17 December - Markets Review - Drikus Combrinck - PSG
CNBC Africa
Transcript
because some have been surprised by the little impetus that's been provided by uh Abid Abu Dhabi stepping in to grant that 10 billion US dollar loan to neighboring Dubai. I mean it really hasn't been to the extent that maybe some people were thinking have you been surprised by market reaction to that? I've I've been surprised that they've helped at all. Um uh I think most of the market was surprised. Um, if you just look at what what the credit ratings and what the credit default swaps did, you know, credit defaults that what you when you buy insurance for uh the the bonds defaulting at the end of the day and the credit default swaps were pricing in that they would get no help at all and it strengthened by about 35% overnight when Abu Dhabi announced the $10 billion uh bailout. Yep. Yet market reaction has been pretty muted to that. So, let's bring you into this discussion. I mean, what does this say about the mind of the investor? Because when that Dubai debt crisis came to the four, we saw markets pretty much tanking and now little recovery. It's been pretty muted trade as we've seen it play out. My view was when it hit the news um wires um at that point in time, I certainly had the view that it would have been priced in a default was expected at some point in time. And the reason why is that a couple of months ago or a year or so ago or probably for the last two years uh some of the Dubai companies, government owned companies have been significantly overpaying for assets. So it wasn't too surprising from my personal perspective. Um uh I I'm a bit surprised that the market didn't expect that uh that to happen. Uh but the one thing that you've got to remember that the default in in the in Dubai is small relative to if you look at what happened in the United States in terms of the license the losses and the in the you know on mortgages in the US um and and and and loans to consumers in the US that's been massive and very big and there's been big um bailout money to support that. So I am certainly of the view that the Dubai crisis was small relative to to other the the big financial crisis that we've had over the last 18 months or so. Um so the market reaction as expected would be muted um because a lot of the bad news or the market wasn't pricing in in in bad news. Well, given the fact that it has been a small situation compared to the US, we've also had the fact that US economic data has largely been overshadowing. I mean, since we left on Tuesday, we've seen the Fed come out as expected, leaving rates near zero, reaffirming that rates will be left low for some time and remaining pretty optimistic about the US economy as a whole moving forward. So, that largely overshadowing anything else. So let's get your view on the US economy and where you expect it to go as we head into 2010. Well, if you listen to what the Fed had to say yesterday, everybody expected no change in interest rates and that's what we got. But what was interested was the view on the economy going forward in the US and which was actually very positive um from from the committee and um that is actually what led to the strengthening in the dollar. The dollar sitting at 144 this morning. I think it's a it's a three month it's close to a three-month high now. And um you've got the fundamentals for the dollar strengthening at to one side and you've got sovereign debt raging in Europe at this stage. You're looking at Spain, Ireland, Greece um has already been downgraded and if one or other two of the European economies sovereign debt gets downgraded downgraded then you would see the dollar much much stronger than it is now. Um what's interesting is um is that the market hasn't really sold off with the stronger dollar. I would have expected um well a lot of commentators talking about a carry trade reversal. We haven't seen that. The market's not really coming back that strongly and only thing is the dollar is holding back the market now. The market wants to go higher. Let's take a look at that dollar strength though as with you because certainly the rhetoric out of the Fed has been supportive together with data showing slowing US job losses improving consumer confidence as well. But we've heard before that dollar strength at this stage of the game is unlikely to be sustainable. your view on the dollar position moving forward? Yeah, my view is it's I think it's more of a technical um strengthening of the dollar index at this point in time. Um what has been happening in the United States has the economic data that's been coming out has generally been surprising on the upside. Um the other is the the markets interestingly um the futures markets on on on on the fra the in this United States they in fact starting to price in a a rate hike sometime next year although the Fed has come out to say that they'll keep um rates on hold um I am the view that the Fed has really um done a lot they've uh to try and stabilize the economy uh the fact that they're keeping interest rates close to zero or 0.25% 25% um more and more pushes will push investors to move out of um risk-free assets uh into more risky assets because the yield on risk-free assets is just so low. It's in fact costing you to stay in in in the risk-free assets. Um I'm not too certain whether the dollar strength will will will will stay there, but technically in the short term it looks like it could go a bit stronger. Um longer term I would probably expect it to stabilize at at at current levels. Well, for now it's certainly helping Japan's exporters as I was saying earlier. It's what lifted the Nikai into positive territory today. But most banking shares seem to have taken a breather after yesterday's performance. I mean this on a reportif that global banking regulators are eyeing an effective delay uh in the implementation of new capital rules. What are you making of that news that's hit the markets this morning? Generally, I uh the the the scenario for banks generally, whether it's locally or or globally or US banks, is that it's going to be a bit more difficult for them to earn excess profits over the next few years. Um we've gone through a terrible crisis uh largely caused by overleveraging um and this is by the banks more than anything else. Um significant over leverage. we've got 40 times capital. Uh the US government and the ECB and other central banks and uh or or governments um are have been very concerned about this and what they are doing currently with legislation is trying to rein that in. Um they've also trying to limit um leverage to not more than 10 times banks capital and I think that's good for the long term. It's good for for for for economies. So to to to try and prevent the excessive risk that has been taken. Um they've also clamped down on bonuses. Uh that's partly been uh the encouragement for the excessive risk takingaking. Um I think it's good for the economy, global economy and for markets in general. Um possibly that's part of the reason why uh bank shares have have have taken a bit of a knock. um uh but I don't think it it's going to persist in the longer term. Well, let's uh bring it to you, Dus. I mean, we've seen the UK propose tax bonuses t be taxed and uh while South African banks have certainly not been as reckless. There is this fear that we may well see that starting to filter through to home ground as well. Do you see that coming to the four at all? Uh not really. Um our banks have have played it safe. A lot of commentators have reiterated that a lot of times. Um when you talk about tax that's a different issue. Um tax in the western world is going to be a huge problem for the next decade. Um they've got huge especially in the UK economy and other European economies and um that's especially a place to start is in the banking sector. Um luckily we still got banks with good capitalization rates and uh they've written off a lot of uh they've made a lot of provision for bad debt last 3 years and um I'm actually very optimistic about the banks. I think they they've hit a throw um and um I think um over the next three years if you just look at Standard Bank for instance um you see a a 5 to 550 earnings per share recovery only in the reversal of provisions for bad debt and um at 11.5p you you're adding 60 65 rand um to the share price. Well you're certainly optimistic about the banks moving forward. What about resources? I mean given the fact that we have this optimism about the global economy. We've got a dollar strength coming to the for maybe not sustainable but certainly positive news for now for our resources sector. Well it's it's it's largely a dollar story at this stage. It depends on where you see the dollar going. Further weing dollar again if you see the dollar at above 150 um then I would expect a much stronger resources market price-wise. Um but just looking at demand forget about the price just looking at demand. Um China has restocked tremendously. You've got the PMI figures in the US above 50. Now, it's not going to go much higher than this. We're not seeing a huge Vshaped recovery. Where's the marginal demand going to come from? Where's that extra buy going to come from to push copper 10 15% higher over the next 6 months? Where's the marginal buyer going to come from to push platinum to $2,000 again? Um, I'm not seeing that happening anytime soon. Your view.