STANLIB Weekly Focus

STANLIB keeps you in touch with the latest investment news:

Morningstar Performances (16/02/2012) 
Weekly Focus (20/02/2012) 

Executive Summary

Market Comment:

• In the main report, we show a graph of the US S&P 500 Index, illustrating its very sharp and impressive 26% rise since early October.  The index is now approaching its 2011 highs, reached at end April last year. 
  
  
• It is quite possible that there may be a pause, or consolidation or correction in the near future.
  
  
• US market analyst, Elaine Garzarelli, says her quants system remains in bullish mode, although she is concerned, as are many others, about the rising oil price, saying that a level of $134 a barrel would be worrisome for her.
  
  
• However, she notes that there is a massive global monetary easing cycle underway with the US Fed, the Bank of Japan, the European Central Bank and the People’s Bank of China all contributing to an unprecedented easing.  This is positive for business and for financial markets.  There have been 97 stimulative policy initiatives announced around the world over the past 5 months. 
  
  
• This has been especially positive for bank and other financial shares.  Bank shares in Japan have rallied over 20%, US bank shares are up 28%, European banks are up 35%  -  all indicating that the stimulus is working.  Even so, Eurozone banks are only trading at 0.4 times book value, less than half their US peers, notes the Financial Times today.  The FT says European banks are losing market share for a variety of reasons.  Canadian banks, by comparison, are trading at 1.8 times book value.
  
  
• Any correction in US shares is likely to be flattish to 4-7% in her view…and of course no human being alive or dead can accurately call stock markets to the “T”; they are discounting mechanisms and have “minds” of their own.

BCA’s Chen Zhao visits STANLIB

• Chen, who grew up in China, has been with BCA, in Montreal Canada, for 20 years and is their Chief Global Strategist.  He is as sharp as a razor blade in his grasp of economic and market issues.
  
  
• He says the Eurozone crisis has to-date had a minimal tangible impact on the world economy.  Even though Europe is China’s biggest export market (bigger than the US), he says China can handle this slowdown (in exports) better than any other economy  -  so just as well China is the shock-absorber here (rather than some other weaker country), because they have plenty of means at their disposal to counteract any slowdown in their exports to Europe, one of which they did this weekend, which is loosen monetary policy by reducing by 0.5% the amount of their capital that the commercial banks need to hold with the central bank.  This move releases an estimated $50bn of lending power for the Chinese banks.
  
  
• He says the year 2012 is a year of reflation in China, meaning an easing in monetary policy. BCA is forecasting much lower inflation in China, largely because food prices are declining.
  
  
• Chen’s view is that a so-called hard landing in China is highly unlikely in 2012, partly because of their extensive toolbox and also partly because so many analysts are eyeballing just that possibility in so much detail.
  
  
• Of course he openly acknowledges the threat posed by Iran and the rising oil price.
  
  
• Chen says China dictates the Emerging Market equities and global commodity cycles.  He expects Chinese M1 (narrow money) supply growth to pick up this year (currently under 10% year-on-year, much lower than its historic 18% average growth rate) and to help drive commodity prices higher.  He also expects the broader money supply measure of M2 to pick up and help drive emerging market equities higher.
  
  
• Chen is bullish on the gold price because of the growing money supply in the top seven countries of the world (G7) and because of negative real interest rates (very low nominal interest rates less inflation).
  
  
• BCA is, however, bullish on non-gold mining shares, especially mining holding companies, noting potential upside of some 30% or so from current levels.

Snippets of Info

• Foreign investors have so far bought approximately R10bn of our government bonds and sold about R10bn of our equities in 2012, so the net effect on the currency appears to be neutral thus far.
  
  
• Illustrating yet another nasty event in 2011, Thailand’s economy shrank 10.7% in the 4th quarter of 2011, the sharpest on record, after the kingdom’s worst floods in over 50 years pummeled industry.  This shock reduced the country’s overall 2011 growth rate to 0.1% (7.8% in 2010). The country is optimistic about a rebound in 2012 (perhaps for growth of 5-7% for the export-dependent economy).
  
  
• Japanese auto giant Honda has idled operations since early October at its factory in Thailand, being forced to destroy more than 1,000 cars that were submerged by the muddy flood waters! 
  
  
• Finally, an optimistic construction company! The Business Day said Basil Read had increased its order book by a whopping 75% in the past 12 months to R14bn.  CEO Marius Heyns said he expected a “bumper” year for the group as it anticipated a pipeline of project awards.  “We are bullish this year because our order book is growing with a lot of opportunities in the mining and engineering sectors” he said.  Three months ago Basil Read was awarded a R2.7bn contract to design, build, operate and transfer an airport on the island of St Helena.  The project is funded by the British international development department.
  
  
• The share price is up 18% in the last 11 days at its highest level in 3 years.
  
  
• Another recent mover is Wilson Bayly Holmes-Ovcon, whose share price is up close to 12% so far in 2012.  WBHO says its order book at the beginning of 2012 rose to R21.1bon compared with R16.2bn in June 2011.  Approximately 50% of the book is in Australia.  The geographical split of the order book is now 61% foreign and 39% local.

Economic Weekly

• On Friday, the US Conference Board released their leading economic indicator which rose by 0.4% in January 2012 following a 0.5%m/m increase in December and a 0.3%m/m improvement in November.
  
  
• The outlook for the US economy is, currently, highly dependent on employment growth.
  
  
• The success for the implementation of the new cut-back measures for Greece is dependent on some internal factors. The general election scheduled for April this year will in all probability culminate in a change of government, which may introduce its own spending priorities. In that regard the EU will undoubtedly impose post election adherence measures.