Share

JSE resource index suffers on China demand

Cape Town - The JSE resource 20 index will be under pressure in months ahead, as global demand continues on a downward trend, Overberg Asset Management said in its weekly overview of the SA economic landscape.

"China’s demand, and therefore global demand, for mining resources is likely to remain under severe pressure placing added stress on base metals prices and the JSE Resource 20 index in the months ahead," OAM said.

"Since the start of the year the Resources 20 index has lost -15.19% compared with the +5.41% return of the All Share index. By contrast the Financial 15 and rand-hedge laden Industrial 25 indices have gained +12.69% and +9.0%," According to OAM.

The supply-demand fundamentals of China’s residential and non-residential property market are so out of kilter that the downward trend in construction activity is likely to persist for at least a decade before an equilibrium can be re-established.

South Africa economic review

• The Standard Bank/ Markit purchasing managers’ index (PMI), measuring combined activity in both manufacturing and services sectors, fell from 49.2 in June to 48.9 in July below the key 50 threshold which demarcates expansion from contraction. The decline is attributed to sharp falls in output and forward-looking new sales orders which both fell at their fastest rate in twelve months. The decline in new sales orders at both domestic and export levels does not bode well for an improvement in economic momentum during the second half of the year.

• According to the Absa House Price Index growth in house prices fell in nominal terms from 5.4% year-on-year in June to 4.8% in July well below the average of 6.8% recorded in the first half of the year. The slowdown is attributed to weakening price growth in medium- and large-sized houses while lower-priced units experienced an uptick in price performance. In real terms overall home prices fell in June by -0.2% with the year-on-year growth rate declining from 1.4% to 0.6%.

READ: SA house price growth subdued - index

The week ahead

• Manufacturing production. Manufacturing production decreased by 0.4% in June 2015 compared with June 2014, Statistics SA announced on Tuesday.

• Mining production. Due Thursday 13th August. Mining production is expected to show a moderate increase in June due to improved platinum group metals production but will not be sufficient to reverse the overall -4.7% month-on-month decline in May. On a year-on-year basis the increase in mining production is expected to fall from 2.7% to 2.5%.

Technical analysis

• The rand remains below successive support levels suggesting a continuation in the rand’s depreciation. A break above the key “Fibonacci” level of R/$12.45 signals further depreciation in the rand to the R/$13.00 level.

READ: Rand falls as China devalues currency

• The US dollar index is testing a major 30-year resistance line, which if broken will pave the way for further strong gains in the currency.

READ: Dollar rises as China devalues yuan

• Despite the recent uptick in bond yields the long-term JPMorgan global bond index bull trend remains intact, with the yield targeting a new low during the fifth and final wave.

• The US 10-year Treasury yield has broken above key resistance levels of 2% and 2.2%. However, there is unlikely to be a major bear trend in US bonds as the deleveraging phase is still in its early stages.

• The benchmark R186 SA Gilt yield is testing support at 8.15% and needs to break below resistance at 7.90% in order to resume its bull trend.

• The MSCI World Equity index is in the 5th and final wave of a rising-wedge formation. A rising-wedge formation is a typical trend-ending signal. European equities are set to outperform US markets. The Nikkei exhibits the most bullish pattern.  

• Since the 1950s the Dow Jones and S&P 500 have displayed 7-year up-cycles and the top of the current US equity cycle can be expected in the next year. The next major wave down will complete the 16-17 year secular bear market that started in 2000. The secular bottom should occur around June 2016.

• The S&P 500 is breaking down from a rising wedge pattern, which is traditionally a trend-changing pattern. A break below the previous low of 2067 will confirm a trend reversal. A further negative signal is that the Dow Jones Transport Index, traditionally a lead indicator for the broader market, has already broken down from its rising wedge.

• Brent crude’s break below the key $50 support level suggests a continuation of the weakening long-term trend. Copper is regarded a reliable lead indicator for industrial commodity prices and barometer of global economic growth. It has broken below the key $5,500 support level suggesting further downside ahead.  

READ: Oil prices down in Asian trade

• Despite recent advances Gold is in a protracted bear market signalled by rapid declines through successive support levels at $1 300, $1 250 and $1 100. Gold’s next target is $1 000 which is likely to be breached before the bear market ends.  

READ: Gold basks in JSE spotlight

• The All Share index has lost most of its gains since the start of the year. The All Share Index is testing the key support line which has been in place since 2009. A break below 50 000 would signal a sharp move lower to the October low of 47 000.

Bottom line

• When will the fortunes of the JSE resources sector change? Since the start of the year the Resources 20 index has lost -15.19% compared with the +5.41% return of the All Share index. By contrast the Financial 15 and rand-hedge laden Industrial 25 indices have gained +12.69% and +9.0%.

READ: Resources drag JSE down

• A quick analysis of China’s property market and construction industry contributes to a sober outlook for base metals prices and the JSE Resources index. China accounts for over 50% of total global demand in iron and steel, copper, zinc, aluminium and nickel. Over half of China’s demand of base metals comes from the construction industry.

• Although monetary easing and fiscal stimulus will provide short-term reprieve the long-term outlook for China’s property market and construction activity is extremely negative. Construction activity is slowing across all property sectors and across all provinces due to a long-term structural shift in the property market.

• From a demand perspective the residential property market, which accounts for around 70% of total construction, will be impacted by changing demographics. China’s population growth peaked in 1987 due to the one-child policy which means household formation is now also past its peak and will slow sharply over the next 10-15 years. To make matters worse, the current generation are marrying and forming households later in life, which will impact the natural increase in residential property demand. Moreover, the great urban migration of the past twenty years is almost completed.

• With falling natural demand for housing it has fallen on investors to prop up the market: Around 80% of total home sales are for investment purposes which means any fall in investor demand could be calamitous. Investors have already started to shy away from the residential property market and will continue to do so as they increasingly sense a protracted slowdown in price performance.

• The over-supply of residential property is well documented with commonplace images of newly constructed vacant “ghost” cities. The problem is getting worse with the area under construction over five times the current annual sales rate. The oversupply problem is even more acute for non-residential property with the area under construction more than twelve times the current annual sales rate.

• The supply-demand fundamentals of China’s residential and non-residential property market are so out of kilter that the downward trend in construction activity is likely to persist for at least a decade before an equilibrium can be re-established. China’s demand, and therefore global demand, for mining resources is likely to remain under severe pressure placing added stress on base metals prices and the JSE Resource 20 index in the months ahead.

For the full report, including a look at international markets, click here.

* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.

Disclaimer: Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report.


We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.93
-0.2%
Rand - Pound
23.90
-0.0%
Rand - Euro
20.43
+0.2%
Rand - Aus dollar
12.34
+0.1%
Rand - Yen
0.13
-0.1%
Platinum
907.85
+1.2%
Palladium
1,012.25
+1.1%
Gold
2,218.87
+1.1%
Silver
24.85
+0.8%
Brent-ruolie
86.09
-0.2%
Top 40
68,346
+1.0%
All Share
74,536
+0.8%
Resource 10
57,251
+2.8%
Industrial 25
103,936
+0.6%
Financial 15
16,502
-0.1%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders