Captains of Industry and Friends
“Wherever I have travelled, it has always been the commitment of young people to peace, equality and justice that has given me hope for the future. I have heard time and again the fresh thinking and enterprising solutions you bring to difficult problems. The more I see of the values, solidarity and responsibility shown by the younger generation the happier I am that the world will be in your hands.” – UN General Kofi Annan.
I bid you a warm and inspired East coast greeting. It is my privilege to serve you our October market view and may it find you and your families healthy and filled with promise for the future.
The rand continued to lose momentum in September to close at R10.08, R13.65 and R16.25 to the dollar, euro and pound respectively. The local currency remains vulnerable to global investor sentiment which has been preoccupied of late with the fiasco in the US as the Fed threatens to stop buying bonds and Congress to break the impasse on the debt ceiling negotiations. Year to date, the embattled rand has shed 15.1% to the dollar. Ironically, the growing whispers of uncertainty in uncle Sam’s economic calling, may well see the tables turn on the once mighty greenback in time to come.
An ailing currency exacerbated by transport, housing and food pricing has weighed in on inflation. Consumer inflation (CPI) continued its trend upwards recording 6.4% in August (from 6.3% in July) whilst producer inflation (PPI) likewise gained 10 pips to 6.7%. The inflation trajectory is forecast to sneak back into the band by year-end, coming in perilously close to the upper band at 5.9% for 2013.
Notwithstanding a hawkish view on inflation, the MPC in cognisance of our spluttering economic engine held rates firm (REPO 5.0% & PRIME 8.5%) last month, making it official that we’re into forty year low territory. The MPC is likely to maintain this “wait and see” posture in an effort to keep its monetary gunpowder dry whilst at the same time watching Anglo-Saxon developments with bated breath.
Equity & Bonds
The local equity market was buoyed last month by strong gains in non-commodity rand hedge stocks with the JSE all-share index closing September up at 44,359 points. The local bond market in Q3 has taken its cue from a volatile rand and jittery global prices with the benchmark R157 and R186 closing September at 6.01% and 7.91% respectively. In the short term bond yields are likely to be aided by stable money market rates with the 3,6,9 & 12 month JIBAR coming in at 5.13%, 5.54%, 5.72% and 5.96% respectively. A controversial article in Money News alleged that a handful of billionaires (Warren Buffet, John Paulson, George Soros) are quietly offloading millions of shares in US companies such as Johnson & Johnson, Proctor & Gamble, Kraft Foods, Intel, JP Morgan, Citi Group & Goldman Sachs. Economists such as David Wiedemer in his NY times best-selling entitled “aftershock” purport that the money printed as the cure will soon become the poison as it triggers inflation and interest rates culminating in another real estate and equity crash. One can only wonder what ramifications this would have for countries rich in precious (safe) metals, should their predictions be right.
Credit, Money Supply & Governance
Credit demand ticked up 8.2% y-on-y in August fuelled primarily by corporate appetite for loans which recorded 10.1% up. Household demand was consistent at 8.2% despite private balance sheets still in desperate need of repair, as illustrated by the Q2 debt-to-income ratio of 75.8%. Credit markets will in all likelihood remain hamstrung by high unemployment, encumbered households and a cautionary lending environment. A last minute deal struck in the US congress to the tune of $16.7Trill answered the unthinkable question of a US sovereign default, at least for now. Exactly how this US debt bubble can be deflated without bursting or printing more money remains unanswered.
Retail surprised the market with a 3% annual growth in August. Mining production recovered 2.1% y-on-y in August (1.2 % in July). Manufacturing, plagued by industrial action and waning investor confidence, came out weaker than expected in August at 0.2% (5.5% in July). Growth in capital expenditure by the private sector which makes up two-thirds of total capex, increased by 4.4% in Q2 from 2.8% in Q1. All three strategic sectors and key employers Agriculture, Mining and Manufacturing re-engaged which was nothing short of courageous and inspirational. Moving forward, Growth can stem from government’s infrastructure programme which amounts to an ambitious R827Bill over the medium-term. The caveat in a public sector notorious for chronic under-spending is of course that its actually spent. The IMF moderated its global growth forecast recently characterising the global market as being “in low gear”. The forecast for global GDP was revised to 2.9% in 2013, 3.6% in 2014, 4.0% in 2015 and 4.1% in 2016. The spread appears uninspired, forecasting gains of 1.6% in the US, -0.4% in the EU, 0.5% in Germany, 2% in Japan, 7.6% in China, 3.8% in India and 2.5% in Brazil. SA is projected to grow by 2% in 2013, 2.9% in 2014, 3.3% in 2015 and 3.4% in 2016.
Employment & Education
It is young people who have been hardest hit by the impact of the current economic crises. 1 in 2 of the planets young people are neither working nor studying and 250Million children are out of school. Disheartening recent findings at home reflect that 95.4% of 74 523 job losses in September were permanent. Sharp job losses were observed in mining, manufacturing and financial services sectors. Since January 2013, the formal sector has shed 260 826 jobs whereas the informal sector has created only 48 828 jobs. Efforts to accelerate enterprise and entreprenurship development need to be elevated and multiplied.
According to the UN, a billion people worldwide lack food to eat, thousands will die from diseases we know how to treat and treat cheaply. It is always the youngest that suffer the most from disease, lack of food or conflict. With the average age in Africa being 19, it’s no wonder Africa is the worst hit with 1 in 4 people suffering from chronic undernourishment, and climbing in stark contrast to Asia and Latin America who have decreased their prevalence to 13.9% and 8.3% respectively through socio-economic progress.
According to the African Development Bank, African countries could finance most of their development needs through their own resources without depending on external debt if they properly stewarded their wealth. ‘The irony of Africa being richly endowed with natural resources but continuing to depend on external support for the provision of basic services is beginning to dawn on many African countries.
We have the knowledge, resources and capabilities to overcome these challenges. What is needed is mature leadership and effective democratic institutions to make it happen. What is need is a global vision with a local heart…We need to break the cycle.
Wildly South African
Bruce & the Team at GENUITY