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Investment Research

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General Market Conditions

The World Cup should give us something to cheer about

In a period where investor sentiment is almost as negative as in the days and weeks after the collapse of Lehmann Brothers and the news flow is dominated by stories of Europeansovereign default risk, we are all looking for a much-needed uplift. We therefore hopethat the upcoming football World Cup finals in South Africa will give us something tocheer about – not only on the football field, but also in the financial markets.In this note we take a closer look at the economic and financial outlook for the WorldCup host nation South Africa and we also provide an overview of the economies of other participating nations. Finally – and perhaps most importantly – we forecast the likelywinner of World Cup 2010.Why do we, as economists, care about World Cup 2010? To be frank, because we lovefootball and obviously because the World Cup is a major media, cultural and economicevent. Spicing up our research with some football stats makes it easier for us to attract theattention of our readers. In this note you will also find macroeconomic and FX forecastsfor the 32 nations participating in the World Cup finals.

Our conclusions:

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Even though we expect the World Cup to have a relatively small impact on the SouthAfrican economy in the near term, we are optimistic that the current recovery in theSouth African economy will continue. We expect South African GDP to grow by2½% in 2010 and 3½% in 2011.

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The outlook for the South African rand is less bullish than the outlook for the SouthAfrican economy and while we could see some “World Cup rand buying” this effectis likely to be rather short-lived, as the rand is somewhat overvalued and most short-term indicators point toward a weaker rand.

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We have estimated an OLS regression model for the World Cup performance of indi-vidual participants and used the model’s results to simulate the outcome of the WorldCup games.

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The model simulations indicate that the economically and financially ailing PIIGScountries will not find much to cheer about on the football field either. In fact thePIIGS – or rather Portugal, Spain and Italy – will probably beat each other and finallyGermany will knock out Italy – a prophecy that some might find symbolic. Greecewill not fare any better and is set to go before the knockout stage.

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The final will be played on 11 July in Johannesburg between Germany and Brazil – if our model is correct. And as in “real life” the Emerging Market nation will beat thedeveloped nation. Said another way, we expect Brazil to once again become WorldChampions. So, we are happy to be long Brazil as we head into the World Cup.Enjoy reading and please cheer up a bit.

28 May 2010

Assistant Analyst

Jens Nærvig Pedersen+45 45 12 85 48 jenpe@danskebank.dk

Analyst

Stanislava Pravdova+45 45 12 80 71spra@danskebank.dk

Chief Analyst

Lars Christensen+45 45 12 85 30 larch@danskebank.dk

Macro forecast

Source: Reuters Ecowin and Danske Markets

FX forecast

Source: Reuters Ecowin and Danske Markets

World Cup 2010 forecast

Source: Danske Markets, IMF, FIFA

South AfricaMacro Monitor

World Cup 2010 special

1) Average % y/y

YearGdp

2012 3.62011 3.52009 -1.82010 2.5 4.94.7

Inflation

7.34.9

Danske Forward25-May 9.66+3M 9.84 9.79+6M 9.55 9.95+12M 10.86 10.24Danske Forward25-May 7.82+3M 8.20 7.91+6M 8.30 8.03+12M 8.55 8.24

EUR/ZARUSD/ZAR

1Brazil2Germany3Italy4England

2 | 28 May 2010

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South Africa Macro Monitor

Recovery under way, but no strong boost from World Cup

The recovery of the South African economy is well under way and continued in Q1 10,when GDP growth moved back into positive territory. Data showed that the economygrew 1.6% y/y in the first quarter of 2010. Looking ahead we expect the South Africaneconomy to grow at an average rate of 2.5% y/y in 2010E and 3.5% y/y in 2011E.The recovery is partly driven by rising private consumption. Although we expect privateconsumption to continue to grow, the effect on consumption of South Africa hosting theWorld Cup is expected to be limited. At the last World Cup finals in Germany, we sawonly a marginal effect on German retail sales and we expect to see more or less the sameeffect on South African retail sales in June and July. We therefore forecast private con-sumption to expand by 2.5% y/y this year and 3.5% y/y next year.Investment is bottoming out and we expect it to start growing in the coming quarters. AnyWorld Cup effect on investment should have shown up in data already, as work on WorldCup venues and infrastructure projects have been completed. Looking ahead we expectinvestment to decline by 1.7% y/y in 2010E and grow by 3.5% y/y in 2011E.Exports are recovering as the economic outlook for South Africa’s trade partners im- proves. The growth outlook is particularly robust for China, one of South Africa’s mainexport markets. We expect the World Cup finals to have a temporary effect on exports, astourism should pick up sharply in June and July. The World Cup could also have alonger-term positive impact on South African exports, as people discover the beauty of the country, but it is not possible to predict the magnitude of this effect. Nonetheless,exports are set to decline by 1.0% y/y in 2010 and another 0.4% y/y in 2011. Importshave also recovered recently as domestic demand has picked up. Given the positive out-look for domestic demand, we expect South African imports to continue to improve, with projected import growth of 0.4% y/y in 2010E and 1.0% y/y in 2011E.The table below shows our updated macro forecast for the South African economy, takinginto account the latest data releases, including Q1 GDP growth.

Source: Reuters Ecowin and Danske Markets

SARB to stay on hold

In line with expectations, the South African Reserve Bank (SARB), left interest rates onhold at its policy meeting in mid-May. One of the main reasons for leaving rates un-changed was the uncertainty related to Europe. The outlook for South African inflationlooks rather neutral. Inflation has declined significantly since it peaked at double-digitlevels in 2008. Going forward we expect inflation to remain around the current level andwe therefore forecast South African inflation at 4.9% y/y in both 2010E and 2011E.Hence, we currently see no room for further monetary easing and we expect South Afri-can policy rates to remain unchanged for a prolonged period of time.

YearGdp

Private.cons

Fixed Inv

Export

1) Average % y/y

-1.7

Import

2012 3.6 3.6 4.2 2.0 2.5-0.4 1.02011 3.5 3.5 3.52009 -1.8 -3.1 2.4 -19.4 -17.2-1.0 0.42010 2.5 2.5 4.94.7

Inflation

7.34.9

Economic growth is recovering

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03040506070809101112-3-11357-3-11357

% y/y% y/yGDP

Source: Reuters Ecowin and Danske Markets

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led by private consumption

03040506070809101112-5.0-2.50.02.55.07.510.0-5.0-2.50.02.55.07.510.0

% y/y% y/yPrivate consumption

Source: Reuters Ecowin and Danske Markets

Investment is bottoming out

03040506070809101112-5.0-2.50.02.55.07.510.012.515.017.5-5.0-2.50.02.55.07.510.012.515.017.5

% y/y% y/yInvestments

Source: Reuters Ecowin and Danske Markets

Exports and imports are recovering

03040506070809101112-30-20-100102030-30-20-100102030

% y/y% y/yExportsImports

Source: Reuters Ecowin and Danske Markets

3 | 28 May 2010

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South Africa Macro Monitor

World Cup unlikely to help the rand

We have updated our forecast on the South African rand. The rand is currently trading atlevels that we consider somewhat overvalued relative to our ‘fair value’ assessment, sothe short- and long-term outlook for the rand is bearish. We now forecast USD/ZAR at8.20, 8.30 and 8.55 in three-, six- and 12-months, respectively. We do not expect theWorld Cup to have any long-lasting positive impact on the rand, although we could seesome short-term World Cup rand buying.

Inflation should remain stable USD/ZAR looks set to weaken