Brian Kantor for Nexia; Cape Town May 28 th The SA economy and its financial markets Making sense of a complicated environment

Donald Rumsfeld’s inimitable observations (about Iraq not the global credit and banking crisis) “There are known knowns. These are things we know that we know” (What have been driving markets) “There are known unknowns That is to say, there are things that we know we don’t know” (For example how banks will look in a year’s time and how this will influence opportunities in credit markets. Or where Emerging Markets will be in 12 months- or what will happen top SA tax rates) But there are also unknown unknowns. There are things we don’t know we don’t know. (The truly scary stuff) Was the credit crisis a unknown-unknown 24 months ago?

Key issues The SA economy - will government spending, interest rates and the rand do enough for the economy? The rand – does it make sense? US interest rates and credit spreads- the banking crisis identified – and overcome. Relief in sight for credit markets and the US economy?? The equity markets – risk and returns. Will risks retreat and equity valuations improve?

The vehicle cycle and short term interest rates – interest rates kept going up regardless of economic weakness

The state of the SA economy

The second derivative- turning down rather than up

The real money base cycle- quantitative easing needed

Consumer and Producer Prices- in different directions

CPI and PPI Inflation

Net government loan to GDP ratio a great strength – we did squirrel away in the good years

The SA yield curve – portending gradual recovery

RSA expected short rates as per FRA curve- big move in response to GDP numbers

SA Banks still paying up for 12 month money – but paying less

The US Yield Curve- dramatic recent moves – the slope has never been steeper

The Forward Rate Agreements (FRA’s)

The SA risk premium = expected rand depreciation

The SA sovereign risk premium declining rapidly

The trade weighted rand- more than holding its own

The rand cost of an AUD

The rand close to predicted value. Predicted value R8.29

All that glisters is gold – though signs of a recovery in the metal and mineral markets- Oil also up on recovery prospects

Behind the crisis. US interest rates- increases after 2005 did very little to mortgage rates – and so to the housing market

The credit crisis identified; US Corporate bond spreads

Libor spreads USD – have come in sharply

3 month sterling LIBOR and LIBOR spread

US corporate cost of borrowing – approaching normality

No longer a bear market rally- a rally period – but still well off the highs of a year ago

A long run view of the VIX

Uncertainty in the stock markets The Vix and the SAVI – telling us about the unknowns

Daily moves in the Vix and the S&P Correlation (-0.86) Risks lead prices follow

Daily moves the JSE and the MSCI EM the umbilical chord Correlation of daily moves (0.74)

Volatility on the JSE- financials became as risky as resources

Volatility on the JSE – resources and financials

Model of monthly moves in JSE USD value- drivers – earnings, EM and SA risk

12 MONTH CUMULATIVE RETURNS R100 invested May 1 st 2008

The Findi earnings cycle

The dividend gap - value screams out