Monday, 24 October 2011 - 20:00
Purchasing Power Parity
Purchasing Power Parity (PPP) is an economic and investment concept explaining how prices of goods and services increase at the same rate (all else equal) around the world. Over the long run, differences in inflation rates should result in changes in exchange rates, with those countries experiencing high inflation seeing their currencies depreciate and vice versa.
The table below shows how this concept works in reality (using an extreme example to illustrate the theory):
In the above example we can see that at the start of the period identical rugby balls cost the same amount (in common currency) in South Africa (SA) and New Zealand (NZ). Over the period SA has a higher inflation rate and at the end of the period in order for the rugby balls to still cost the same (in common currency) the rand would need to have weakened to R9.09/NZ$.
In a world of zero frictional costs (i.e. transport, taxes, etc) if the actual exchange rate is R4.55/NZ$ (too strong) then South Africans’ would be able to exchange R 1 000 for NZ$ 220 (R 1 000 / R4.55/NZ$) and buy 2 rugby balls in NZ. They would then be able to sell these balls in SA for R 2 000 and make a riskless profit of 100% (R 1 000). Conversely if the rand had weakened to R20/NZ$ then rugby balls could be bought in SA and sold in NZ at a healthy profit. This process is known as arbitrage and will happen until either the price of rugby balls changes to neutralise the difference (change in inflation rate) or the exchange rate moves to neutralise the difference.
In this frictionless world exchange rates would always trade at fair value. In the real world there are frictional costs which therefore result in currencies spending periods where they are either over or undervalued relative to other currencies. PPP therefore doesn’t hold over the short term, but will generally provide a good estimate of fair value over the longer term.
As a currency moves further and further away from its fair value, the likelihood being able to arbitrage (make a riskless profit) goods between the two countries increases. At some point the currency will move back to fair value as the flow of goods and cash equalises the exchange rate.
In reality this plays out in the import and export sectors. Importers always want a strong currency so that imported goods cost less, while exporters prefer a weaker currency which lowers the prices of their goods in foreign currencies and therefore boosts demand.
The chart below shows how the rand has traded against the US$ over the past 26 years and compares it to the fair value exchange rate implied by PPP (i.e. the difference in inflation rates between the two countries). Notice that there are extended periods where the rand doesn’t trade at fair value, but over this long period we can see that the PPP fair value rate does provide a good anchor of where the actual exchange rate should be. The recent rand weakness has seen it move closer to fair value, but will still think that it is overvalued.
This method of valuing currencies is a blunt method and should therefore not be used to predict short term movements, but it does give an indication of which way your currency should move over the longer term.
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Mon, 24 Oct 2011
South African stocks closed at their highest level in nearly three months as demand for resources firms rose with hope that European Union leaders will agree on a solution to their region's debt woes later this week.
Revenue decreased by 10.9% to R762.1 million (R855.3 million). Gross profit declined to R83 millio (R96.9 million). Net attributable profit slumped by 38.3% to R13.5 million (R21.8 million). In addition, headline earnings per share was down by 43% to 3.09c (5.42cps).
Rescuers searched the rubble of collapsed buildings Monday for survivors and victims of a major earthquake that killed at least 279 people and injured more than 1,300 in mainly Kurdish southeast Turkey.
Yemeni President Ali Abdullah Saleh, facing an increasingly entrenched uprising against his rule, on Monday welcomed a U.N. Security Council resolution urging him to sign a Gulf-mediated power transfer plan, the state news agency reported.
The United States has pulled its ambassador out of Syria because of what it said were credible threats to his safety after his public support for protesters led to attacks on his embassy and diplomatic convoy by supporters of President Bashar al-Assad.
Revenue for the interim period increased to R30.6 million (2010: R26.6 million). Gross profit rose to R20.2 million (2010: R19.2 million), operating profit grew to R2 million (2010: loss of R370 000), while profit attributable to ordinary shareholders was higher at R1.2 million (2010: loss of R265 000). Furthermore, headline earnings per share improved to 0.5cps (2010: loss of 0.1cps).
No dividend has been declared for the interim period.
The core focus will c. . .
World Markets (Spot Prices)
|JSE Top 40||17:00||28370.97||205.36||0.73%|
|JSE Indust 25||17:00||28458.18||-8.37||-0.03%|
|Rand / Dollar||19:59||7.8593||-0.1827||-2.27%|
|Rand / Pound||19:55||12.5439||-0.2766||-2.16%|
|Rand / Euro||19:55||10.9600||-0.2143||-1.92%|
|Rand / NZD||19:58||6.3696||-0.0831||-1.29%|
|Rand / AUD||19:55||8.2513||-0.0787||-0.94%|
|Yen / Dollar||19:58||76.0250||-0.2140||-0.28%|
|Euro / Dollar||19:55||0.7168||-0.0039||-0.54%|
|Dollar / Euro||19:59||1.3946||0.0077||0.56%|
|Pound / Dollar||19:55||0.6245||-0.0024||-0.38%|
Click here for the Sharenet Spot Price page
The JSE Today
|Index Name||RP||Move||% Move|
|Financial & Ind. 30||31,317.81||-36.59||-0.12%|
|Oil & Gas ||27,621.70||529.44||1.95%|
|Oil & Gas Producers ||14,851.68||284.67||1.95%|
|Basic Materials ||28,484.67||465.78||1.66%|
|Forestry & Paper ||11,923.81||244.74||2.10%|
|Industrial Metals ||27,542.81||-112.32||-0.41%|
|General Industrials ||77,652.08||1063.21||1.39%|
|Consumer Goods ||30,017.51||-149.01||-0.49%|
|Automobiles & Parts ||3,725.03||11.32||0.30%|
|Health Care ||34,115.49||119.34||0.35%|
|Index Name||RP||Move||% Move|
|Food Producers ||51,001.22||-89.18||-0.17%|
|Personal Goods ||441.35||2.59||0.59%|
|Consumer Services ||55,571.29||609.58||1.11%|
|General Retailers ||45,213.63||129.13||0.29%|
|Travel & Leisure ||3,465.20||.51||0.01%|
|Support Services ||2,249.12||10.67||0.48%|
|Non-life Insurance ||33,584.99||121.24||0.36%|
|Life Insurance ||15,936.19||-122.48||-0.76%|
|General Financial ||2,150.79||-5.73||-0.27%|
|SHARIAH TOP40 ||3,048.05||35||1.17%|
|FTSE/JSE SHARIAH ALL||3,106.18||34||1.10%|
|FTSE JSE Fledgling ||4,518.13||17||0.37%|
|FTSE/JSE Alt X ||1,174.93||55||4.94%|
|SA LISTED PROPERTY ||387.17||-0.14%|
|CAPPED PROPERTY ||321.31||0.17%|
|FTSE/JSE RAFI 40||6,541.22||37||0.57%|
|Capped Top 40||14,903.69||93||0.63%|
|Capped All Share||15,983.02||98||0.62%|
Click here for the Sharenet Index Summary page
Latest Consensus Changes**
|NED||NEDBANK GROUP LTD||HOLD||19 Oct|
|OCT||OCTODEC INVESTMENTS LIMIT...||SELL||19 Oct|
|SBK||STANDARD BANK GROUP LIMIT...||HOLD||19 Oct|
|AIP||ADCOCK INGRAM HLGS LD||HOLD||19 Oct|
|IPF||INVESTEC PROPERTY FUND LT...||HOLD||19 Oct||
|Expected||Company Name||Fin. Date|
|25 Oct 2011||SANYATI||August 2011 (Interim)|
|26 Oct 2011||AQUARIUS||September 2011 (Q)|
|26 Oct 2011||AQUARIUSCVT||September 2011 (Q)|
|26 Oct 2011||KAIROS||August 2011 (Interim)|
|26 Oct 2011||PSV||August 2011 (Interim)|
|NTC PREF||11-10-03||11-10-21||11-10-31||R 3.3842|
|SER||Seardel Investment Corporation Ltd||24/10/2011||Confirmed|
|SRN||Seardel Investment Corporation Ltd||24/10/2011||Confirmed|
|HCI||Hosken Consolidated Investments Ltd||24/10/2011||Confirmed|
|PKH||Protech Khuthele Holdings Ltd||24/10/2011||Confirmed|
|IFH||IFA Hotels - Resorts Ltd||25/10/2011||Unconfirmed||
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