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Brian Kantor for Nexia; Cape Town May 28th 2009.
The SA economy and its financial markets
Making sense of a complicated environment
Donald Rumsfeld’s inimitable observations (about Iraq not the global credit and banking crisis)
• “There are known knowns. These are things we know that we know” (What have been driving markets)
• “There are known unknowns That is to say, there are things that we know we don’t know” (For example how banks will look in a year’s time and how this will influence opportunities in credit markets. Or where Emerging Markets will be in 12 months- or what will happen top SA tax rates)
• But there are also unknown unknowns. There are things we don’t know we don’t know. (The truly scary stuff) Was the credit crisis a unknown-unknown 24 months ago?
Key issues
The SA economy - will government spending, interest rates and the rand do enough for the economy?
The rand – does it make sense?
US interest rates and credit spreads- the banking crisis identified – and overcome. Relief in sight for credit markets and the US economy??
The equity markets – risk and returns. Will risks retreat and equity valuations improve?
The vehicle cycle and short term interest rates – interest rates kept going up regardless of economic weakness
-40
-20
0
20
40
6
7
8
9
10
11
12
13
2005 2006 2007 2008 2009
VEHICLE CYCLE SHORT RATES
VE
HIC
LE C
YC
LE
SH
OR
T R
AT
ES
The state of the SA economy
60
80
100
120
140
160
180
200
90 92 94 96 98 00 02 04 06 08
HNI COINCIDING INDICATOR
HNI
The second derivative- turning down rather than up
-20
-10
0
10
20
30
90 92 94 96 98 00 02 04 06 08
HNI SMOOT HED GROWT H COINCIDER Y/Y
The real money base cycle- quantitative easing needed
-5
0
5
10
15
20
00 01 02 03 04 05 06 07 08 09
Growth smoothed T rend growth
Consumer and Producer Prices- in different directions
90
95
100
105
110
08:01 08:03 08:05 08:07 08:09 08:11 09:01 09:03
PPI CPI
PPI
CPI
CPI and PPI Inflation
0
5
10
15
20
08:01 08:03 08:05 08:07 08:09 08:11 09:01 09:03
CPI INFLATION PPI INFLATION
PPI
CPI
Net government loan to GDP ratio a great strength – we did squirrel away in the good years
The SA yield curve – portending gradual recovery
6.0
7.0
8.0
9.0
10.0
11.0
12.0
R 153 R 201 R 157 R 204 R 186 R 209
27-May-09 20-May-09
13-May-09 6-May-09
RSA expected short rates as per FRA curve- big move in response to GDP numbers
66.26.4
6.66.8
77.2
7.47.67.8
1x4 2x5 3x6 4x7 5x8 6x9 7x10 8x11 9x12
27-May-09 20-May-09
13-May-09 6-May-09
SA Banks still paying up for 12 month money – but paying less
5.05.5
6.06.5
7.07.5
8.08.5
9.0
30/4 7/5 14/5 21/5
Implicit 3 months forward rate
Implicit 6 months forward rate
The US Yield Curve- dramatic recent moves – the slope has never been steeper
0
1
2
3
4
5
1m 3m 6m 2yr 5yr 10yr 30yr
27-May-09 20-May-09
13-May-09 6-May-09
The Forward Rate Agreements (FRA’s)
6
6.2
6.4
6.6
6.8
7
7.2
7.4
7.6
1x4 2x5 3x6 4x7 5x8 6x9 7x10 8x11 9x12
22-May-09 15-May-09
8-May-09 #REF!
The SA risk premium = expected rand depreciation
4.804.90
5.005.10
5.205.30
5.405.50
5.605.70
30/4 7/5 14/5 21/5
SA risk premium
The SA sovereign risk premium declining rapidly
50150
250350
450550
650750
850
May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09
Sovereign risk premium
220240260280300
320340360380400
30/4 7/5 14/5 21/5
Sovereign risk premium
The trade weighted rand- more than holding its own
90
100
110
120
130
140
150
May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09
Nominal effective exchange rate80
85
90
95
100
105
110
30/4 7/5 14/5 21/5
Nominal effective exchange rate
The rand cost of an AUD
80
85
90
95
100
105
May-08 J ul-08 Sep-08 Nov-08 J an-09 Mar-09
ZAR/AUD
The rand close to predicted value. Predicted value R8.29
-0.2
0.0
0.2
0.4
0.5
1.0
1.5
2.0
2.5
90 92 94 96 98 00 02 04 06 08
Residual Actual Fitted
6
7
8
9
10
11
08:01 08:03 08:05 08:07 08:09 08:11 09:01 09:03 09:05
ZAR ZARFORC
ZAR
FORECAST
All that glisters is gold – though signs of a recovery in the metal and mineral markets- Oil also up on recovery prospects
405060708090
100110120
May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09
Gold price Platinum price Metal index 40
45
50
55
60
65
30/4 7/5 14/5 21/5
Oil price
Behind the crisis. US interest rates- increases after 2005 did very little to mortgage rates – and so to the housing market
0
2
4
6
8
10
00 01 02 03 04 05 06 07 08 09
US FED FUNDS RATE 30 YEAR MORTGAGES
Mortgage Rate
Fed Funds
The credit crisis identified; US Corporate bond spreads
Libor spreads USD – have come in sharply
3 month sterling LIBOR and LIBOR spread
1
2
3
4
5
6
7
May-08 J ul-08 Sep-08 Nov-08 J an-09 Mar-09
LIBOR
0
100
200
300
400
500
600
700
May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09
LIBOR spread
US corporate cost of borrowing – approaching normality
5.5
6.5
7.5
8.5
9.5
10.5
11.5
May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09
10yr BBB yield
50
150
250
350
450
550
650
750
May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09
AAA Spread BBB Spread
7.2
9.2
11.2
13.2
15.2
17.2
May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09
10 yr J unk bond yields
No longer a bear market rally- a rally period – but still well off the highs of a year ago
-100
-80
-60
-40
-20
0
20
40
12/31/07 5/19/08 10/06/08 2/23/09
JSE ALSI RANDS JSE ALSI USDA
NN
UA
L P
ER
CE
NT
AG
E C
HA
NG
E IN
iND
EX
80
100
120
140
160
180
3/09 3/23 4/06 4/20 5/04 5/18
JSE USD EM WORLD
A long run view of the VIX
Uncertainty in the stock markets The Vix and the SAVI – telling us about the unknowns
0
20
40
60
80
100
12/31/07 5/19/08 10/06/08 2/23/09
VIX SAVI
Daily moves in the Vix and the S&P 500 2008 -9 Correlation (-0.86) Risks lead prices follow
-0.4
-0.2
0.0
0.2
0.4
-0.10 -0.05 0.00 0.05 0.10 0.15
DLOGSP
DLO
GV
IX
DLOGVIX vs. DLOGSP
Daily moves the JSE and the MSCI EM the umbilical chord Correlation of daily moves (0.74)
-0.06
-0.04
-0.02
0.00
0.02
0.04
0.06
12/31 1/28 2/25 3/25 4/22
DLOGEM DLOGALSI
Volatility on the JSE- financials became as risky as resources
0.00
0.01
0.02
0.03
0.04
0.05
0.06
0.07
12/30/05 10/06/06 7/13/07 4/18/08 1/23/09
RESOURCES INDUSTRIALS FINANCIALS
Resources
Industrials
Financials
Volatility on the JSE – resources and financials
0.00
0.01
0.02
0.03
0.04
0.05
0.06
0.07
12/28/07 5/16/08 10/03/08 2/20/09
RESOURCES FINANCIALS
Model of monthly moves in JSE USD value- drivers – earnings, EM and SA risk
-20
-10
0
10
20
-60
-40
-20
0
20
40
90 92 94 96 98 00 02 04 06 08
Residual Actual Fitted
12 MONTH CUMULATIVE RETURNS R100 invested May 1st 2008
40
60
80
100
120
140
160
08:05 08:07 08:09 08:11 09:01 09:03
CUMJSECUMLONG
CUMPROPCUMSHORTSA
The Findi earnings cycle
-20
0
20
40
60
00 01 02 03 04 05 06 07 08 09
Growth y /y Smoothed growth
The dividend gap - value screams out
-5
0
5
10
15
20
80 85 90 95 00 05
FINDI S&P 500
FINDI
S&P 500
