Captains of Industry and Fellow South Africans
“We don’t see things as they are we see things as we are” … Anaïs Nin.
On that deep thoughtful note as Winter breathes her last gasp across the escarpment before Spring breaks, I bid you a hearty greeting. It is my privilege to serve you our August market view and may it find you and your families in good health and inspired for the road ahead.
The rand has been relatively range bound the past couple months closing July at R10.65, R14.30 and R17.93 to the dollar, euro and pound respectively. Emerging market currencies such as ours are expected to remain susceptible to hot (“speculative”) capital flows in the short-term. Our Rand faces added headwinds from its twin fiscal and current account deficits.
Consumer inflation (CPI) cooled to 6.3% in July from 6.6% in June, with fuel and utilities the main factors contributing to increased cost of living last month. Producer inflation (PPI) likewise moderated to 8% in July from 8.1% in June. Inflation is expected to be stubborn above SARB’s 6% upper band for the rest of 2014 before being reined in by monetary policy and declining global oil & food prices. The Rand of course remains the wild card in the inflation equation.
In a less contested (6 to 1) decision on the 17th July that took some by surprise, SARB’s MPC decided to notch the REPO rate up to 5.75% (PRIME 9.25%) off the back of a deteriorating inflation outlook. The Central Bank continues to straddle inflation and an anaemic domestic economy (widening output gap between actual & potential growth). The MPC reiterated that we have come off a 40year rate low into a tightening cycle and that real rates will need to be normalised. There appears to be consensus for another 25pips in November and a further 1% hike next year. Globally, rates in western markets remain at rock bottom (below 0.5% in US, EU & UK) whilst our BRICS peers have likewise begun tightening their monetary belt (between 6 and 11%).
Equity & Bonds
The JSE continued its benevolent trajectory with the ALSI closing July at 50,917 points. Bond yields last month were higher in line with the marginally weaker currency, with the yields on the benchmark R157 2015 and R186 2025 rising to 6.70% and 8.30% respectively. The money market buoyed in step with interest rates with the 3,6,9 & 12 month JIBAR rates closing July at 5.96%, 6.52%, 6.85% & 7.10% respectively.
Credit, Money Supply & Governance
Annual growth in private sector credit extension rose to 8.8% last month, so despite Moodys’ downgrading our banking sector, their cheque books remain open for business. The scintillating pace off the mark shown by SARB in coming to ABIL’s rescue was alas not enough to change their mood. Gross reserves increased by 2.6% in July to $49.9Bill, mainly as a result of proceeds received from a $1.7Bill bond issue by National Treasury. The cumulative trade deficit for the first half of 2014 amounted to R48.3Bill (R35.6Bill H1 in 2013) with exports recovering 4.2% from a year ago to R80.27Bill in June and imports rising by 3.1% for the month to R80.46Bill.
South Africa narrowly sidestepped a recession in Q2 (technically defined as two back to back quarters of negative economic growth), registering a modest 0.6% expansion in GDP. A special mention needs to go to transport, communication and general government services whose relative contributions pulled the economy back into the black for the quarter. Of concern is that output in both strategic sectors mining (-9.4%) and manufacturing (-2.1%) continued to decline in Q2 as the hangover of industrial action lingered. Growth in household consumption declined to 1.8% in Q2 from 2.6% in 2013 with consumers beleaguered as a result of rising inflation, weak employment, easing social grants & unsecured lending and government’s gun powder running dry.
Employment & Education
The unemployment rate rose to 25.5% in the second quarter from 25.2% in the first, due to a large increase in the size of the labour force (+126 000) relative to a modest increase in the number of employed people (+39 000). The detailed Labour Force Survey shows that most of the subcategories (seven out of the ten) recorded job losses in the second quarter, with the manufacturing sector shedding the most number of jobs (-60 000). Noticeable losses were also recorded in the finance, construction and utilities industries. Government led employment creation over the quarter, with 103 000 jobs added in the ‘community & social services’ category, while the transport industry also held up well, employing 52 000 people.
“We are underperforming like a developed country, for developed country reasons: government regulatory burdens, labour relations rigidities, severe infrastructure shortcomings, extreme redistributive preoccupations, morbid lack of business confidence, absence of private commitment to expansion and public-sector inability to accelerate fixed investment” recently wrote FNB chief economist Cees Bridgeman’s. “But we are not a developed country. We have a large body of labour unproductively deployed. We have crying urban and infrastructure needs that could be major sources of economic stimulus. Like other emerging markets we should be running.” he writes. “Instead we are mired in argument, endless argument, … as the economy is on the ropes”.
Many of you who may be sporting enthusiasts like me may have immersed yourself in action from the recent football in Rio or commonwealth games in Glasgow as a way of selective hearing when it comes to the run of news of elections, strikes, Nkandla and even earthquakes. What we perhaps should be asking is…
Do we see things as they are or as we are?
Do we see things as they are or as they could be?
How do you see the future of our beloved land and nation?
Wildly South African
The Team at GENUITY