Daily Equity Report

Correlations and bond yields

Anglo American released its annual results to December. Revenue declined 25% with operating profit down 50% to $4,9 billion. Basic EPS fell 53% from $4,34 to $2,02 a share. The dividend was not resumed, but the indication is that this should commence again next year.

Anglo has a market cap of just on R400 billion and is 12,1% of the Top 40 index.

It is also one of the top 20 companies by market capitalisation on the UK’s FTSE100 index.

The SA and UK indices have other common listings included in their respective indices, including BHP Billiton, SAB Miller, Liberty International, and Old Mutual.

It is also very evident that over periods of time, the local JSE equity market has a high correlation with a developed market such as the UK’s FTSE100 index.

The graph below reflects a common starting point for the JSE All Share index in green and the FTSE10 index in red in February 2008. It is evident how closely these 2 indices have tracked one another over this time period.

Source : Sharenet, Market Tracker

The Budget and Local Bonds

The budgeted deficit for the 2009/10 year was set last year at R93,9 billion. The release of the numbers yesterday is estimating this at R177,8 billion – i.e. almost double the originally envisaged deficit.

The outlook for the 2010/11, which starts on 1 April 2010 and the years following has deteriorated significantly from the previous year. The effect is sizable budget deficits compared to the numbers set a year back.

For the current budget to 2010/11 a deficit of R168,6 billion is on the cards – some 6,2% of GDP.

These are large numbers that the government must finance – they do this by issuing bonds in their weekly auctions. This large pickup in issuance has been widely anticipated by bond investors.

It is therefore interesting to note that the expected increase in government debt has not put any real pressure on yields – in fact the exact opposite.

The yield on the long term R186 reached its lowest level for the year on the day of the budget at 8,955%.

The chart below reflects the 6 month yields of the R186 (long term) and the R157 (medium term)

It is evident that yields have declined from mid January – i.e. prices are up.