Captains of Industry and Fellow South Africans
“Every father should remember that one day his child will follow his example and not his advice” … Unknown.
On that challenging note, I bid you a crisp East coast greeting. It is my privilege to serve you our June market view and may it find you and your families in good shape and inspired for the path less travelled.
The volatile rand forfeited prior gains to close May’s trading at R10.58, R14.44 and R17.75 to the dollar, euro and pound respectively. The currency ebbed on the back of negative Q1 GDP, widening deficits and a global investor herd by and large retreating into US & German bonds. The ZAR’s fortune remains hitched to emerging market investment with the recent clipping of SA’s sovereign credit rating by Standard & Poors adding to the hawkish sentiment.
Consumer inflation (CPI) peaked at 6.6% in May, its highest level in nine months from 6.1% in April, with food and transport pricing the usual culprits bloating local living costs. Core inflation which excludes food, petrol and energy remained unchanged at 5.5%. Producer inflation (PPI) likewise spiked at 8.8% with food, fuel, chemicals, plastics, metals and equipment all weighing in to the PPI mix. The inflation outlook remains elevated with CPI forecast to stick above 6% this year before cooling back within the band in 2015.
In another split (5 to 2) decision last month, SARB’s MPC maintained its accommodative stance (negative real rates) with the REPO unchanged at 5.5% (PRIME 9%). The Central Bank continues to face the unenviable conundrum of balancing its mandate to curb inflation with placing further drag on a waning domestic economy. Governor Marcus made it clear that monetary tightening had begun but the extent and pace of ratcheting rates will depend on ensuing economic data. Negative Q1 GDP and the state of SA’s production and labour market could well postpone decisions later this year.
Equity & Bonds
The JSE continued its illustrious post-elections trajectory with the ALSI closing May at 49,633 points. The local bourse is tracking a global rally in equities and in particular a firmer S&P 500 due to a large dual-listed component. Bond yields last month were higher in line with the weaker currency, with the yields on the R157 2015 and the benchmark R186 2025 rising to 6.56% and 8.17% respectively. The money market notched up marginally with the 3,6,9 & 12 month JIBAR rates closing May at 5.80%, 6.43%, 6.65% & 6.93% respectively.
Credit, Money Supply & Governance
Credit demand remained robust in April with private sector advances up 8.3% y-on-y (8.7% in March). Strong extensions were evident in corporate loans (+13.4%) whereas by contrast households continued their endeavour to de-leverage (+4.6%). The ratio of household debt to disposable income edged down slightly to 74.5% from 74.6%, while the ratio of debt service cost to disposable income rose to 7.9% from 7.7%. Insolvencies notched up 2.46% y-on-y in Q1 with many consumers and enterprises scraping the bottom of the liquidity barrel alike.
SA’s economic engine backfired in the first quarter of 2014, contracting for the first time since the recession of 2009. Real GDP shrunk 0.6% in Q1 with production sectors mining and manufacturing haemorrhaging -24.7% and -4.4% respectively in the face of what cynics are coining the most volatile labour market in our democratic history. Other sectors were by no means inspiring in their performance with the likes of trade, finance and agriculture coming in around 2% for Q1. In fact, the only modest cheer could be heard for construction, surprisingly robust at 4.9% value-added. Gross domestic expenditure (GDE) rose by 2.7% in Q1 following a 3.6% decline in Q4, mainly reflective of an inventory bounce as real growth in household & government spending as well as fixed capital formation slowed over the quarter. Encouragingly, the current account deficit narrowed below consensus to 4.5% of GDP in Q1 from 5.1% in the fourth quarter. The trade deficit widened to R13Bill in April with exports under pressure. Manufacturing production declined a further 1.5% y-on-y in April whilst mining posted a spectacular 0.2% recovery. Growth in retail sales ticked up 1.8% y-on-y in April from 0.8% the prior month. Total vehicle sales recorded 49,465 units in May which was 9.2% lower than the 54,490 posted the same time last year.
Employment & Education
The World Economic Forum’s (WEF) Global Risk Report placing SA 3rd when it comes to youth (15-24year olds) unemployment in the world at a staggering 50% did by no means feature as a highlight in youth day celebrations. SA’s economy is structurally shifting from a production to a consumption one with traditional sectors (mining, agriculture & manufacturing) under pressure and shrinking in terms of their relative contribution to GDP whilst tertiary sectors such as trade, finance and services are growing proportionately. Mines, farms & factories have historically been our major employers and the contraction in these sectors is exacerbating unemployment, not to mention political temperature, trade deficits and the fragility of our growth trajectory. The average age in Africa is 19 compared to an ageing population in the developed world which can be a blessing or a curse in the knowledge and services based economy of the future, hinging no doubt on the provision of education, skills and mentorship to these 19 year olds. SA’s IT infrastructure, internet connectivity and telephony costs also came under the spotlight of the WEF as key enablers, with the cost and speed of connectivity clearly correlating to economic growth in other markets. Who knows what the consequences on society, safety and stability will be on failing our task at hand to this generation.
The story of entrepreneurial, skills and enterprise development as part of the solution to drive growth, opportunity and living standards across the continent has been well told. GENUITY is proudly South African and bullish of the growth & development prospects of the awaking African giant this next two decades. In a world whose population has roughly doubled since 1960, demand for natural resources (fuel/gas/minerals) and food security (arable land/water) will only become more valuable and strategic moving forward benefiting richly endowed regions such as SADAC. The bottom line is the urbanisation and infrastructure wave (which fuelled China’s growth) has only just begun (continental growth idling at 7%) making Africa irresistibly the next growth story. If South Africa, contributing around 20% of Africa’s GDP (with 5% of the workforce), with our infrastructure, sophisticated banking & securities exchange and our prime political positioning (member UN, BRICS and chair AU) cannot capitalise on this opportunity to be the conduit to the African Growth story, it will be an indictment on us and our leadership in this generation.
On the ground, demand is likely to remain lacklustre in the second quarter as household balance sheets and consumer confidence repair with government committed to reeling in its wage bill (burgeoning at R400Bill annually) and fiscal deficit. Some improvement could be experienced during the second half of the year should labour conditions normalise and production march on. Firms will be hesitant to form capital and expand capacity too aggressively against the backdrop of high input costs, unpredictable labour, infrastructure and power constraints. Sustaining the improvement in the current account deficit, fiscal discipline, policy commitment to the NDP and a concerted collective economic nation building will go a long way to turning the tide, building confidence and who knows, may even lead down a path of ratings upgrades … a path less travelled.
Passionately South African
The Team at GENUITY