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Market Comment 11/11/2014 - Stanlib


      While the US S&P 500 Index rose 0.7% during last week, to a new record high, the MSCI World Index fell slightly in dollar terms (-0.1%) and the MSCI Emerging Markets Index fell 2.8%, partly hit by weaker currencies and partly by a pullback in some of the big markets like China and Brazil.

      The Nikkei Index in Japan jumped another 2.8%, but in dollar terms it lost 2.5% as the yen weakened sharply.

      The top 50 shares in Europe (Euro Stoxx 50 Index) fell 1.6% in euros and are now down 10.7% so far in 2014 when converted into dollars (-1.6% in euros)  -  and trading at the same level as 16 years ago in 1998!!!

       This does create a potential buying opportunity for patient investors.  The euro has lost around 11% against the dollar in the past 5 months, aggravating the dollar return for this index. The euro could bounce a little from here, although many forecasters expect the euro to decline further over the next 3 to 6 months.

      Meanwhile the US stock market has had an almost uninterrupted gain of 11.2% over the past 3 weeks, in a sharp ‘V’ shaped recovery to new record highs from its recent correction.  It probably needs to consolidate a little now, meaning a sideways to smallish down move is possible over the next few weeks, although who knows for sure?  This need for some consolidation is validated by Garzarelli’s high sentiment reading - too bullish (see below).

$B"*      The MSCI World Index is still 3.2% below its record high and is currently trading at the same level as seen in May this year, although it has bounced up by 7.2% from its recent low (in dollar terms).

      The global equity bull market, now 4 months short of 6 years in duration, remains firmly intact at this stage (except for resource shares) and if anything, is helped quite nicely by the recent sharp fall in the price of oil, because this is similar to a global tax cut and therefore is positive for company profit margins and consumer spending.

      On the whole, economies are neither too hot, nor too cold (including the US), which is good for keeping both inflation and interest rates low, which in turn is positive for property investment and shares.

      The MSCI Emerging Markets Index is still a hefty 10.3% below its recent high and is currently trading at the same level as September 2013…and January 2010. The index has broadly moved sideways for the past 4.5 years (in dollar terms).

South African Markets

      The All Share Index rose by 0.7% last week, despite incurring three consecutive down days. The ALSI 40 Index rose by 1%, while the Resources Index, bouncing from a very nasty downtrend of almost 24% uninterrupted, rose 4.1%.

      The ALSI and ALSI 40 are both up 0.7% this Monday morning at 11am, with the ALSI holding above the 50,000 level and the ALSI 40 holding above the 45,000 level. Resources are up 1.7%, leading again.

      At this level, the JSE ALSI is 3.5% below its record high of 52,323 seen at the end of July (up 8.75% from its recent low point).

      Being that the powerful US dollar has hurt commodity prices because commodities are priced in dollars (so prices rise in other currencies if commodity prices remains steady), investors are wondering whether the dollar is now overcooked/overbought and due for a period of underperformance, which could certainly help commodity prices and mining shares bounce back a bit. There is some valid hope there, but we’ll have to wait and see.

      The dollar hit a high of $1.236 to the euro on Friday and is now $1.246. Put it this way, the dollar is currently full of good news, while the euro is bursting to the rim with bad news. Any small turnaround there could spark a move the other way.

      Credit Suisse’s highly regarded Strategist, Andrew Garthwaite, puts only a 10-20% risk of Japanese-style deflation in Europe, because he says the key is falling wages and falling property prices - not happening in Europe (did happen for years in Japan).

      In Japan it is twice as hard as in Europe to fire workers and hence reduce labour costs.

      Wages in Europe are currently rising by 1.5%, more than double the existing inflation rate of around 0.6%.  This boosts real disposable income, positive for consumers.

      The JSE All Bond Index fell 0.7% last week on the weaker rand (which fell with many other emerging market currencies) and the SA Listed Property Index fell 0.9%.

      One of the sectors that have been in a bear market for 7 years, the JSE Construction & Materials Index, hit yet another new low for the year on Friday, putting it down 16.2% so far in 2014 (excluding dividends) and down 57% from its record high in 2007, almost exactly 7 years ago (see chart in main document).

Other Commentators

US Market Analyst, Elaine Garzarelli

      Shares have been strong since mid-October in the US and the Republican sweep was favoured by markets. Shares are happy about lower petrol prices, strong earnings and an economy that is growing decently. She expects the first rate increase in around mid-2015.

      Her quants model reading dipped to 74.5% last week from 76.5% due to the downgrade of her contrarian sentiment indicator, which indicates that investment advisors are now a bit too optimistic.  However, overall the quants model remains firmly bullish (above 30%).

      She remains fully invested in equities and believes shares are still the best investment.

      Stronger earnings data and easier global monetary policy should continue to support equities. US 3rd quarter earnings are up 7% so far.

      Fair value for the S&P 500 Index is 2380 (17% higher), assuming her operating earnings forecast of 136 for 2015 is met.

BCA Research

      BCA thinks that beyond a short-term bounce, the euro should remain under pressure.

      BCA expects continuing dollar strength to support the outperformance in common currency terms of the US equity market over many other markets - over the intermediate term.

      The strong dollar will affect US profits though, because some 40% of the profits of US S&P 500 companies are from offshore.

      BCA thinks that recent actions by the Bank of Japan increase the likelihood that the European Central Bank will follow suit (with proper quantitative easing).

Economic Focus

      Locally, The Kagiso PMI index increased by 1 index point to 51.8 in October 2014. The 1 point increase brought the index to its best level since November 2013 and signals a better outlook for the fourth quarter of the year.

      Moody's Investors Service downgraded the government of South Africa's debt rating to Baa2 from Baa1. The outlook on the rating was changed to stable from negative.

      Offshore, in October 2014, the US unemployment rate improved further to 5.8%, from 5.9% in September 2014.

      In the emerging markets, the Central Bank of Kenya’s Monetary Policy Committee kept rates on hold at 8.5% at their meeting on 4 November 2014. This was in-line with market expectations.

      Inflation in Mauritius came in lower than expected at 1.9%y/y in October from 2.9% in September. This was mainly due to food prices which fell by a massive 2.3% on a monthly basis and only increased by 0.1% on an annual basis.


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(03/11/14) where Kevin discusses what is happening both globally and domestically on the economic front.

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