Global outlook - Improving but with tail risks
Deutsche Bank's global macro outlook continued to evolve positively over the latter part of 2009, with global growth now expected to be 3.9% in 2010. Considerable thought has been given to the implications of the manner in which we exit the ultra-accommodative backdrop. The release of 2011 forecasts, which suggest only a modest slowdown as stimuli are withdrawn, implies that DB expects a self-sustaining rebound in all private demand components globally. The power of the credit impulse turning positive from extremely depressed levels continues to feature prominently in our thinking. Possibly the biggest risk seen right now, in our view, would be a material back-up in bond yields as quantitative easing is withdrawn while government issuance remains high.

South Africa - Gradual healing but no fireworks
Our macro backdrop for South Africa suggests an environment during which the healing continues, but with Eskom signalling a ceiling on growth at c.3.8% (rather anaemic in the context of EM) and the South African consumer proving slow to get up off the floor, we are becoming concerned that after the steady rise since March in sympathy with global markets, selectively, some primarily domestically focused shares are starting to discount too much. That consensus forecasts for 2010 earnings are still edging lower for South African, while virtually all other markets have been in net upgrade territory for some time is a nagging worry.

17% return from equities as the earnings recovery gets under way
Trading on a trailing and 12-month forward PEs of c.15x and 14x respectively, ratings remain lofty by historical standards. We do, however, see ourselves at the beginning of a multi-year earnings recovery, most strongly in 2011. With the help of a big upgrade to our Resources forecasts in the latest round of revisions, our expected rebound is even stronger than before. This does highlight the disconnect between GDP growth and the composition of the listed equity market. Our top down model suggests a total return of c.17% over the next 12 months.

Resources and Industrials preferred over Financials
Our current sector preference is for Resources and Industrials over Financials. Although Resources ratings appear to be particularly stretched right now, they unwind rapidly over the next 24 months. Financials are fully discounting the earnings recovery, while possible regulatory and accounting changes pose disappointment risk this year. We remain overweight Industrials, focusing on stocks that offer a superior dividend yield, are geared to the offshore recovery or where we see an earnings recovery that is not fully appreciated.

Eoin Treacy's view The South African All Share Index bottomed in October 2008 just below 18,000, retested the low in March 2009 and broke upwards from its base in May. It consolidated the breakout until July, reasserting the medium-term uptrend with an emphatic upward dynamic. The Index then trended consistently to its recent high near 28,500, where it had become somewhat overextended relative to the 200-day moving average. If has now pulled back to the mean in what has been the largest reaction in the medium-term uptrend to date and needs to find support in the region of 25,000 to remain relatively consistent. A sustained move below that level would likely signal a more prolonged consolidation of last year's advance.

The FTSE/JSE Africa Banks Index bottomed relative to the wider market in July 2008 and retraced half of the relative decline by December 2008. It continues to perform in line with the wider market and a sustained move below 1.2 would be required to question scope for this situation to continue.

The FTSE/JSE Africa Gold Mining Index broke its progression of rising reaction lows in January and is currently testing the May and July lows near 2175. While somewhat oversold in the short-term an upward dynamic is required to indicate anything other than temporary steadying in the current area.

The South African Rand has been among the better performing currencies over the last year and despite losing momentum against the US Dollar from October, it has held the majority of its gain. The US Dollar's rally is now testing the 200-day moving average but a sustained move above R8 would be required to question potential for continued lower to lateral ranging.

The synchronicity of the bottoms in the stock market and the Rand is also noteworthy because it perhaps indicates the extent to which foreign currency inflows, seeking a higher yield or stronger performance have influenced the Index's return. The recent strength of the Dollar relative to the Rand has also coincided with the stock market pullback which bolsters the view that South Africa is a carry trade destination market. Certainly, with interest rates at 7% the Rand is an expensive currency to be short of if the trend goes against you.

South African bond yields rallied impressively from their late 2008 low and have been ranging, with an upward bias, below 9.5% since October. A sustained move below 9% would be required to question scope for some further higher to lateral ranging.