GENUITY August market view
Captains of Industry and Fellow South Africans
“Some people see the glass as half empty, some see it as half full but very few of us see it as refillable.”
My Wife and I recently had the privilege of going to the US to visit family and to be inspired. Why is it that a relatively “young nation” such as the US has dominated world markets and politics (for that matter) the past century, punching three times above its weight (+-5% of population contributing +-15% of GDP globally)? The answer we found was patriotism (picture American flags prolific in the burbs and nearly everybody believing in the American story), confidence (bred from a young age and inculcated into their culture) and a huge middle-class that both contributes (enterprise, employment, rates & taxes) and holds the organs of state and business accountable (vibrant democracy).
My question to you on the eve of our local elections is why can’t we as South Africans learn from this “best practice” and do the same? Personally I think back to when SA hosted the world cup in 2010 and what I saw were streets that were clean and cared for, security forces that were present making you feel safe and most of all people that were confident and committed to build this beloved nation of ours.
It is my privilege to present to you our August market view…
The Rand gained 4.1% in August against a trade-weighted basket of currencies. The local unit closed July at R13.86 to the US dollar, R15.50 to the euro and R18.41 to the pound respectively, its strongest level against the majors in nine months. Who would have predicted recent global affairs (BREXIT etc.) would boost our currency thus and one wonders how many of our financial executives called that forward position correctly. The Rand has arguably been the comeback kid of 2016 (up 8.9%) with yield-seeking investors returning on mass to its high beta emerging market and liquidity. Estimates of purchasing power parity suggest the Rand is still undervalued and with our trade deficit stabilising whilst US interest rates remain on hold, it will be interesting to see the levels it tests. Having painfully sampled retail prices for myself in the Big Apple, I can attest first hand to how much further our Rand goes at home
Consumer inflation (CPI) notched up to 6.3% in June despite the rallying Rand as food inflation persisted in double-digit territory. Producer inflation (PPI) likewise accelerated to 6.8% in June led by higher food and equipment costs. Inflation is now expected to peak around 6.8% this year before coming back within SARB’s 6% band next year. No doubt, the Rand’s performance remains a crucial caveat to analysts’ forecasts.
As was expected in a lack-lustre domestic market-place, SARB’s MPC left interest rates unchanged in their July meeting (REPO 7% & PRIME 10.5%) by unanimous decision. Their caution was the risk to inflation remains to the upside and the current global appetite for risk is both fragile and fickle. Global monetary policy by and large remains accommodative with major central banks such as the FED (0.25%), BOE (0.5%), ECB (0.25%) and BOJ’s (-0.1%) positions unchanged.
Equity & Bonds
A delay in the normalising of US rates and political turmoil in other emerging markets led foreigners to a net buy position of R6bn in SA government paper in July. SA Bond yields were lower in line with the firmer Rand with the benchmark R207 2020 and R186 2025 tapering to 7.95% and 8.74% respectively. The JSE all-share index closed trading for July at 52,798. The Top 40 “SA” corporations now have more than half of their revenue coming from off-shore and yet the JSE Top40 index has still outperformed in hard currency terms (up 11%) while being largely flat in local currency (up 1%). The money market was up slightly in July with the 3,6,9 & 12 month JIBAR rates closing at 7.35%, 7.94%, 8.21% & 8.57% respectively. Capital inflows to SA are expected to remain volatile and sensitive to global risk appetite, domestic politics and a potential sovereign risk downgrade.
Credit, Money Supply & Governance
A trade surplus of R12.5bn was recorded in June with the current account expected to narrow this year to around 3.6% of GDP. Annual growth in money supply eased further to 5.9%. Growth in private sector Credit extension by contrast accelerated to 7.3% y-on-y driven largely by extensions to companies. The consumer market remains under pressure with households and companies for that matter, reluctant to borrow as job security and earnings come under pressure. Financial institutions are tipped to tighten lending criteria as rates trend higher and the risk of impairments increases.
After the local economy retreated in Q1, recent Q2 data suggests we may avert a recession by the skin of our teeth as mining, manufacturing and electricity all made significant gains in April and May which could result in a rebound of GDP around 2% for the quarter. The IMF and SARB both expect SA’s overall growth for the year to be a scintillating 0% what with our hangover from the drought, domestic constraints, anaemic commodity prices and global uncertainty applying the brakes.
Employment & Education
Our spluttering local economic engine is struggling to create jobs particularly for our youth, with the unemployment rate virtually unchanged at 26.6% in Q2 (from 26.7%). A total of 129,000 jobs were shed over the quarter, with both the formal and informal sectors as well as the agricultural sector shedding jobs. The only category to record an increase was private households. The number of “discouraged job seekers” increased by 379,000 which had nothing to do with unemployment stats being published a week before elections. For 2016 to date, the bottom line is 473,000 jobs were lost compared with 337,000 added in the same period last year and I can’t help thinking of a song by Rodriguez waxing about “it being an angry young tune” (fees must fall, jobs must find).
Something that bereaves me with politics (whether it be in the US or here) is that so much time and energy is spent criticising the opposition. One can’t help wondering what the fruit of that energy could be if it was invested in strategic planning, innovation and change management. Well here goes, my humble handful of suggestions for the current administration would be to reintroduce the military service (making it part civil service) to absorb matriculants which should help with employment, border control, customs collections and public works not to mention discipline and inadvertently crime. Mentorship programs (farmers, engineers, artisans, entrepreneurs and executives) should be crafted in such a way that the economic output of the mentoree determines the incentive or tax rebate for the mentor thus driving downstream output. The billions spent on social grants should perhaps be incentivised when circulated in local community projects (co-ops etc.) and enterprise boosting the economic multiplication thereof and encouraging economic independence and dignity. The public sector should be run like the private sector with a culture of performance and best practice with the lowest ranked municipalities and provinces having to learn from highest ranked by way of exchange programs.
The only thing that appears certain at the moment is change. What with the UK exiting the European Union since WW2, Europe tragically on heightened terror alert, the US consumed by presidential jockeying and several Emerging countries in the grips of extreme weather conditions and mounting social consciousness. Ironically SA’s currency and capital gains in this environment is in all likelihood not about our strength (given no structural changes) but about being the recipient of growing impatience with the normalisation in US rates blended with the irresistible allure of our risk adjusted return. In closing, as our nation heads to the polls on Wednesday … we can only trust that hope will prove stronger than fear and more of us will all see the glass as refillable.
Wildly South African
The Team at GENUITY