Words from the (Investment) Wise for the Week That Was (June 16 - 22, 2008): Part II

By: Prieur du Plessis | Sun, Jun 22, 2008
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Bloomberg: China raises fuel, electricity prices
"China, the world's second-biggest oil consumer, will raise the prices of gasoline and diesel by 1,000 yuan ($145.50) a metric ton, starting tomorrow, the National Development and Reform Commission said on its website. The nation will also raise jet fuel prices by 1,500 yuan a ton tomorrow, the top policy planner said. On July 1, China will increase electricity prices by an average 0.025 yuan a kilowatt-hour, the NDRC said. China will impose temporary caps on thermo-coal prices until the end of this year, it said. The country must cut energy use by at least 5% for every unit of gross domestic product annually for the next three years to meet its 2010 objective ..."

Source: Wang Ying and Theresa Tang, Bloomberg, June 19, 2008.

Financial Times: Fed holds clue to gold's next move
"Gold bugs are becalmed. After breaching $1,000 an ounce in March, the metal has spent the past two months at $850 to $950. Such a range, in which the price is close to the 200-day moving average, has chartists salivating. A break-out either way may signal a lurch to new highs or a sharp fall - but which?

"With supply issues taking a back seat, the answer depends on which of gold's demand drivers - let's call them physical, funk, funds, fuel and forex - commands the tiller.

"The impact of physical demand is weak. World Gold Council figures show jewellery demand, for instance, fell 21% between the first quarter of 2007 and the same period in 2008, but gold prices still rose.

"Financial market and geopolitical-induced funk is most potent when it comes out of the blue, so there is no knowing what could soon trigger a flight to gold. But it seems to have lost some of its safe-haven status in this regard of late.

"A flow of money into products such as exchange-traded funds has been a powerful force for pushing gold higher. Demand for gold ETFs doubled to 73 tonnes, or $2.2 billion, over the year to the end of March. Retail investors like gold.

"A more powerful, long-dormant force may be back. Gold bulls can again promote the metal as a hedge against inflation. And at the vanguard of inflation is the soaring price of fuel. Oil and gold have enjoyed a tight correlation since mid-2007, but it has been somewhat estranged during crude's recent leap towards $140.

"But the best guide to trends in gold has long been found in the forex markets. The correlation between the dollar and gold price is long and tight. The greenback's pull-back from record lows over recent months triggered gold's 12% fall from its peak to today's $886.

"With the dollar so sensitive to interest rate policy, the US Federal Reserve holds the clue to gold's next move."

Source: Jamie Chisholm, Financial Times, June 18, 2008.

Telegraph: Things will get worse, warns Bank of England governor Mervyn King
"Families will see their standard of living stagnate this year while the value of their homes will fall further, the Bank of England Governor has warned.

"The coming months represent the biggest challenge for the economy for two decades, Mervyn King said, adding that some households will find them 'particularly difficult'.

"In his most sombre message yet, Mr King said families were being squeezed hard by higher electricity and food prices on the one hand and slowly-increasing wages on the other.

"He told Alistair Darling and leading City dignitaries in London that the experience would be even tougher than the credit crunch, and warned that the 'era of cheap mortgage finance ... is over'.

"Mr King said: "This year our real take-home pay will rise at a slower pace than national productivity. Rising fuel, gas, electricity and food prices, mean that average real take-home pay will stagnate this year.

"'It will not be an easy time, and I know that some families will find it particularly difficult.'"

Source: Edmund Conway and Robert Winnett, Telegraph, June 19, 2008.

Financial Times: UK house price declines intensifying
"House prices fell by 0.6% in May in England and Wales according to the latest FT House Price Survey published on Friday, the third monthly drop in a row and the sharpest one month fall since February 1995. Norma Cohen, FT's economics correspondent, talks to Daniel Garrahan of FT.com about the data."

Source: Daniel Garrahan, Financial Times, June 13, 2008.

BCA Research: Euro area price pressures persist
"Elevated CPI inflation continues to provide fuel for ECB hawks.

"Yesterday's CPI report showed that euro area headline inflation rose in May to 3.7% YoY (from 3.3%). While the jump was largely driven by surging energy and food prices, the core measure also edged higher on the month.

"The release will only help reinforce the ECB's recent hawkish rhetoric. The central bank has become increasingly determined to reign in price pressures and inflation expectations, due to growing concerns of pass-through. Indeed, ECB President Jean-Claude Trichet warned earlier this month that the central bank may lift the policy rate by 25 basis points. While a one-off rate hike is a possibility, it will be difficult to attain the consensus needed from the PIGS (Portugal, Italy, Greece and Spain), given that their economies are on track for a period of below-trend growth.

"Still, the ECB will continue to talk aggressively and try and jawbone inflation expectations lower, at least until there is clear evidence that price pressures are starting to ease. Bottom line: Although the backup in euro area bond yields look stretched (and we have switched to a benchmark duration allocation), we remain underweight euro area bonds within a global hedged fixed income portfolio."

Source: BCA Research, June 17, 2008.

Financial Times: German investor confidence plunges
"German investor confidence has plunged to its lowest for almost 16 years, according to a survey, highlighting nervousness about the outlook for Europe's largest economy.

"The ZEW index, which is intended to give a guide to future economic developments, dropped by 11 points to minus 52.4 points this month, its lowest since December 1992. That suggested fears are mounting of a significant economic slowdown.

"But analysts pointed out that the survey was not necessarily a good guide to the scale of the expected deceleration. Recently it has tended to exaggerate trends in activity. By contrast, the Ifo German business confidence survey has remained relatively strong, reflecting the confidence of business leaders.

"'While industry captains see business evolving in line with the long-run trend in the next six months, investors seem to see Germany heading for a recession,' said Elga Bartsch at Morgan Stanley. 'Eventually one of them will be proven wrong. We believe that it is likely to be the investor community.'"

Source: Ralph Atkins, Financial Times, June 17, 2008.

Bloomberg: EU seeks to rescue new treaty

Source: Bloomberg, June 19, 2008.

Ambrose Evans-Pritchard (Telegraph): Emerging markets face inflation meltdown
"Central banks across much of Asia, Latin America, and Eastern Europe will soon have to jam on the brakes or risk a serious crisis as inflation spirals into the danger zone.

"As the stark reality becomes ever clearer, this year's correction in emerging market bourses and bond markets has now accelerated into a full-fledged rout.

"Shanghai's composite index touched a fourteen-month low of 2,900 yesterday. It follows moves this week by the central bank raised reserve requirement yet again, draining a further $60 billion from the banking system. Chinese stocks have now slumped by almost 50% since peaking in October.

"In India, Mumbai's BSE index has lost 27% of its value as the exodus of foreign funds accelerates. The central bank has raised rates to 8% to curb inflation and halt a run on the rupee, but critics still say the country waited too long to tackle overheating. The current account deficit has shot up to near 3.5% of GDP. A plethora of subsidies has pushed the budget deficit to 9% of GDP.

"Russia, Brazil, India, Vietnam, South Africa, Indonesia, Nigeria, and Chile - among others - have all had to raise interest rates or tighten monetary policy in recent days. Most are still behind the curve.

"'The inflation genie is out of the bottle: easy money is the culprit,' said Joachim Fels, chief economist at Morgan Stanley.

"'Weighted global interest rates are 4.3%, while global inflation is above 5%. The real policy rate in the world is negative,' he said

"The currencies of Korea, Thailand, the Phillippines, and Malaysia have come under pressure this week as investors scramble for dollars in moves that echo the East Asia crisis in 1997-1998. Several countries have had to intervene to slow the currency slide.

"The sudden shift in sentiment appears to follow comments by Ben Bernanke and Tim Geithner, the heads of the US Federal Reserve and the New York Fed, leaving no doubt that Washington has lost patience with the crumbling dollar.

"It is almost unprecedented for Fed officials to take a public stand on the Greenback. The orchestrated move is clearly aimed at halting the vicious circle in the oil markets, where crude prices are feeding off dollar weakness - with multiples of leverage."

Source: Ambrose Evans-Pritchard, Telegraph, June 17, 2008.

Financial Times: Brazil's central bank warns on inflation
"Inflation is the biggest threat facing Brazil and the rest of the world, Henrique Meirelles, president of Brazil's central bank, has told the Financial Times, making an appeal to other central bankers to join the task of keeping international price rises under control.

"'The biggest concern over the next 12 months for Brazil and the rest of the world is inflation,' he said in an interview in São Paulo. 'The risk is that prices for food and raw materials will continue to rise. If every central banker decides that this is a problem for other countries, nobody will do anything and there will be [faster] worldwide inflation.'

"The US Federal Reserve and other central banks have cut interest rates over the past nine months to ward off the threat of recession. But Mr Meirelles said he was confident that central bankers would now turn their attention to the greater threat of inflation.

"'It is important that now we are seeing authorities in general taking a different attitude, which is welcome,' he said. 'Inflation is really the most important challenge now.'

"Brazil's central bank began raising its target overnight interest rate in April after two years of monetary loosening. The rate, known as the Selic, fell from 19.75% in September 2005 to 11.25% in September 2007. The bank has since raised it twice by half a percentage point each time in April and May, to 12.25%.

"Most economists expect the rate to reach 14.25% by the year end."

Source: Jonathan Wheatley, Financial Times, June 18, 2008.

Financial Times: New Zealand poised to fall into recession
"... New Zealand is on the cusp of a downturn and risks seizing the dubious honour from the US of becoming the world's first developed nation to sink into recession, as measured by two consecutive quarters of negative gross domestic product growth.

"GDP numbers for the January-March quarter due this month are forecast to show a contraction of at least 0.3%. TD Securities and other economic forecasters are predicting a 0.2% decline for the April-June quarter.

"With a GDP of NZ$155 billion ($116 billion), New Zealand's economy is small by world standards but is watched with interest by the US, UK and Australia, which are also grappling with the ill-effects of rising household debt, large current account deficits and a correction in the housing market.

"Strong indications from the Reserve Bank of New Zealand that interest rates - at 8.25 per cent second only to Iceland in the developed world - will be heading down in the coming months have taken the heat out of the yen carry trade, through which Japanese professional and retail investors hunted high-yielding currencies such as the Kiwi, the New Zealand dollar."

Source: Peter Smith, Financial Times, June 15, 2008.

Financial Times: Hendrik du Toit on Africa and commodities
"The chief executive of Investec Asset Management talks to FT's Pauline Skypala about the African investment story, structural change on that continent and commodity-driven fads."

Source: Pauline Skypala, Financial Times, June 13, 2008.

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Prieur du Plessis

Author: Prieur du Plessis

Dr Prieur du Plessis
investmentpostcards.com

Dr Prieur du Plessis

With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.

He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).

Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.

Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.

Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.

In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).

Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.

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