Market View

10 Nov 2009 : Market corrections may be muted and markets could continue grinding higher. But it is clear that the easy money has been made and that there is ever-increasing risk in entering the markets at these levels.

The mix of positive and negative economic news makes for confusing analysis, and the increasing market volatility in October attested to this. However, low global interest rates and a lot of money sitting on the sidelines implies that market corrections may well be muted and that markets could continue grinding higher. Nevertheless, it is clear that the easy money has been made and that there is ever-increasing risk in entering the markets at these levels.

Market Summary

The SA All Share Index posted a rand total return of 6.0%, compared with a gain of 2.2% and 4.2% for the MSCI World and EM indices respectively. The ALSI posted a US$ total return of 1.9%, while global equities shed 1.8%.

Technology was the best-performing industry group, posting a total return of 17.9%, followed by Consumer Goods (11.4%) and Health Care (9.0%). Telecoms (-3.3%) was the only group to post a negative total return.

Within the equity sectors, Software & Computer Services (17.9%), Beverages (15.9%), Household Goods (15.2%) and Equity Investment (15.0%) were the top-performers. Industrial Metals, Mobile Telecoms, Construction and Gold Mining were the worst-performing sectors.

Of the Top 100 shares, Anglo, Didata, Datatec, HCI and Mondi Plc were the top-performers, while Highveld, Arcelor, DRDGold, Group 5 and Wilson-Bayly were the worst-performing shares.

Commentary

The USA has moved from recession into a period of recovery, but at a slow rate by historical standards. The recovery is largely due to immense government sponsored economic stimulus. Because growth is slow and inflation is low, rate tightening is unlikely to happen before 2011.

The October Purchasing Managers Index numbers show a positive trend, with all of the regions (except for Italy), having exceeded a score of 50, which indicates economic growth (rather than shrinkage, where the score is below 50). Historically, PMI up trends have preceded strong periods of industrial production growth. For the current trend, which has been in place since the beginning of 2009, there has been a widespread fiscal stimulatory boost, which is likely to tail off over the next few months. Therefore, the true recovery in global industrial production and consumption may be relatively muted.

Fiscal stimulus has boosted the USA economy out of recession, but recovery in consumer spending is ultimately needed for sustainable growth. Although banks balance sheets now generally look healthier, there is still reluctance by banks to lend and borrowers to borrow. US house prices have been rising for the last three months, yet consumer confidence surveys reflect ongoing concerns on debt, income and unemployment.

The global unemployment numbers are still on a rising trend: the UK at 7.9%, USA at 10.2%, Eurozone at 9.7%, although Japan has risen and come off slightly to 5.3%. It is quite possible that the former three numbers will deteriorate further before an improvement is seen.

Chinese infrastructural development spend has been one of the mainstays of commodity demand this year, where Chinese demand has risen to between 40% and 60% of world metal and steel demand in 2Q09. However, stockpiles are now relatively high and there is more likely to be some sort of pause than a straight line continuation of rising demand.

The mix of positive and negative news makes for confusing analysis, and the increasing market volatility in October attested to this. However, low global interest rates and a lot of money sitting on the sidelines implies that market corrections may well be muted and that markets could continue grinding higher. Nevertheless, it is clear that the easy money has been made, and that there is ever increasing risk in entering the markets at these levels.

Positioning

We used the minor 4% odd “market correction” towards the end of October to make quite a few changes to the portfolios. Firstly, Eskom’s proposed electricity tariff hikes poses great threat to our SA gold miners’ profitability, hence we switched out of the Old Mutual Gold fund. Secondly, we decided to tilt the portfolios’ equity exposure to larger “blue chip” shares by switching out of the Stanlib and Investec Small Cap funds and adding exposure to the Investec Value and Prudential Equity funds.

Thirdly, we are still of the opinion that strength of the rand presents an opportune time to move money offshore and have therefore introduced a new position in the Allan Gray Orbis Global Equity Feeder fund. The net effect of all the above is a slightly higher equity exposure with a large, quality “blue-chip” focus and more currency diversification. This should provide some downside protection if equities have another “mini-correction”.

The Intervest Funds of Funds Team
November 2009