Captains of Industry and Fellow South Africans
“The moment you stop learning is the moment you stop leading” … Rick Warren.
On that note, I bid you a crisp and inspired East coast greeting. It is my privilege to serve you our April market view and may it find you and your family refreshed by these epic autumn conditions.
Our local currency bravely rebounded against the majors in Q1, after being hammered through R11.30/$ (January) amidst an emerging market selloff, to close March’s trading at R10.60, R14.57 and R17.63 to the dollar, euro and pound respectively. The rand remains vulnerable to emerging market sentiment and increased investor trepidation as locally, mineworkers continue to down tools and citizens head to the polls this week.
Consumer inflation (CPI) rose to 6% in March from 5% in February with housing & utilities, transport and food & beverage being the key contributors to an increased cost of living. Producer inflation (PPI) accelerated to 8.2% in March from 7.2% in February weighted by food, beverage, tobacco and petroleum prices. CPI is still forecast by SARB to average 6.3% this year before easing to 5.8% in 2015.
In a tight (4 votes to 3) decision, SARB’s MPC kept the re-purchase rate unchanged at 5.5% (PRIME 9%) in March 2014. Notwithstanding the lacklustre local economy and output gap, continued currency and inflationary headwinds will no doubt lead to further tightening of the illustrious monetary belt but by how much? The market is currently pricing in 100bassis points by year-end and 250bp of hikes in the medium-term rate cycle with the MPC due to convene again in May.
Equity & Bonds
The local bourse was relatively upbeat in Q1 as the allure of our rand hedge and in particular industrial stocks once again attracted foreign interest to record strong gains, with the JSE closing March up around 47,930 index points. Trading was buoyed by increased liquidity to the tune of R11.6Bill net equity inflows in February & March as the tide of yield-seeking capital continues its speculative ebb and flow. Bond yields tracked the firmer rand with the benchmark R157 and R186 yields closing March lower at 6.79% and 8.33% respectively. The money market eased with the 3,6,9 & 12 month JIBAR rates closing March at 5.73%, 6.36%, 6.64% & 6.99% respectively.
Credit, Money Supply & Governance
Money supply (M3) rose to 7.9% in March from 5.9% in Feb. Private sector credit extended by 8.8% y-on-y in March with material advances in corporate and unsecured loans. Household wallets remain stretched and vulnerable to higher interest rates, key consumer prices outpacing income growth and bleak employment conditions. Some consumers have now resorted to credit cards to assist in kicking the proverbial debt can down the road. The strain on consumers ability to service their debt within household budgets (credit health) is optimised by the consumer credit index declining for nine consecutive quarters. 76% of South Africans income is still going to service debt which does not auger well for savings. With around ten million consumers allegedly under duress (arrears/write-off/judgment/counselling), there is clearly still room for more judicious behaviour by all stakeholders in this segment. March’s downgrade of Brazil’s sovereign credit rating to one notch above junk status (BBB-) has come as a shock to a recent BRICS star and should perhaps serve as a warning to SA, whose growth appears to be stuttering for many of the same reasons, about the likelihood of another downgrade since being unceremoniously clipped to BBB in 2012.
Recent economic indicators suggest that the economy remained fragile and patchy in Q1 of 2014. The embattled Mining sector shed -4.8% y-on-y in February as the platinum belt ground to a halt embroiled in the fiercest labour standoff in decades, haemorrhaging 35.8% in output. Manufacturing under-delivered to expectations, slowing to 1.4% y-on-y. Household real disposable income which encapsulates not only average income per worker but the number of people being employed, hit its lowest level in Q4 since 2009 (2.2% y-on-y). This has knocked-on to Retail slowing to 2.2% in February from 6.4 % in January as both confidence and spending on the ground wanes. Vehicle sales, a good leading indicator of consumer confidence, increased marginally to 55503units in March (0.1% y-on-y). The Ratio of used cars per new vehicle sold is climbing from 0.6, although nowhere near its peak of almost 1 as to 1 in the heart of the recession of 2009.
Employment & Education
Tshwane recently made history by becoming the first metro to roll out free Wi-Fi. The announcement of the provision of the free service by executive Mayor Ramokgopa was made before the City of New York, hailed a ground-breaking achievement for an African city. The Tshwane network costs R1/GB which is 1,000 times cheaper than Vodacom 3G (R1/MB) and aims to compliment SA’s deployment of 3G (currently 39.3% vs. 7.6% in Sub-Saharan Africa & 17.3% in Developing markets). The World Bank purports that for every 10% broadband penetration a country’s GDP grows by 1.3%, not to mention the productive and knowledge kickers of access to information and on-line learning alike.
The recovery in developed economies soldiered on in the first quarter whilst emerging markets proved more fickle. The markets initially punished currencies perceived as vulnerable to the major central banks turning off the tap but many of these losses have since been repatriated. Most commodity prices and hence producers remain under pressure on concerns of oversupply and a supressed appetite from the tiring Chinese dragon.
SA’s local economic engine once-again spluttered in the first quarter as industrial action hand-braked the mining sector, interest rates rose on the back of rand losses and electricity interruptions again dampened activity & confidence. Growth this year of 2.5% after last year’s 1.9% is still possible due mainly to improved exports to traditional trading partners and stronger capital formation. On balance, it must be said that risks are to the downside with over-corrective monetary policy in response to rand vulnerability fundamental to these. With credit growth to households in diminutive single digit territory and confidence low on a lack of employment prospects, consumer spending is unlikely to fire anytime soon. The recent bounce back in the rand is encouraging and the Reserve Bank’s instincts will probably be to hold its accommodative (negative real interest rates) stance as long as possible, given our sub potential growth on a continent gaining economic momentum and global relevance.
With a record 25.3Million South Africans poised to make their mark at the ballot this week, one can only hope that hard earned freedoms are vested wisely and pray for revelation in stewarding this beautiful rainbow nation into time and space for the next generation.
Wildly South African
The Team at GENUITY