Global Markets - 1st quarter 2002
Is all that glitters, gold?

There have been two interesting developments since our last report (as at 31 December 2001). The first has been the partial strengthening of the Rand, the second being the steady rise in the gold price over the past two months.

The enquiry ordered in January 2002 by President Mbeki into the rapid decline of the Rand at the end of last year has resulted in traders not wanting to be seen as speculating heavily against the Rand, while at the same time, they are not willing to be aggressively long on the currency either (particularly with the Zimbabwe elections looming in the background). Accordingly, this has kept turnover in the Rand over the past two months to a minimum. Advocate John Myburgh, who is heading up the inquiry, is due to deliver his first report to President Mbeki at the end of April. Secondly, the recent Rand strength can partly be attributed to exporters "covering" the Rand forward at current rates, which has in turn resulted in an increased demand for Rands.



The gold price ended last year at $279 per ounce, while the metal averaged a price of $271.05 per ounce for 2001. Investor demand, most notably by the Japanese, resulted in a movement in the price to just above $305 per ounce earlier this year. Some of the reasons cited for the increased demand by the Japanese are: their falling confidence in the Yen, their domestic stock markets reaching new lows and, from March 31st, the reduced Government protection over bank deposits. There are conflicting views on whether or not we will see a rally in the gold price - there are those who are of the opinion that a price of $300/oz is the best we can expect in the short to medium term, while the other school of thought does not believe that the recent strength in the gold price is anything like the seven brief rallies that we have experienced since 1996. They believe that there are many sustainable positives that will auger well for a stronger gold price in the months to come. The gold price closed at $296.75 on 28 February 2002.

We now take a look at some of the economic regions around the world.

UNITED STATES OF AMERICA

The Federal Reserve decided to leave short term interest rates unchanged (1.75%) at their meeting on 30th January 2002 - this after one of the most aggressive cutting campaigns in history (interest rates were cut 11 times during 2001). When stating reasons for not cutting interest rates at their meeting, the Fed indicated "With the forces restraining the economy starting to diminish, and with the long-term prospects for productivity growth remaining favourable and monetary policy accommodative, the outlook for economic recovery has become more promising."

Some analysts believe that growth is likely to remain relatively flat during the first two quarters of 2002, while they are optimistic that growth should pick up from the third and fourth quarters. Other views are that, while there are signs that the economy is beginning to react favourably to the monetary and fiscal stimulus, evidence of a true recovery is still sparse. Events like the collapse of Enron have not helped matters and have resulted in markets concentrating on accounting anomalies rather than on corporate profitability. We are convinced that the key to sustainable returns for the year ahead, is good corporate profits.


EUROPE

On 1st January 2002, the successful launch of Euro notes and coins took place - prompting a brief rally by the Euro against the US Dollar and Sterling. Following this however, the Euro has been somewhat flat against these currencies. This may be due to the fact that a currency is often judged by the behaviour of its Central Bank. The ECB is known for having been reactive rather than proactive in recent months - this has, perhaps unfairly so, not done anything to enhance confidence in the Euro. Many fund managers are beginning to show a strong interest in the Euro as an alternative to the US Dollar, stating that the downside risk on the Euro appears to be lower than that on the US Dollar - this continues to be an interesting debate.

The ECB kept interest rates at 3.25% during the quarter (rates were cut 4 times during 2001) and have indicated that rates are likely to stay at these levels for the next few months, unless inflation or growth provide some surprises.

JAPAN

Japan, as in 2001, continued to disappoint investors during the first two months of 2002. Prime Minister Koizumi's popularity suffered a blow following the dismissal of Foreign Minister Makiko Tanaka, after an argument between the Foreign Ministry and herself. The detrimental effect this has had on the Prime Minister's approval rating will undoubtedly impact negatively on structural reform in Japan.

While Prime Minister Koizuimi stated on 4 January 2002 that the Government would do everything in its power to prevent a collapse in the banking system, this industry still remains fragile. It is extremely difficult for the Government to encourage domestic economic growth, with interest rates being close to zero.

The Yen has continued to weaken and there has been speculation that Japanese officials will continue to support currency weakness in the hope that this could lead the economy out of the recession.

UNITED KINGDOM

In a recent forecast by the International Monetary Fund, it was estimated that the economy in the United Kingdom is likely to grow by 1.8% in 2002. Overall economic activity in the United Kingdom has been sustained mainly by the consumer sector (by way of consumer spending and borrowing), which constitutes approximately 60% of GDP.

Currently interest rates are low (the Bank of England cut rates 7 times during 2001), inflation is benign and it is expected that Government spending is likely to escalate. While all these factors are positive for economic growth, there is still the view that, as with the USA, a sustainable recovery is more likely to occur in the second half of 2002.

SOUTH AFRICA

In a surprise move on 15th January 2002 the Monetary Policy Committee raised interest rates by 1%. The view in the market, at present, is that we may see another 100 to 150 basis points rise in domestic interest rates this year, followed by a decline in interest rates in 2003. Pursuant to the inflation numbers released on 28th February 2002, the Monetary Policy Committee is expected to increase interest rates by between 50 and 100 basis points at their meeting on 13th and 14th March 2002.

The sharp decline in the Rand at the end of last year is likely to have a negative impact on domestic inflation over the short term. Statistics SA estimate that, based on past history, it could take up to six months for the impact of the Rand's slide to filter through the CPI and PPI. While it is now unlikely that the 2002 inflation target will be met, it is anticipated that this is temporary and that by 2003 the inflation targets should be achieved. In figures released on 28th February 2002, year on year inflation increased from 6,5% in December 2001 to 7,1% in January 2002 - substantially higher than the expected 6,9%.

All in all the Budget Speech, delivered on 20th February 2002, was well received. A number of encouraging relief measures were announced:

• The maximum marginal tax rate for individuals has been reduced to 40% (previously 42% in the 2002 tax year)
  
• Tax exempt donations have been increased to R 30 000 (from R 25 000 in 2002)
  
• The estate duty exemption has increased from the first R 1 000 000 to the first R 1 500 000.
  
• Transfer duty on the purchase of immovable property by natural persons has been amended as follows 0% on the first R 100 000, 5% on R 100 001 to R 300 000 and R 10 000 + 8% on the value above R 300 000.
  
• The interest exemption for individuals over 65 has been increased to R 10 000 (from R 5 000 in the 2002 tax year). For individuals under 65, the interest exemption has been increased to R 6 000 (from R 4 000 in the 2002 tax year).

One nasty little surprise was the proposal that Trusts be taxed at a fixed rate of 40% with effect from the 2003 tax year. In 2002 the first R 100 000 taxable income received by a Trust was taxed at 32% and all taxable income above R 100 001 was taxed at 42%. It was interesting to note that exchange controls, retirement funds and privatisation were not addressed at all in the Budget Speech

Conclusion

While markets have rallied since the events on 11th September 2001, corporate profits and economic numbers have been disappointing. This may be an indication that investors are looking through the "noise" and are anticipating that the aggressive interest rate cuts over the last 12 months will be sufficient to underpin an economic recovery in 2002. We expect market volatility to continue in the short term, however, we continue to believe that investors who have weathered the storm are likely to be well rewarded for their patience over the long term.

Last quarter we hinted that the first signs of the "winds of change" were becoming evident - it is encouraging to note that perhaps, a discerning breeze may have begun to blow.

This report is based on information sourced from various institutions, both local and international. The report reflects a variety of views and is not intended to convey investment advice. Please consult us to obtain specific advice relevant to your investment portfolio.