Money

Issue No. 35 - June/July 2007

On the Money

by Mr Marcus Campbell

There has been a notable improvement in the overall tone of the macro data flow over the past two to three weeks.

In particular, we have been focusing on the Goldman Sachs Global Leading Indicator (GLI, see image below) which appears to be at a “turning point” with the unsmoothed monthly rise during April the largest since 1996 - almost all components were uniformly positive.

This turning point theme was reinforced by last week's ISM factory readings in the US which came in ahead of market expectations, suggesting we are close to a positive turnaround in the US inventory cycle.

This improving global outlook theme is reinforced by the impressive performance of global equity markets since the mini-correction in early March and the continued strength of commodity prices since January.

Commodity-based currencies - historically a good leading indicator for global momentum - have also rallied strongly against the US dollar since March.

It is worth highlighting which asset classes have historically outperformed when the GLI is increasing. The Goldman Sachs Global Macro team made the following observations:

•Global bond yields typically increase

•Global equity markets tend to perform well (outperforming bonds)

•Cyclical equities tend to outperform

•Commodities generally produce higher returns

•Cyclical currencies (AUD, NZD, JPY) have traditionally outperformed

In the Australian Equity market, resources have outperformed Industrials while banks and listed property trusts have lagged during periods of increasing GLI. As a result, for client's portfolios we would look to increase resources and offshore industrials positions leveraged to Europe and reduce bank positions to neutral.

SA Stock summary from the recent reporting season

Santos (ST...