Prowess Investment Managers

gathering clouds: South Africa's economic situation and how it affects you Kelebogile Moloko Prowess Investment Managers

what to expect ~ how to identify a recession ~ what are the implications for South Africa... and us ~ global overview: what caused it ~ domestic economy: what it means ~ conclusions

recession? a significant decline in economic activity spread across the economy, lasting more than a few months/two or more quarters source: NBER

how to spot a recession? a recession is normally visible in: ~ real Gross Domestic Product (GDP) ~ real income ~ employment ~ industrial production; and ~ wholesale & retail sales

the butterfly that flapped its wings! how did it all start? t? 25 20 15 10 5 - -5-10 -15-20 -25 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08 10 8 6 4 2 0-2 -4-6 -8-10 US House Prices US Fed Funds Rate source: Economic research Federal Reserve of St Louis, Standard& Poors

housing deflation a global phenomenon Changes in Real House Prices Korea Switzerland Netherlands Italy Ireland Japan Finland France Australia United States Norway Canada Sweden Spain United Kingdom New Zealand Denmark -5.33-4.76-6.04-13 -8-3 2 7 12 Change during 2007 Change in 2008:H1 source: IMF

spending power diminishes

consumption o falls

10 8 6 4 2 0-2 -4-6 -8 real GDP and industrial production Jan-5 0 Jan-53 Jan-56 Jan-59 Jan-6 2 Jan-6 5 Jan-68 Jan-71 Jan-7 4 Jan-77 Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-9 5 Jan-98 Jan-01 Jan-04 Jan-0 7 Jan-47 US GDP YOY % Change US Industrial Production Index % Change source: IMF, Economic research Federal Reserve of St Louis

unemployment e rises

how bad could it be? 45 43 40 35 history & lengths of US recessions 30 25 20 15 10 5 8 6 0 1904 1980 1912 1914 1919 1921 1924 1927 1933 1938 1945 1949 1954 1958 1961 1970 1975 1980 1982 1991 2001 2009 source: www.recessions.org Months

how far have we come? Global GDP: 2008Q4 1.0% 2008 3.4%, 2007 5.2% G-20 Nations in Technical or Severe Recession: 2009Q1 2008Q4 2008Q3 2008Q2 2008Q1 2007Q4 USA Japan Germany USA Japan Germany USA Japan Germany USA Japan USA Japan UK France Italy UK France France Italy Italy Canada 43% of Global GDP 41% of Global GDP 38% of Global GDP 28% of Global GDP 28% of Global GDP And Not in Recession in Q4: China, India, Russia, Brazil, Mexico, South Korea, Turkey, Indonesia, Australia, Saudi Arabia & South Africa (in order of GDP & comprising 34% of worldwide GDP; excludes 20th membership, courtesy to EU) Remaining 160 nations comprise only 23% of worldwide GDP.

what to do? monetary ypolicy response Interest Rates 6.00 5.00 Dec-02 UK Euro USA Japan Dec-05 Dec-08 4.00 3.00 2.00 1.00 - source: Bloomberg, BJM Research, INET

cumulative monetary policy response since August 2008 Iceland Russia Hungury Brazil Japan Indonesia Mexico South Africa Malaysia US Thailand Canada China Euro area Swtzerland Chile South Korea Norway India Australia UK New Zealand -500-300 -100 100 300 source: Bloomberg, BJM Research, INET

and fiscal stimulus (government spending) Stimulus GDP package % of Infrastructure % of Country (2007 USDm) (USD bn) GDP (USD bn) GDP China 3280224 586 17.80 97.9 9 2.98 US 138705550 825 6.00 77 0.56 SA 283071 69 24.30 69 24.38 Brazil 1313590 42.2 2 3.20 42.2 2 3.21 Germany 3320913 65 2.00 23.4 0.7 Mexico 1022816 22.8 2.20 22.7 2.22 Saudi Arabia 381938 126.7 33.10 18.1 1 475 4.75 Taiwan 383347 25.7 6.70 16.6 4.33 Spain 1439983 14.3 0.90 12 0.83 France 2593779 33 1.30 5 0.19 Source: Empowerdex Economic Research

where eeis sthe money eygoing? g Global Stimulus Packages R&D, 3% Education, 5% Healthcare, 3% Workforce, 3% Automotive, 5% Energy/Green Tech, 9% Tax breaks, 36% Public Sector Jobs, 9% Infrastructure, 16% Financial, 13% Source: Empowerdex Economic Research

but it means big budget deficits! General Government Fiscal Balances Emerging and developing economies World 1 0-1 -2 Advanced economies -3.206-5.225-6.935-3 -4-5 -6-7 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-8 source: IMF

inflation declines but the focus might shift to deflation? CPI Inflation Emerging and developing economies World Advanced economies 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0.3 5.8 2.8 10.00 9.0 8.0 7.0 6.0 5.0 4.0 3.0 20 2.0 1.0 0.0 source: IMF

the usual global inflation clouds evaporate... for now Real Commodity Prices 450 Oil 400 350 300 250 Metals 200 150 Food 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 100 50 0 source: IMF

implications for emerging markets

emerging e g markets not immune 280 MSCI World Index MSCI emerging market Index 220 160 100 40 97/ 7/01/12 00/ 0/01/12 03/ 3/01/12 06/ 6/01/12 09/ 9/01/12 Index 100 (1997) source: INET, acsis, 27Four Investment Managers

liquidity drying up as a result of risk aversion Current account balance as a % of GDP 15 10 5 0-5 -10-15 Malay aysia China Venezu zuela Rus ussia Nige geria Thaila iland Philippi pines Argent ntina Chile Mex exico Brazil Czech Repub ublic India Pola oland Hung gary Kenya Tur urkey Sri Lanka South Africa Roma mania source: INET, Futuregrowth, IMF investmentt risk

foreign trade the biggest risk to economic growth Baltic Dry Index 12000 10000 8000 6000 4000 2000 0 Mar-97 Sep-97 Mar-98 Sep-98 Mar-99 Sep-99 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 source: INET, IMF, Bloomberg, RMB FICC foreign tra de risk

foreign trade the biggest risk to economic growth Growth in Global Industrial Production & Merchandise Trade de risk 15 10 5 Industrial production LHS Merchandise export value RHS 50 40 30 20 10 fore eign tra 0-5 -10-15 0-10 -20-30 -40-50 1997M1 1998M4 1999M7 2000M10 2002M1 2003M4 2004M7 2005M10 2007M1 2008M4 world trade volumes expected to fall by 2.8% in 2009 from 4.4% source: INET, IMF, Bloomberg, RMB FICC

is there a silver lining?

is the US consumer the saviour again? Household Debt-Income Ratios Italy South Africa France Germany Japan Canada US UK 0 50 100 150 200 Source: OECD US consumer accounts for +/-70% of US GDP and +/- 25% of world GDP

is the US consumer the saviour again? US Household Net Worth & Indebtedness % 1.35 1.3 1.25 1.2 1.15 11 1.1 1.05 1 2002 2002 Household indebtedness 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 Household net worth 5.9 5.7 5.5 5.3 5.1 4.9 4.7 45 4.5 source: IMF

is the US consumer the saviour again? US Credit to Households USbn 1400 1200 1000 800 600 400 200 0 2002 2003 2004 2005 2006 2007 2008 Residential mortgages Other credit to households source: IMF

is the US consumer the saviour again? US Real Personal Consumption & Saving Rate 7 6 5 4 3 2 1 0-1 -2-3 -4 2002Q1 2003Q2 2004Q3 2005Q4 2007Q1 2008Q2 2009Q3 7 6 5 4 3 2 1 0-1 -2-3 -4 Savings Rate Real Personal Consumption source: IMF

signs of bottoming in the housing market US housing starts at record lows

stabilisation sat in labour markets 8.5 8 7.5 7 6.5 6 5.5 5 4.5 4 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Unemployment USA Unemployment UK Unemployment Canada rising unemployment will continue to undermines income and spending source: INET, 27Four Investment Managers

return of confidence in the banking system 380 Dow DAX S&P Nikkei 310 240 170 100 30 01/01/96 30/11/97 31/10/99 30/09/01 31/08/03 31/07/05 24/06/07 world equity markets still searching for the bottom! source: INET, acsis, 27Four

synchronised sed downturn in play 9 7 5 GDP Growth & Forecasts Emerging and developing economies 3.3 World 0.5 3 1-1 -3 Advanced economies -2.0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 source: IMF

gathering clouds: South Africa

is SA on the brink of a recession? SA GDP q-q q saar% 10.00 800 8.00 6.00 4.00 2.00 0.00-2.00 200-4.00-1.84-6.00 Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08 the manufacturing sector posts the largest decline in history! source: INET, Vector Securities

recession signs continue to mount!

recession signs continue to mount!

the verdict is out as manufacturing plummets!

It looks like we are heading for a recession SA real GDP 7.0 5.0 3.0 3.1 1.0 10 1.0-1.0-3.0 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 source: INET, Vector Securities

SA government growth projections 4 3 SA Goverment Growth Projections % 3.1 3 4 2 1 1.2 0 2008 2009 2010 2011 GDP

what can South Africa do to combat the effects of the global recession??

SA government e joins the party Budget deficit ratio (% of GDP) 3 2 1 0-1 -2-3 -4-5 -1-1.9-3.2-3.8-6 -7-8 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 source: National Treasury, Vunani Securities, INET

is the SARB lagging g behind? 15 12 9 Repo Rate 6 3 CPIX\New headline CPI 0 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Inflation (LHS) Repo Rate (RHS) source:inet, Reuters

commodity currencies to track global l cycle USDZAR Dow 15,000 6 14,000 7 13,000 12,000 8 11,000 10,000 9 9,000 10 8,000 7,000 11 6,000 5,000 12 07/02/04 07/03/04 07/04/04 07/05/04 07/06/04 07/07/04 07/08/04 07/09/04 07/10/04 07/11/04 07/12/04 08/01/04 08/02/04 08/03/04 08/04/04 08/05/04 08/06/04 08/07/04 08/08/04 08/09/04 08/10/04 08/11/04 08/12/04 09/01/04 09/02/04 source:inet

recession and the consumer

the pain continues

access to consumer credit tightens 40% 35% 30% 25% 20% 15% 10% 5% 0% 31/10/1980 30/04/1983 31/10/1985 30/04/1988 31/10/1990 30/04/1993 31/10/1995 30/04/1998 31/10/2000 30/04/2003 31/10/2005 30/04/2008 Money supply Private Sector Credit Extension source: Reuters 3

750 650 550 450 350 250 150 50 debt servicing costs still high but Insolvencies & Liquidations 500 450 400 350 300 250 200 150 100 Jan-84 Jan-85 Jan-86 Jan-8 87 Jan-88 Jan-89 Jan-90 Jan-9 91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-9 97 Jan-98 Jan-99 Jan-00 Jan-0 01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-0 07 Jan-08 Jan-09 6 per. Mov. Avg. (Liquidations) 6 per. Mov. Avg. (Insolvencies) source: Stats SA, Vector Securities, INET Jan-83

tax relief e an added benefit e Personal Income Tax Relief, Rm 16,000 14,000 12,000 10,000000 8,000 6,000 4,000 2,000 0 1998 2000 2002 2004 2006 2008 13,600 source: National Treasury

employment and income growth at risk

wealth implications

property.have p we seen the worst? ABSA House price index 45% 35% 25% 15% 5% -5% -15% Nov- 76 Nov- 79 Nov- 82 Nov- 85 Nov- 88 Nov- 91 Nov- 94 Nov- 97 Nov- 00 Nov- 03 Nov- 06 ABSA House price index source: INET, Vunani Securities

can you go wrong holding cash & bonds? 12 month rolling returns 65% 55% 45% 35% 25% 15% 12.73% 5% 11.51% Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08-5% -15% -25% -35% -32.40% Bonds Equities Cash source: INET, 27Four Investment Managers

investment e t implications ~ cash offers a safe haven but offers no upside in a recovery scenario ~ bonds are attractive provided we have seen the worst ito global risk aversion ~ property likely to recover in late 2009 ~ equities recovery uncertain!

conclusion c o ~ global l recession the end is not in sight ~ trade and investment effects pose further downside risk to emerging markets including SA economy not to be underestimated! ~ consumer recovery will take some time ~ hard work and patience imperative virtues!

thank you Kelebogile Moloko Prowess Investment Managers kmoloko@mweb.co.za