*The bear might stay with us through winter

*Where are the safe ports to weather the storm?

From Gareth Stokes, MoneyWeek editor, SA

Dear MoneyMorning reader

There was not much fanfare when Statistics SA announced a 1.8% contraction in the domestic economy for Q4 2008. Instead, the gathered economists poured a handful of sand over the coffin carrying South Africa Inc. Growth in the third quarter of last year was an equally unflattering 0.2% a – and there are those who suggest a pending restatement of that number will confirm the country’s technical recession.

The news from the trenches is not good. You cannot read a set of results without the chief executive mentioning “difficult trading conditions” or “tough economic times”. Even the supposedly buoyant construction sector is against the ropes. “These are challenging economic times and Murray & Roberts has prioritised the preservation of its capital and the selective procurement of new order book in the period ahead,” said Murray & Roberts chief executive Brian Bruce at the group’s 2008 results presentation. The building giant somehow manages a smile as it recounts the recent loss of R10bn from its order books. They ‘replaced’ cancelled Middle East contracts with local infrastructure projects to keep the total forward book at R60bn at year end. The company’s results are about as good as it gets right now.

Murray & Roberts was kind enough to pay shareholders an 85c per share final dividend; but the country’s mining ‘bell weather’ Anglo American ‘passed’ its final dividend for the first time in 70-years. Meanwhile financial institutions have no defence as the sub-prime monster rips the heart out of their investment results. Corporate earnings will be under pressure for some time to come. And you are going to have to stick with defensive shares to survive the market turbulence!

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What you need to decide is whether shares that satisfy the traditional definition of a defensive stock can withstand today’s abnormal markets. The Lex Column notes there are fewer equity market “lifejackets” than ever before. They mention defensive consumer goods companies that are taking strain in the United States. Unilever, which survived the 1929 great depression, fell heavily after revising its optimistic 2009 forecasts. And blue chip peers like “Procter & Gamble, Kraft, Diageo and L’Oreal also disappointed in the latest earnings round.” Will South African heavyweights like Tiger Brands and Pioneer foods follow suit? MoneyWeek SA believes these counters will prove resilient; but if South Africa mirrors results in the US our consumers could start “trading down to supermarkets’ private label goods.”

Where are the safe ports to weather the storm?

A quick look at the best performing US S&P 500 shares over 18-months gives a great indication of where the so-called defensive properties reside. Top performer is Southwestern Energy, with a scattering of fast foods (McDonalds), cheap retailers (Wal-Mart), and pharmaceutical companies on the list. You won’t find a utilities company on the JSE – so you’ll have to stick with Aspen Pharmacare (JSES: APN) and Adcock Ingram (JSE: AIP) in the pharmaceutical sector, something like Famous Brands (JSE: FBR) for fast food – and Shoprite (JSE: SHP) and Spar (JSE: SPP) for value retailers.

“As in the Depression, cheap treats and vice still look solid,” concludes the Financial Times. British American Tobacco is one of the best performers in the UK since August 2007. South African investors can gain direct exposure through the companies local listing BAT (JSE: BTI). Or you can get indirect exposure through investment holding company Reinet (JSE: REI). “With so little clarity on when the upturn might come, the defensive case still stands,” says the Financial Times’ Lex Column. Their assessment of the situation is spot on!
 

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Turning to the markets

The JSE all share index closed up 0.03% yesterday. The gold mining index shed 5.45%. Resources lost a whopping 8.83%. Banks and financials dropped 3.25 % and 4.04% respectively. Industrials fell 4.22% and the platinum mining index plunged a massive 9.43%.

London’s FTSE100 closed up 0.85%. The Dow Jones lost 1.09% and the Nasdaq fell 1.14%.

Tokyo’s Nikkei closed up 0.30 %. Hong Kong’s Hang Seng shed 0.8%.

Brent crude is currently trading at $44.56 per barrel.

Spot gold’s trading at $947.90 and platinum was last quoted at $1,047.00.

And here’s how the rand is performing against the major currencies:
R/$ 9.95
R/£ 14.16
R/€ 12.65

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