Local economic news

Ahead of the monetary policy meeting on Wednesday, here is a summary of various economic indicators.

• Q3 household consumption expenditure gained 5,9% quarter on quarter seasonally adjusted and annualised.
• Real incomes grew 5,6%
• December passenger vehicle sales grew 38,9% year on year with total sales in 2010 up 24,7% after falling 25,9% in 2009.
• Household credit grew by 7,2% year on year in November 2010, up from 6,6% in November
• Manufacturing production growth for November grew 4,6% year on year, up from 2,3% year on year in October.
• Mining production data released today increased by a seasonally adjusted 9,6% year on year from 6,5% year on year in October.

The expectation is for November retail sales growth to be at 6,8% year on year in November, up from October’s 6,1% increase.

Generally these indicators reflect a steady improvement in the economy in 2010 and point to a continuation in 2011.

Country rating

Rating agency, Fitch announced this week that it had revised its economic outlook for South Africa from negative to stable.

Fitch is expecting GDP for 2010 to be at 2,8%, following the decline of 1,7% in 2009.

Some of the factors that supported the more positive outlook include low inflation, a strong policy framework, central bank independence, and a history of fiscal conservatism.

Net foreign purchases of SA Equities

The chart below reflects monthly net inflows or outflows into SA equities in R billion over a 10 year period.

Source : Old Mutual

The latest statistics indicate net purchases of R5,04 billion in December 2010, with the 10 year average at R2,48 billion per month.

According to JSE statistics, foreigners bought a net R36 billion in 2010, following the R75 billion in 2009. The economist, Kevin Lings notes that over the last 7 years foreigners have bought an accumulated R270 billion of SA equities. Since 1994, this number is a massive R437 billion.

According to JSE stats of net flows into bonds and equities, for the first time in 2010 since 1994, the bond market attracted bigger flows than local equities. JSE stats indicate that a net R58,6 billion flowed into local bonds.

These strong inflows naturally helped push the rand firmer during 2010.

Monetary policy

This week we will see the release of consumer inflation data. The expectation is that this should be up slightly from the 3,6% in November.

The Monetary policy committee meets for the first time in 2011 this week. They will announce on any changes to interest rates on Thursday. At this stage, the expectation is for there to be no change to the current repo rate of 5,5%, which in turn drives prime rate, currently at 9%.

The 10 year average inflation is at 6%.

While official inflation has remained in the 3-6% band, going forward however, there are some looming concerns, including the rising oil price which is close to $100/barrel and rising food prices, both of which have high weightings in the inflation basket.

Currency

The rand came under some pressure last week. A factor that may have contributed was the announcement coming out of China that it has increased the reserve requirements of its banks by an additional 0,5%. It is doing this to cool down its economy and ahead of the state visit by Chinese President this week to the US, which starts today.

An expanding economy is a prerequisite for long term growth on investments. But over any shorter period of time, there is a low correlation between investment performance and economic performance and so unfortunately trying to predict the performance of investments based on recent or even impending economic releases does not work.

In many ways both the strong level of the currency and the more expensive valuation of the local equity market have priced in a fair degree of anticipated good news.

Please do not hesitate to contact Vincent or Ian at Seed Investments, if you would like to discuss your investment planning and management.

Kind regards

Ian de Lange
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966

Tue, 18 Jan 2011

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