A parting gift set to rev up the South African economy

From Gareth Stokes, MoneyWeek editor, SA

Dear MoneyMorning reader

Reserve Bank Governor Tito Mboweni’s parting gift will have put a broad smile on your face if you pay instalments on a house or car. In his final Monetary Policy Committee meeting before vacating the hot seat for incoming Governor, Gill Marcus, Mboweni slashed another 50 basis point from the bank repo rate. Prime is now at 10.5%, a level last seen in April 2005 and the lowest it’s been since a brief stint at 9% in mid-1981! You’ll now pay R2,666 per month less on a R750,000 mortgage loan when compared to the interest rate cycle peak of 15.5%! Of course, you can’t expect an immediate residential house price party. It’ll take months for South Africa’s battle-weary consumer to revert to previous spending patterns.

Investors shrugged off the disappointing June manufacturing production (down 17.1% year-on-year) and retail sales (down 6.7%) numbers released last week. This sent local equities above 25,000 points. Can this equity market rally continue unabated? In his weekly Sunday Times column, Bull’s Eye, Jeremy
Thomas reminds us that “the average Joe’s sense of greed kicks in at absolutely the wrong time”. In other words: The herd stampedes into equities moments before the crash. Before you hastily commit your hard-earned cash to a mixed bag of local equities, consider that the JSE All Share Index has surged 38% since its March 2009 low. Equities could go higher if sentiment holds; but there’s a good chance punters will panic when the appalling earnings numbers at the country’s top companies sink in.

Standard Bank’s 34.37% drop in earnings per share for the first half of 2009 illustrates this earnings pressure. Investors must have gasped at the 58% increase in credit impairments to R7.1bn although the drop in earnings was expected, apart from the usual defaults on personal home and vehicle loans, there was an increase in impairments in the group’s corporate unit. With rising unemployment, you might dismiss the bank’s upbeat assessment of impairments going forward. The bank’s claim that most of the “damage” is already in the numbers may yet prove a trifle optimistic!

What about earnings per share results at other companies? City Lodge reported a surprising 31.41% decline despite the glut of international sporting events recently held in the country. Gold Fields surprised us with a 45.86% decline, while platinum counter Aquarius, uranium outfit Uranium One, heavy machine manufacturer Bell Equipment and long-term insurance giant Liberty Holdings all reported heavy losses. It was left to construction bell-weather Group Five to impress us with a 21.59% improvement! Against all odds, the group announced pipeline projects to the amount of R72bn at 30 June 2009. Project cancellations in the Middle East have been easily replaced.

Whether or not the market is “overbought” remains to be seen. Until then, concentrate on sectors that will punch above their weight should the expected pullback occur. Food retailers, construction shares, food producers and drug manufacturers seem unfazed by recent market volatility. To find out if you should still invest in these sectors read this week’s MoneyWeek. We ask a handful of the country’s top market analysts and economists where they’d position their portfolios today!

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Turning to the markets...

The JSE all share index closed up 1.13 % on Friday. The gold mining index gained 0.52%. Resources climbed 1.38%. Banks and financials added 2.26% and 1.33% respectively. Industrials bounced 0.66% and the platinum mining index jumped 2.63%.

London’s FTSE100 closed up 1.98%. The Dow Jones ran up 1.67% and the Nasdaq gained 1.59%.

Tokyo’s Nikkei closed 3.25% up. Hong Kong’s Hang Seng shot up 1.94%.

Brent crude is currently trading at $74.72 per barrel.

Spot gold’s trading at $954.03 and platinum was last quoted at $1,260.00.

And here’s how the rand is performing against the major currencies:
R/$7.82
R/£12.92
R/€11.21