State of the Nation - Global markets are caught

The JSE All Share Index traded near its record highs of 2008 this week with the weekly chart showing that although the trend remains bullish, it is overbought. We can expect some profit taking. We have also seen a flow of funds out of emerging markets, such as South Africa, back into developed markets. Consequently, the Rand did weaken slightly, thanks to a bit of market intervention by the Reserve Bank. At the same time, the petrol price has increased with implications for higher transport costs and ultimately higher inflation. Global markets are caught between quantitative easing on the one hand and rising interest rates on the other. China, for example, raised its interest rates for the second time in a little over six weeks. Eskom is also increasing the price of electricity soon by another 25% and this will also have a further impact on inflation. We are at the end of the interest rate cycle and the trend can only be upwards from here. The poor consumer will be squeezed once more with regards their disposable incomes.

The South African Road Agency Limited (SANRAL) announced this week its much awaited toll fees for Gauteng motorists using the freeway around Johannesburg. Because of limited public transport, Gauteng commuters have little choice but to use their own transport to reach their places of work. The obvious effect of the toll fees would be to raise the direct cost of getting to work for many people. Granted, our roads are among the worst congested roads in the world and something had to be done. About 80% of all freight arrives in Gauteng. Business owners and logistics operators will just have to take the consequences of the proposed toll system on the chin, but the general consensus is that it will have a significant effect on how businesses operate. With the increased costs, it is only a matter of time before it filters back to the consumer via the prices of products and services. The big question now is whether all of this bad consumer news is being reflected in the share prices of retailers or can we expect further increases? The JSE General Retailers Index has fallen about 12% from its recent highs amid profit-taking after increasing more than 70% since the lows of December 2009. Unfortunately, from a value point of view, most of these retailers, including food retailers, are still not cheap, despite the recent pullback.

Being contrarian by nature, we are inherently drawn to companies that are currently not flavour of the month, as history has shown that laggards, where expectations have been crushed, tend to offer the best opportunities for returns going forward. One such company is Value Group Limited. Value and its subsidiaries provide a comprehensive range of tailored logistical solutions throughout Southern Africa. The major operating divisions provide distribution services, warehouse and fleet management and forklift and commercial vehicle rental and leasing. The group reported a satisfactory set of results for the six months ended August 2010, in a period influenced by the Soccer World Cup and the protracted Transnet strike. Value has reasonable operating margins, traditionally good cash generation and a high ROE. Trading on a rolling P/E ratio of 6.7 times, the share does seem to offer value. However, the group's performance is likely to be under pressure in the medium term should difficult economic condition persist. Accordingly we would only recommend the share to longer term investors. The share price is trading just below its short-term moving averages but still trading above its long-term 200-day moving average. Although the short-term trend is down, the long term remains bullish, having traded near a record high of 395c recently. Technical oscillators like the Stochastic and MACD show that the share price has pulled back into oversold territory to present a buying opportunity.

Small businesses will strive to ward off margin erosion and a potential decrease in service levels by either eliminating free delivery or implementing longer delivery lead times. Businesses will be taking a closer look at shared transport and shipping, as well as outsourcing of the services. In short, businesses will need to consider how to do their transportation smartly and economically.

For further information visit http://www.psgonline.co.za