Executive Summary of Weekly Focus (by Group Advisory Services, Stanlib)

Market Comment

  • The JSE rose this Monday morning to a new 2009 high of over 27,000. The last time it was at this level was in early September 2008, before the Lehman Bros collapse.
  • As usual, our market follows offshore trends. Record low interest rates offshore (and low inflation) coupled with a change in the economic cycle (turning upwards) is a powerful combination or concoction for risk assets like shares and commodities (sweet spot); and the economic cycle seems to still be early in its upswing, despite concerns.
  • A number of asset managers in SA have openly announced that they are reducing their allocation to SA equities because they see our market as overvalued.  While one understands their reasoning, one risk they are taking is that they are cutting back very early in the economic upturn.
  • It comes down to risk versus reward.  Each investor’s risk/reward equation differs because of age, net worth, responsibilities and the ability to handle risk (stomach churn) and sleep peacefully at night.
  • The risk/reward ratio of the stock market is much higher today than it was on 9th March 2009 because of the market’s big gain.  Each person needs to make a judgement call on what his/her risk profile should be at this stage.

What are some of the other market analysts saying?

  • One risk of forecasting the future is that one’s forecasts may change as new data emerges.  This has happened with US market analyst, Elaine Garzarelli.  She has turned more positive again because of strong trends emerging from US Q3 growth numbers and the latest company earnings reports.
  • Strong cost-cutting by US companies has translated into strong cash flow and a mountain of cash, leaving US companies in a strong financial condition and competitively placed.
  • With 87% of US companies having reported profits for Q3, earnings are down 2.5% instead of the -13% forecast. So Elaine is raising earnings forecasts for 2010.
  • The broad leading indicator of the top 29 countries (OECD) has rebounded to a level that is higher than in the 1975, 1983, 1991 and 2002 economic recoveries.
  • Many positives are emerging. Korea’s manufacturing is up 47% over the past nine months, Brazil’s manufacturing is up 20% and Japanese vehicle sales rose 63% over the past seven months.
  • BCA say that although they would prefer a stock market correction or consolidation, US equity prices are not yet stretched.  They see the “cyclical bull market rally” having further to run, although the short-term risk/reward ratio has deteriorated because of the big run in the market and the uncertainty about sales growth and consumer spending.

Economic Weekly Review

  • Last week showed more evidence that the V-shaped economic recovery is in full swing; with the Euro-Area posting GDP growth of 1.6%q/q annualised; and Japan 4.8%q/q annualised. The sustainability of the recovery is still in question though, as are the appropriate policy exit strategies.
  • China had a good October with most of its key economic data continuing to show strong growth, especially the domestic economy. The economy remains on track to achieve 8% growth for 2009, and is expected to accelerate to around 9.0% in 2010.
  • Locally, manufacturing activity recorded a welcome improvement in September.
  • Ahead of the SARB interest rate decision tomorrow, STANLIB held its Interest Rate and Forex forecast meeting on the 12th November. The general consensus is that we have seen the bottom of the interest rate cycle and that the first upward movement in rates will only occur in the 4th quarter of 2010.
  • The weighted view for the currency is to end 2009 at R7.50/$; 2010 at R8.10/$ and R8.60/$ at the end of 2011.  The risk of further Dollar weakness and the positive sentiment around the world cup in the first half of 2010 could see the Rand remain strong or even strengthen over the short term. 

To see the full review, Read on…

Leave a Comment