Market View

03 Jul 2007 : Although July is off to a better start markets are likely to continue to be range bound and we will exercise caution until we are comfortable we are out of the danger zone.

Barry Shamley, Portfolio Manager of the Equinox Managed Portfolios suspects that many fund managers will be glad to see the back of June. Although the JSE Allshare index was only down -1.01% it was helped along by extraordinarily good performance by Billiton which was up 12.4% for the month.

The Index continues to be range bound. It is trading in a diamond formation which it has been doing since mid April and according to the technical chartists this pattern is characterized by volatility which is evident from the chart below.

The Financial index (-4.16%) suffered again as inflations worries continued and market started to price in further interest rate hikes, the Industrial Index was down –1.23%. The Gold Index was a poor performer again -7.63% on a weaker gold price which was down -2.79% in Rands and -1.3%% in USD closing at $650.9. The Resource Index remained above water and ended up only +0.81% despite Billitons sterling performance. The Rand strengthened by 0.93% against the USD to end at R7.058.

Most equities markets (emerging and developed) were weaker with the exceptions being Brazil +4.06%, Hang Seng +5.52% and Russia +6.59%. The S&P 500 ended down -1.78%, Dow Jones – 1.61% FTSE -0.2%, Australia -0.61% and the Shanghai composite -7.03%. Metals (base and precious) were mixed. Platinum was up +0.24%, Copper +2.44% and Nickel sold off dramatically to end -21.3%. Brent Crude was much firmer ending at $72.82 (+6.38%).

The notable move of the month was the US 10 year treasury which sold off to its lowest level in 10 years and there is speculation that the 20+ year bull market in US bonds may finally be over.

As mentioned above the break of the key 5% level of the US 10 year treasury was the focal point for the month and although it is back at 5% it did trade as low as 5.32% intra day and as can be seen below it very well may have ended the 20+ year bull market for US treasuries. From a technical point of view, the 5% level which was support now becomes resistance. This move is important as it is a gauge of inflation expectations as well as interest rate expectations and a higher yield means investors are selling treasuries as they expect the Federal Reserve to raise interest rates in reaction to higher inflation.

With the US economy still feeling the effects of the housing slowdown now would not be an opportune time for interest rates to go up. The average US consumer is struggling to pay their mortgage repayments and is overextended in terms of their household debt. Inflation data will be carefully monitored in months to come and any sustained move above the Fed’s comfort level of 2% will be of concern.

The general feeling is that the US economy should be able to sustain itself despite the housing crisis assuming no interest rate hikes and we expect the volatility to continue until the market is comfortable that inflation is under control.

Being quarter and half year end I thought now would be an opportune time to review the performance of the equity market for the last quarter as this usually provides a good overview of the general trend and sometimes provides good opportunities.

The ALSI returned 4.3% for the 3 months. The Resources index lead the way moving 6.8% higher followed by Industrials index up 4.3%. The Financial Index ended lower -2.4% as banks anticipated rising interest rates in the foreseeable future until inflation moved back into the Reserve Banks comfort range of 3% to 6%. General retailers were also affected by the above sentiment and were -6.7% lower. The Gold mining index was extremely disappointing as the spot price of Gold was weaker while quarterlies disappointed on the back on higher costs.

Top performing shares in the Top 40 were Billiton +20%, Sappi +17%, Sanlam +16.3%, SAB +11.3% and Sasol 9.9%. The worst performers were Gold Fields -18.7%, Anglogold -17.8%, JD Group -17.5%, RMB Holdings -8.7% and Firstrand -8.1%.

Top performers in the Overall index were Palamin +58.5%, Merafe +40.9%, Grindrod +29.7%, Eland 27.9% and Kumba Iron Ore 24.2%.

Worst performers in the Overall index were Tiger Wheel -46.2%, Amalgamated Appliances -18.7%, Combined Motor Holdings -17.8%, Ellerines -12.9% and Foschini -11.7%.

Over the course of the month we switched out of the Investec Value Fund in Top Managers, Prudential and Maximizer. This was replaced Foord Equity in Top Managers and Prudential and by the Cannon Equity fund in Maximizer. These switches confirm our underweight approach to financials, overweight resources and in line on Industrials for the short to medium term.

Although July is off to a better start markets are likely to continue to be range bound and we will exercise caution until we are comfortable we are out of the danger zone (the diamond formation on the ALSI Index). Other markets to keep an eye on are the S&P 500 and the German DAX index. From a technical point of view any significant weakness in these will confirm a ‘double top’ and this would be bearish for global markets.