Tuesday, 20 November 2012
UPDATE 1-Iron ore at 2-week low as China demand slips, swaps down - RTRS
REF : Thomsons Reuters
"20-Nov-2012 09:11
Miners offering 600,000 T at spot tenders on Tuesday
China Nov 1-10 daily steel output up 1.6 pct
(Updates rebar price)
By Manolo Serapio Jr
SINGAPORE, Nov 20 (Reuters) - Iron ore swaps dropped on Tuesday after spot prices hit two-week lows with demand from top buyer China losing steam after weeks of restocking, prompting miners to unload more cargoes onto the spot market before prices fall further.
Top miners Vale VALE5.SA, Rio Tinto RIO.AX RIO.L and BHP Billiton BHP.AX BLT.L are together offering around 600,000 tonnes of iron ore at spot tenders closing today, traders said, far more than usual volumes.
The December swap contract SGXIOSZ2 cleared by the Singapore Exchange edged down to $115.50 per tonne in early deals after falling more than a dollar to $115.72 on Monday, brokers said, reflecting market expectations spot prices will slip further.
Iron ore with 62 percent iron content IODBZ00-PLT fell 1.2 percent to $122.25 a tonne on Monday, its lowest since Nov. 6, according to data provider Platts.
Chinese steel mills had stocked up on iron ore over the past four weeks on hopes of positive policy signals from China's 18th party congress. The meeting, however, ended last week without any indications of economic stimulus, said a physical iron ore trader in Singapore.
"And all this time, steel consumption has remained fundamentally weak, so now that mills are well stocked with iron ore, there's no incentive to procure more spot cargoes," the trader said.
"I believe sentiment will start to weaken from this point onwards," he said, adding he expects the benchmark iron ore price to drop to $115 in the near term.
MEASURED RESTOCKING
Before prices fall further, miners are unloading cargoes in the spot market at separate tenders on Tuesday, which traders expect to be sold at less than previous deals.
Vale is offering 155,000 tonnes of 60.74-percent grade iron ore and another 90,000 tonnes of 63.63-percent grade material, traders said.
BHP Billiton is selling 100,000 tonnes of 63-percent Newman iron ore fines and 110,000 tonnes of 58-percent Yandi fines, while Rio Tinto's tender for 165,000 tonnes of 61-percent Pilbara fines is also closing today, traders said.
"I guess no one wants to miss the boat so everyone will try and sell a lot today," said Jamie Pearce, head of iron ore broking at SSY Futures.
Iron ore has rebounded from three-year lows below $87 in early September, but price gains have since been capped at just above $120, with any recovery in Chinese steel demand remaining fragile.
Shanghai rebar futures SRBcv1 closed up 0.2 percent at 3,552 yuan ($570) a tonne, after briefly hitting a fresh seven-week low of 3,539 yuan. It fell nearly 3 percent on Monday.
But after heavy destocking in recent months that had cut steel inventories at both traders and mills to 2-1/2-year lows, there is a potential for a restocking cycle in China's steel sector, Commonwealth Bank of Australia said in a note.
"Any restocking in the steel sector is likely to be measured, though, thanks to Chinese banks rationing credit in the steel and iron ore sector," the bank said.
China's average daily crude steel output rose 1.6 percent to 1.957 million tonnes for the first 10 days of November from the preceding period, industry data showed on Tuesday, as large mills lifted output on a recent rally in steel prices from September lows. (Full Story)
Shanghai rebar futures and iron ore indexes at 0704 GMT
Contract Last Change Pct Change
SHFE REBAR MAY3 3552 +8.00 +0.23
PLATTS 62 PCT INDEX 122.25 -1.50 -1.21
THE STEEL INDEX 62 PCT INDEX 122.8 +0.00 +0.00
METAL BULLETIN INDEX 121.8 -1.15 -0.94
Rebar in yuan/tonne
Index in dollars/tonne, show close for the previous trading day"
($1 = 6.2345 Chinese yuan)
(Editing by Miral Fahmy)
((manolo.serapio@thomsonreuters.com)(+65 6870 3884)(Reuters Messaging: manolo.serapio.reuters.com@reuters.net))
Thursday, 15 November 2012
Eurozone falls back into recession
Breaking News
FT on Line :
BREAKING NEWS
"The eurozone fell back into recession in the third quarter after the combined economy of the 17-member bloc contracted for the second consecutive month, dragged down by the Netherlands and peripheral nations.
Eurostat, the EU’s statistics office said the region’s economy contracted by 0.1 per cent in June to September, compared with the previous three months. This follows from a 0.2 per cnet decline in the second quarter.
The wider EU avoided recession after recording growth of 0.1 per cent in the third quarter, largely thanks to an Olympics-related boost in the UK.
Germany and France expanded in the third quarter, but the outlook remained bleak as the crisis engulfing the eurozone takes its toll on the region’s largest economies "
FT on Line :
BREAKING NEWS
"The eurozone fell back into recession in the third quarter after the combined economy of the 17-member bloc contracted for the second consecutive month, dragged down by the Netherlands and peripheral nations.
Eurostat, the EU’s statistics office said the region’s economy contracted by 0.1 per cent in June to September, compared with the previous three months. This follows from a 0.2 per cnet decline in the second quarter.
The wider EU avoided recession after recording growth of 0.1 per cent in the third quarter, largely thanks to an Olympics-related boost in the UK.
Germany and France expanded in the third quarter, but the outlook remained bleak as the crisis engulfing the eurozone takes its toll on the region’s largest economies "
Tencent in rare profit miss, new forays shrink margins 0700.HK NPNJn.J - RTRS
14-Nov-2012 13:53
Ref: Thomsons Reuters !!
"Q3 net profit up 32 pct on strength in online games
But falls short of market estimates as costs soar
Tencent shares up 72 pct this year as new forays welcomed
(Adds analyst quote)
By Melanie Lee
SHANGHAI, Nov 14 (Reuters) - Tencent Holdings 0700.HK, China's biggest online gaming and social networking company, surprised with a rare earnings miss, as efforts to expand into new businesses hit margins and the number of fee-paying users for its Internet services fell.
Searching for fresh revenue streams, Tencent has steadily expanded into e-commerce and online video but the highly competitive and cost-heavy nature of both these industries has meant that Tencent has had to spend in order to boost sales growth.
"The bottom line was a bit of a miss compared to our numbers and the Street and it's largely due to Tencent's margins," said Hong Kong-based Nomura analyst Jin Yoon.
"Margins will have to continue to go down if this company continues to invest in these negative margin businesses," Yoon said.
Net profit for the third quarter climbed 32 percent to 3.2 billion yuan ($514 million) from a year earlier, helped by strength in its core online gaming business.
But it fell short of an average estimate of 3.5 billion yuan in a Reuters poll of nine analysts as cost of sales soared 80 percent. Tencent's e-commerce business had the lowest margins, as costs were equivalent to 96 percent of that segment's sales, followed by online advertising, where costs were equivalent to 50 percent of that segment's revenue.
Its e-commerce revenue rose 32 percent from the previous quarter to 1.1 billion yuan.
Tencent, which is more than 30 percent owned by South African media group Naspers Ltd NPNJn.J, is a relatively new player in China's e-commerce industry which was worth $45 billion in the second quarter. In the second quarter, Tencent had 4.5 percent of the market, behind 360buy and Alibaba Group's ALIAB.UL Taobao platforms. (Full Story)
The forays into new businesses have, however, found favour with investors this year, driving its shares 72 percent higher, compared with a 16 percent climb for the Hang Seng Index .HSI.
MOBILE PAIN
Tencent said the number of fee-paying subscribers for value-added Internet services fell 4.8 percent in the quarter after it initiated a drive to improve its subscriber base by cutting out user accounts where fee-collection was unlikely.
The company also said the consumer shift to mobile devices was bringing some pain and might pose a risk to its traditional business model -- where users buy virtual currency and virtual items to personalise their accounts. Tencent's value-added Internet service business contributes more than 72 percent to its total revenue.
Tencent also noted that a slower Chinese economy may have hurt its online advertising business, which online video is a part of.
Online gaming continued to drive much of quarterly profit growth, with Tencent's new game "League of Legends" gaining traction in the market to join stalwarts "Cross Fire" and "Dungeon & Fighter" as China's most-searched-for games.
Overall third-quarter revenue jumped 54 percent from a year earlier to 11.6 billion yuan, matching analysts' estimates, with online gaming revenue climbing 44 percent to 6 billion yuan.
Tencent said that Weixin or WeChat, its highly popular mobile chatting app that has been a particular focus for investors, had taken good steps forward and had more than 200 million users as of end-September.
"Several of our investment initiatives, such as open platform, Weixin and online video, made progress in driving user engagement or monetisation," Tencent's Chief Executive Pony Ma said in a statement.
"Our focus remains on building our user base and enhancing our user experience, particularly during this period of rapid mobile Internet growth," Ma said.
Shares of Tencent ended 0.9 percent lower on Wednesday before its results were announced, versus a 1 percent rise for the Hang Seng. "
($1 = 6.2265 Chinese yuan)
Steven
Ref: Thomsons Reuters !!
"Q3 net profit up 32 pct on strength in online games
But falls short of market estimates as costs soar
Tencent shares up 72 pct this year as new forays welcomed
(Adds analyst quote)
By Melanie Lee
SHANGHAI, Nov 14 (Reuters) - Tencent Holdings 0700.HK, China's biggest online gaming and social networking company, surprised with a rare earnings miss, as efforts to expand into new businesses hit margins and the number of fee-paying users for its Internet services fell.
Searching for fresh revenue streams, Tencent has steadily expanded into e-commerce and online video but the highly competitive and cost-heavy nature of both these industries has meant that Tencent has had to spend in order to boost sales growth.
"The bottom line was a bit of a miss compared to our numbers and the Street and it's largely due to Tencent's margins," said Hong Kong-based Nomura analyst Jin Yoon.
"Margins will have to continue to go down if this company continues to invest in these negative margin businesses," Yoon said.
Net profit for the third quarter climbed 32 percent to 3.2 billion yuan ($514 million) from a year earlier, helped by strength in its core online gaming business.
But it fell short of an average estimate of 3.5 billion yuan in a Reuters poll of nine analysts as cost of sales soared 80 percent. Tencent's e-commerce business had the lowest margins, as costs were equivalent to 96 percent of that segment's sales, followed by online advertising, where costs were equivalent to 50 percent of that segment's revenue.
Its e-commerce revenue rose 32 percent from the previous quarter to 1.1 billion yuan.
Tencent, which is more than 30 percent owned by South African media group Naspers Ltd NPNJn.J, is a relatively new player in China's e-commerce industry which was worth $45 billion in the second quarter. In the second quarter, Tencent had 4.5 percent of the market, behind 360buy and Alibaba Group's ALIAB.UL Taobao platforms. (Full Story)
The forays into new businesses have, however, found favour with investors this year, driving its shares 72 percent higher, compared with a 16 percent climb for the Hang Seng Index .HSI.
MOBILE PAIN
Tencent said the number of fee-paying subscribers for value-added Internet services fell 4.8 percent in the quarter after it initiated a drive to improve its subscriber base by cutting out user accounts where fee-collection was unlikely.
The company also said the consumer shift to mobile devices was bringing some pain and might pose a risk to its traditional business model -- where users buy virtual currency and virtual items to personalise their accounts. Tencent's value-added Internet service business contributes more than 72 percent to its total revenue.
Tencent also noted that a slower Chinese economy may have hurt its online advertising business, which online video is a part of.
Online gaming continued to drive much of quarterly profit growth, with Tencent's new game "League of Legends" gaining traction in the market to join stalwarts "Cross Fire" and "Dungeon & Fighter" as China's most-searched-for games.
Overall third-quarter revenue jumped 54 percent from a year earlier to 11.6 billion yuan, matching analysts' estimates, with online gaming revenue climbing 44 percent to 6 billion yuan.
Tencent said that Weixin or WeChat, its highly popular mobile chatting app that has been a particular focus for investors, had taken good steps forward and had more than 200 million users as of end-September.
"Several of our investment initiatives, such as open platform, Weixin and online video, made progress in driving user engagement or monetisation," Tencent's Chief Executive Pony Ma said in a statement.
"Our focus remains on building our user base and enhancing our user experience, particularly during this period of rapid mobile Internet growth," Ma said.
Shares of Tencent ended 0.9 percent lower on Wednesday before its results were announced, versus a 1 percent rise for the Hang Seng. "
($1 = 6.2265 Chinese yuan)
Steven
Wednesday, 14 November 2012
WHY DOES RICHEMONT STAY SO STRONG?
An interesting perspective from HSBC :
Enjoy a great piece of Analysis :
"It was the Diwali holiday yesterday and I left you all with a quiz on Monday so I will start there.
The quiz was: In many countries, gift giving often means money in a brown
envelop. Why is it that in China people give expensive watches instead? The
answer was actually told to me by a watch retailer who shall remain nameless.
In Singapore, the largest currency denomination is $10,000 but you can
actually find the $1,000 (~US$820) quite easily. In HK, the largest
denomination is HK$1,000 (~$128). In China, the largest denomination is
RMB100 (~US$16) so if you want to put a reasonable amount in a brown
envelop, it has to be a pretty big one. Simple practical reason explaining
why about 1 in 3 watches are bought for gift giving purposes. I will make a
case for China related to gift giving. Most China bulls have been smacked
into submission including my own China strategist Steven Sun (though my
Asian strategist Herald van der Linde is overweight on China). I was in a
discussion with Nouriel Roubini during the Salt conference in Singapore and
he was adamant that China will hard-land within the next 2 years. Why then
am I more sanguine on China despite my caution on other equity markets? I
think that the consensus opinion has missed out on just how important gift
giving is in China. There is even a term for it: 关系。The leadership
transition currently underway in China does not just involve the top
leadership. It also involves all the provincial and state governments. In
China, there is an idiom that says that a new Emperor brings a new court of
Ministers (一潮君子，一潮臣). It's no wonder then that gift giving has
slowed massively (if not stopped entirely) as no one is sure if the person
at the other side of the table will be there in a couple of months. As the
situation settles and as the new powers ascend, there will be a pent up
demand of people trying to ingratiate themselves with the new
powers-that-be. This will in fact result in a spike in conspicuous
consumption which will then filter through the system through the multiplier
effect (the Rolex salesperson will get his commission again with which he
can now buy something else and so on). My guess is that sales of luxury
products will be much higher than expected in Q1 next year and this will
once again cause analysts to once again extrapolate too much on the upside.
Am happy to be bullish on China here. "
Take it easy
Steven
Steven Morris Chartered Accountant (SA)
3 Bickley Road
Sea Point
Cape Town
8005
Mobile :+27 83 943 1858
Facsimile : 0866 712 498
E-mail : steven@global.co.za
Website : www.stevenmorris.co.za
Enjoy a great piece of Analysis :
"It was the Diwali holiday yesterday and I left you all with a quiz on Monday so I will start there.
The quiz was: In many countries, gift giving often means money in a brown
envelop. Why is it that in China people give expensive watches instead? The
answer was actually told to me by a watch retailer who shall remain nameless.
In Singapore, the largest currency denomination is $10,000 but you can
actually find the $1,000 (~US$820) quite easily. In HK, the largest
denomination is HK$1,000 (~$128). In China, the largest denomination is
RMB100 (~US$16) so if you want to put a reasonable amount in a brown
envelop, it has to be a pretty big one. Simple practical reason explaining
why about 1 in 3 watches are bought for gift giving purposes. I will make a
case for China related to gift giving. Most China bulls have been smacked
into submission including my own China strategist Steven Sun (though my
Asian strategist Herald van der Linde is overweight on China). I was in a
discussion with Nouriel Roubini during the Salt conference in Singapore and
he was adamant that China will hard-land within the next 2 years. Why then
am I more sanguine on China despite my caution on other equity markets? I
think that the consensus opinion has missed out on just how important gift
giving is in China. There is even a term for it: 关系。The leadership
transition currently underway in China does not just involve the top
leadership. It also involves all the provincial and state governments. In
China, there is an idiom that says that a new Emperor brings a new court of
Ministers (一潮君子，一潮臣). It's no wonder then that gift giving has
slowed massively (if not stopped entirely) as no one is sure if the person
at the other side of the table will be there in a couple of months. As the
situation settles and as the new powers ascend, there will be a pent up
demand of people trying to ingratiate themselves with the new
powers-that-be. This will in fact result in a spike in conspicuous
consumption which will then filter through the system through the multiplier
effect (the Rolex salesperson will get his commission again with which he
can now buy something else and so on). My guess is that sales of luxury
products will be much higher than expected in Q1 next year and this will
once again cause analysts to once again extrapolate too much on the upside.
Am happy to be bullish on China here. "
Take it easy
Steven
Steven Morris Chartered Accountant (SA)
3 Bickley Road
Sea Point
Cape Town
8005
Mobile :+27 83 943 1858
Facsimile : 0866 712 498
E-mail : steven@global.co.za
Website : www.stevenmorris.co.za
Monday, 5 November 2012
The Downgrade of the Sovereign
A good Article from Alastair Sellick from PSG Asset Management.
Enjoy reading !!
"After the close of the local bond market on Friday the 12th October, bond market participants received the unwelcome news that S&P had cut South Africa’s foreign currency credit rating to “BBB“ from “BBB+” and the local currency credit rating to “A-“ from “A”. Importantly, the ratings outlook was maintained at negative. This was the most concerning aspect of the downgrade, as a negative outlook means that there is a material chance that the credit rating could be subject to further downgrades later.
The move by S&P wasn’t unexpected - on Thursday the 27th September, Moody’s had downgraded South Africa’s foreign currency credit rating to “Baa1” from “A3”, the equivalent of S&P’s “BBB+”. At the time, this brought Moody’s in line with S&P and Fitch. However, S&P’s timing certainly was a surprise. The common wisdom of the market had been that they would give the sovereign the benefit of the doubt and wait until the Medium Term Budget Policy Statement had been delivered by Finance Minister Pravin Gordhan. That the ongoing developments had, in their view, deteriorated so rapidly, is quite telling, and serves to underscore the severity of the implications of the maintained negative outlook.
S&P list the following factors that could lead to further ratings downgrades:
If the South African business and investment climate weakens more than they expect
If the diverging factions within the ANC impede the formulation of a policy framework that is conducive to growth and job creation
If the Mangaung congress sets a policy framework that deviates from the path of fiscal consolidation
Factors that could lead to a downgrade of more than one notch include:
If the government’s fiscal flexibility decreases potentially due to public sector wages or debt service costs increasing more than currently expected.
In order for the rating to be affirmed at current levels, and a revision of the outlook to stable, S&P require that:
The expected increase in public sector debt must be offset by an improvement in investment and economic growth prospects, and
Fiscal consolidation must continue
Ordinarily, it is counter-productive for the downgraded entity to respond to a ratings agency. It is far more telling to react to the reasons that have been cited for the rating action. However, National Treasury’s response to S&P is measured and it emphasizes the positive long term consequences of the infrastructure spending programme. The financial markets certainly took the ratings actions in their stride – bond yields sold off around 15 bp and have since recovered. The Rand had weakened significantly around the strike actions which happened the week or two before, so is broadly stronger than it was at the time of S&P’s announcement.
These ratings downgrades were not a fait accompli. They represent the consequences of allowing an inefficient labour market to impact on the productive capacity of the South African economy over a long period of time. It is no surprise that South Africa features so poorly in the labour categories of the Global Competitiveness Report of the World Economic Forum. As an increasingly emboldened and more powerful member of the tripartite alliance, labour has been flexing its muscles – the annual strike season refers. When strikers are so emboldened that the rule of labour law is no longer respected, the consequences can be disastrous. Labour would be well advised to take note that much of the gain, in terms of being able to increase social spending and develop the country’s infrastructure has depended on positive foreign investor perceptions about South Africa.
Fitch has given the Finance Minister the benefit of the doubt, and has indicated that a pronouncement on the South African sovereign rating will occur early in 2013. However, the manner in which the wildcat strikes expanded, as well as the lost output in various mines and support industries suggests that there could be a reduction in the country’s Q3 / Q4 growth rate, and this has implications for the fiscus. We thus continue with the Sword of Damocles hanging over the bond market.
In the current global environment, there is such a heightened focus on government deficits, austerity and fiscal consolidation. It is important that governments keep their house in order, and fly below the radar. While South Africa initially did so well at the start of the financial crisis, primarily through the sound policies of the South African Reserve Bank and the rigorous regulation of our banks, we have lost the advantage we once had. South Africa has also benefitted from the dual windfalls of global quantitative easing, which has sent large amounts of cheap foreign capital out hunting for yield in the well run, investment grade bond markets, and our inclusion in the Citi World Global Bond Index (the WGBI) on the 1st October 2012. We should be doing our utmost to show the world that South Africa is a capital friendly investment destination, and in the context of the global financial crisis, we should be putting our best face forward. We should be marketing our country as the ideal destination for capital that can be deployed towards the economic development of the African Continent. We need to now convert the hot-money of global bond inflows into long term Foreign Direct Investment (FDI) otherwise we will pay the price if that capital leaves at the speed with which it arrived.
Ratings agencies and the bond markets play an important role in regulating the behaviour of governments. If governments play by the rules and adopt sensible, responsible policies, they will be rewarded by good credit ratings and access to foreign capital. If not, it is the duty of the ratings agencies to point this out to bond investors. In turn, it is the obligation of bond investors to price adequately for the investment risk they are taking. Now that foreign investors hold close to 40% of our nominal local government debt, we are even more vulnerable to the marginal ratings change by ratings agencies.
There is no doubt that the required risk premium for investing in South African government bonds has risen, even though our bond yields have fallen. The question is: will the government be able to deliver on the required improvement in investment, economic growth and social prospects that are now demanded of this country?"
"The PSG Angle is an electronic newsletter of PSG Asset Management"
Kind Regards
Steven
Steven Morris Chartered Accountant (SA)
Mobile :+27 83 943 1858
Facsimile : 0866 712 498
E-mail : steven@global.co.za
Website : www.stevenmorris.co.za
Enjoy reading !!
"After the close of the local bond market on Friday the 12th October, bond market participants received the unwelcome news that S&P had cut South Africa’s foreign currency credit rating to “BBB“ from “BBB+” and the local currency credit rating to “A-“ from “A”. Importantly, the ratings outlook was maintained at negative. This was the most concerning aspect of the downgrade, as a negative outlook means that there is a material chance that the credit rating could be subject to further downgrades later.
The move by S&P wasn’t unexpected - on Thursday the 27th September, Moody’s had downgraded South Africa’s foreign currency credit rating to “Baa1” from “A3”, the equivalent of S&P’s “BBB+”. At the time, this brought Moody’s in line with S&P and Fitch. However, S&P’s timing certainly was a surprise. The common wisdom of the market had been that they would give the sovereign the benefit of the doubt and wait until the Medium Term Budget Policy Statement had been delivered by Finance Minister Pravin Gordhan. That the ongoing developments had, in their view, deteriorated so rapidly, is quite telling, and serves to underscore the severity of the implications of the maintained negative outlook.
S&P list the following factors that could lead to further ratings downgrades:
If the South African business and investment climate weakens more than they expect
If the diverging factions within the ANC impede the formulation of a policy framework that is conducive to growth and job creation
If the Mangaung congress sets a policy framework that deviates from the path of fiscal consolidation
Factors that could lead to a downgrade of more than one notch include:
If the government’s fiscal flexibility decreases potentially due to public sector wages or debt service costs increasing more than currently expected.
In order for the rating to be affirmed at current levels, and a revision of the outlook to stable, S&P require that:
The expected increase in public sector debt must be offset by an improvement in investment and economic growth prospects, and
Fiscal consolidation must continue
Ordinarily, it is counter-productive for the downgraded entity to respond to a ratings agency. It is far more telling to react to the reasons that have been cited for the rating action. However, National Treasury’s response to S&P is measured and it emphasizes the positive long term consequences of the infrastructure spending programme. The financial markets certainly took the ratings actions in their stride – bond yields sold off around 15 bp and have since recovered. The Rand had weakened significantly around the strike actions which happened the week or two before, so is broadly stronger than it was at the time of S&P’s announcement.
These ratings downgrades were not a fait accompli. They represent the consequences of allowing an inefficient labour market to impact on the productive capacity of the South African economy over a long period of time. It is no surprise that South Africa features so poorly in the labour categories of the Global Competitiveness Report of the World Economic Forum. As an increasingly emboldened and more powerful member of the tripartite alliance, labour has been flexing its muscles – the annual strike season refers. When strikers are so emboldened that the rule of labour law is no longer respected, the consequences can be disastrous. Labour would be well advised to take note that much of the gain, in terms of being able to increase social spending and develop the country’s infrastructure has depended on positive foreign investor perceptions about South Africa.
Fitch has given the Finance Minister the benefit of the doubt, and has indicated that a pronouncement on the South African sovereign rating will occur early in 2013. However, the manner in which the wildcat strikes expanded, as well as the lost output in various mines and support industries suggests that there could be a reduction in the country’s Q3 / Q4 growth rate, and this has implications for the fiscus. We thus continue with the Sword of Damocles hanging over the bond market.
In the current global environment, there is such a heightened focus on government deficits, austerity and fiscal consolidation. It is important that governments keep their house in order, and fly below the radar. While South Africa initially did so well at the start of the financial crisis, primarily through the sound policies of the South African Reserve Bank and the rigorous regulation of our banks, we have lost the advantage we once had. South Africa has also benefitted from the dual windfalls of global quantitative easing, which has sent large amounts of cheap foreign capital out hunting for yield in the well run, investment grade bond markets, and our inclusion in the Citi World Global Bond Index (the WGBI) on the 1st October 2012. We should be doing our utmost to show the world that South Africa is a capital friendly investment destination, and in the context of the global financial crisis, we should be putting our best face forward. We should be marketing our country as the ideal destination for capital that can be deployed towards the economic development of the African Continent. We need to now convert the hot-money of global bond inflows into long term Foreign Direct Investment (FDI) otherwise we will pay the price if that capital leaves at the speed with which it arrived.
Ratings agencies and the bond markets play an important role in regulating the behaviour of governments. If governments play by the rules and adopt sensible, responsible policies, they will be rewarded by good credit ratings and access to foreign capital. If not, it is the duty of the ratings agencies to point this out to bond investors. In turn, it is the obligation of bond investors to price adequately for the investment risk they are taking. Now that foreign investors hold close to 40% of our nominal local government debt, we are even more vulnerable to the marginal ratings change by ratings agencies.
There is no doubt that the required risk premium for investing in South African government bonds has risen, even though our bond yields have fallen. The question is: will the government be able to deliver on the required improvement in investment, economic growth and social prospects that are now demanded of this country?"
"The PSG Angle is an electronic newsletter of PSG Asset Management"
Kind Regards
Steven
Steven Morris Chartered Accountant (SA)
Mobile :+27 83 943 1858
Facsimile : 0866 712 498
E-mail : steven@global.co.za
Website : www.stevenmorris.co.za
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