Welcome the new guard

From Gareth Stokes, MoneyWeek editor, SA

Dear MoneyMorning reader

South African Inc responded positively to the 19 July 2009 announcement that Absa Bank chairperson Gill Marcus would replace Tito Mboweni as governor of the Reserve Bank. By lunchtime, last Monday, the JSE All Share Index had rallied 232 points, while the rand surged to session-highs of around R7.97 to the dollar. Marcus is no stranger to the central bank, having served as deputy governor between 1994 and 2004. And since it’s the incoming governor has not yet indicated she will make any radical departures from the bank’s existing inflation-targeting strategies, you have to wonder whether the market is celebrating Marcus’ arrival or Mboweni’s departure. MoneyWeek would like to wish the incoming governor well over her first term.

There are weightier issues influencing the domestic currency at present. One is the continued weakening of the US dollar and the resulting calls from China (and others) to debate the dollar’s relevance as the global reserve currency. We expect the debate will dominate international currency markets in years to come, though changes to the status quo are probably decades away.

On the domestic front, the currency is braced for the outcome of talks between Bharti Airtel and MTN Group. If a successful deal is announced, you’ll see massive volumes of two-way currency trade as each group struggles to raise the capital required to bring about their end of the bargain. Other good
news is that Moody’s Investors Service recently upgraded South Africa’s foreign currency rating to A3 from Baa. This upgrade will open the door to cheaper international financing and hopefully lift the country a notch or two on the list of preferred destinations for international investors. Love them or hate them, the ratings agencies still set the tone for international capital flows.

Every silver lining has its cloud. As you celebrate the rosier outlook for the local currency, minister in the Presidency, Trevor Manuel has been adding to his recent recession denialism repertoire. He’s now teamed up with President Jacob Zuma in a “hard to believe” jobs through recession double act. Hot on the heels of Zuma’s “500 000 jobs by June next year” pledge, Manuel declared the country was on track to halve poverty and unemployment by 2014! You cannot fault the goal, but it’s not likely government will be able to conjure up enough infrastructure projects to reach it. To have any hope of meeting these targets, the country will have to undertake new projects similar in size to the Gautrain without sacrificing any of the work already underway. And that’s going to be a tough ask! Even if new projects of this magnitude can be planned, financed and implemented in the next five years, we doubt they’d compensate for job losses in the manufacturing, mining and other consumerdriven sectors of the economy.

And South Africa is one of the few emerging economies to have developed a heavy dependence on consumers for growth. The turbulence of this recession will force consumers to reconsider their ways and shift from consumption to saving. According to Professor Edward Kerchner of Global Wealth Management, “we’re seeing a shift from conspicuous consumption, to conscious consumption!” What happens when someone pushes the “reset” button on consumer behaviour? Check out MoneyWeek for David Stevenson’s take on the matter.

*************
Turning to the market...

The JSE all share index closed up 0.13% on Friday. The gold mining index is 0.35% lower. Resources slid 0.04%. Banks and financials added 0.72% and 0.63% respectively. Industrials lost 0.14% and the platinum mining index shed 2.12%.

London’s FTSE100 closed up 0.37%. The Dow Jones gained 0.26% and the Nasdaq added 1.08%.

Tokyo’s Nikkei closed 1.68% up. Hong Kong’s Hang Seng climbed 1.32%.

Brent crude is currently trading at $71.09 per barrel.

Spot gold’s trading at $956.20 and platinum was last quoted at $1,207.00.

And here’s how the rand is performing against the major currencies:
R/$7.74
R/£12.74
R/€11.02