on matters; so this remains a definite threat to markets.

Economic Weekly


·         Last week the South African Reserve Bank released the Quarterly Bulletin for Q2 2013.

·         In Q2 2013, South Africa’s current account deficit worsened to -6.5% of GDP, down from 5.8% of GDP in Q1 2013.

·         SA’s trade deficit widened significantly to 2.9% of GDP in Q2 2013, from 2.4% of GDP in Q1 2013 and 2.6% of GDP in Q4 2012.

·         During Q2 2013, SA consumer spending rose by a slightly more encouraging 2.5%q/q, annualised, up from 2.3%q/q in Q1 2013.

·         In Q2 2013 SA fixed investment spending rose by a welcome, but still modest 2.7%q/q, annualised, up fractionally from 2.5%q/q growth in Q1 2013. The latest improvement in investment activity, albeit slight, was mostly driven by the private sector.

·         In contrast, fixed investment spending by public corporations contracted at an annualised rate of -2%q/q in the second quarter of 2013.

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