Captains of Industry and Fellow South Africans
“The average tenure of a fortune 500 chief executive is currently 4.5years” … Bill Hybels. “A dream you dream alone is only a dream, a dream you dream together can become reality” …John Lennon.
On that challenging note as the East coast drinks deeply of the first Summer rains, I bid you a hearty greeting. It is my privilege to serve you our October market view and may it find you and your families thriving and expectant for what the future holds.
Our rand was haircut 3.4% on a trade-weighted basis, and by 5.9% against the US dollar in September. On a purchasing power parity basis, the rand is about 12.5% undervalued at September closings of R11.10, R14.02 and R17.79 to the dollar, euro and pound respectively. Emerging market currencies such as ours remain susceptible to the ebb and flow of international capital as well as local fiscal and trade deficits.
Annual consumer inflation (CPI) surprised to the downside in September, slowing to 5.9% from 6.4% in August on the back of cooling food prices. Ironically a recent food price barometer report released in PMB, purported that “if wages do not increase and the price of food, electricity, transport and household debt remain high, the poor working class in SA will fast approach its tipping point. This could lead to an era of hunger riots and food protests”. The study looked at a basket of 32 basic food items that serve the low-income market which have increased by 8.6% year-on-year. Exactly what the real inflation rate facing broad-based SA society has since come under the spotlight.
As was expected, the MPC left interest rates unchanged (REPO 5.75% & PRIME 9.25%) in September. The Committee was swayed by better-than-expected inflation outcomes in recent months and some easing to the inflation outlook set against evidence of an economy struggling to return convincingly to the black. Despite this, the MPC once again confirmed that rates will have to ‘normalise over time’ as indicated in the FRA and medium-term yield curves. MPC said future action will be ‘highly data dependent’. Most economists predict SARB will hike rates by 25basis points next month to close the year at PRIME of 9.5%. However, a tender global and domestic economic backdrop could delay any moves to next year.
Equity & Bonds
The JSE has been weighed by low commodities demand shedding almost 10% in the past two months with the ALSI closing September at 47,092 points. Bond yields last month were lower with the benchmark R207 2020 and R186 2025 tapering to 7.57% and 8.08% respectively. The money market buoyed in step with the rising rates curve with the 3,6,9 & 12 month JIBAR rates closing September at 6.08%, 6.77%, 7.03% & 7.35% respectively. State owned entities such as Transnet and Eskom have been in the market for funding and governments decision to stand behind these state organs has given comfort to credit rating agencies and been well received by the market alike.
Credit, Money Supply & Governance
In the rising domestic rate cycle, consumers will be discouraged from taking on new debt to purchase vehicles or goods. Big finance’s role in investment and an inclusive economy has also come under discussion. Financial capital’s culpability in loosening regulation, credit criteria, increasing leverage and flooding markets with liquidity no doubt resulted in asset bubbles in the property and financial markets the past decade. Possibly the main insulator for South Africa avoiding the worst of the (Anglo-Saxon) financial crises was government resisting calls to deregulate finance and abolish exchange control.
In recent years, South African consumers have been enticed to leverage household balance sheets for houses, cars, consumer goods, credit cards (the American dream) which recently culminated in our own ABIL saga. Arguably, appetite for returns commensurate to a global market coupled by expectation from financiers, may have led to SA outsourcing and moving production offshore which has in-turn exacerbated our exports (trade deficit). The US as the world’s leading economy went through a similar experience as it moved from a production to a consumption economy with China the main beneficiary. I recently heard a story about a Man named Bloomberg who is the mayor of New York for 1$ a year purely because he loves New York is committed to its rejuvenation as the financial hub and that of the American dream.
Manufacturing contracted 1.2% in August, whilst mining shed 10%. Consumer spending continues to be subdued with retail sales moderating to 2.1% in August. Further rate hikes could heighten household vulnerability. There is no doubt that the mining, metals and engineering strikes have placed a drag on growth figures but this should not detract from the underlying trajectory of moderate momentum.
Real interest rates remain negative, artificial inflation is subsiding and the growth in the middle class continues to add bench strength. Notwithstanding the employment, skills, growth and output GAP; capital arguably still tends to sit on huge piles of cash or uses it speculatively rather than investing in the productive inclusive economy. Counter-arguably; policy uncertainty, poor planning and a lack of skills and capacity in the public service could share accountability for low investment and capital formation. It is clear that a collaborative private and public sector effort will be required to close this GAP. Globally, a surplus in the supply of iron-ore, coal and commodities in general will no doubt place further drag on SA’s production and export.
The local economy is forecast to grow at 1.5% this year, the slowest pace since 2009. This is largely due to the runoff with our biggest trading partner China and a falloff in mining output.
Employment & Education
South Africa’s primary challenge remains its burgeoning unemployment. An example of this is the cash-strapped, strike-hammered SA Post Office teetering on the brink of collapse amidst concerns of not having enough to cover salaries of 17,000 people. A quarter of South African’s (12.5m) are reported to already suffer from hunger according to a study by OXFAM.
South Africa is supposed to be a food secure nation, producing enough food to adequately feed everyone, but the reality is one in four people regularly suffer from hunger. Perhaps agriculture as a sector needs to be stewarded better with a view to innovate and cultivate development practices such as the age-old one of leaving a tenth of the fields for people to come and work the margins.
President Zuma unveiled the government’s new “blue economy” plans last week to drill at least 30 deep-water oil and gas exploration wells within the next 10years as part of a multi-billion rand long-term plan to leverage offshore fossil fuels along the country’s 3000km coastline. According to the EIA, this plan has the potential to tap 9bn barrels of oil and 11bn barrels of natural gas which is equivalent to 40 and 375 years of SA’s current consumption respectively. This could create up to 130,000 new jobs and boost GDP by 1% a year but weighed against those benefits are the potential environmental and ecosystem risks.
The “blue economy” plan is part of operation Phakisa (Sotho for “Be Quick”) which has been drafted by around 650 learned people from government, academia, industry & environmental groups to include possible new shipping lines, ocean regulations, ship-repair facilities, fish farming and export capacity.
Our very own East coast is making a compelling bid to be the logistics, conferencing, sport & local tourism hub of Africa. An ambitious R22bn plan for an integrated freight and logistics system was unveiled this month to the private sector. eThekwini’s 20year-plan includes upgrades to road and rail infrastructure, truck stops and weighbridges and a sophisticated computer system linking the port to the transport network and metro police service. It is aimed at improving the capacity and efficiency of Africa’s largest port to cater for heavier volumes once the new deep-water port (old Airport site) and Cato Ridge dry port are switched on. The plan includes a bus rapid transit system to help people move around (live-work-play) easier, should alleviate congestion and link into SANRAL’s vision for a Durban-Johannesburg-Free State logistics industrial corridor.
Durban with its sea, road, rail and air links also plans to boost the capacity of Dube Tradeport to 2840 hectares, the largest greenfield airport development in Africa. Nowhere else in the world do countries land 18m passengers at 9,000feet above sea level as we do in the economic capital of Jo’burg. It is far more economical to land and take-off aircraft at sea level which has weighed in on SAA’s operating results. In fact, nowhere else (except Mexico) in the top 30 world economies is the economic capital land-locked. Durban’s recent bid for the commonwealth games was world class and made a statement of its intent to become the sporting, eventing and tourism hub. It’s land, labour, developing infrastructure and natural water running off the Berg positions it well to serve as the logistics and trade hub to Africa. Not to mention leveraging our esteemed compatriots in the BRICS club.
What makes the difference between a hireling and a legacy builder is the legacy builder is prepared to sacrifice, serve and sustain the dream to leave a legacy for the generation to come.
Hardship often prepares ordinary people for an extraordinary destiny … CS Lewis.
Wildly South African
The Team at GENUITY