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Cape Town - Foreign investors accounted for a large portion of daily trade volume, measuring 48% of total market activity last week, above the 43.0% year-to-date average, according to Overberg Asset Management's weekly report.
Foreign investors bought R2.8bn worth of SA bonds in the past week and sold R1.5bn worth of equities.
Over the month of April foreign investors bought R13.7bn worth of bonds and R1.6bn worth of equities, while for the year-to-date foreign investors bought R9.3bn and R17.2bn worth of SA bonds and equities respectively.
The report below will become a regular feature on Fin24.
South Africa economic review
Credit extension
Growth in private sector credit extension unexpectedly picked-up from 8.7% year-on-year in February to 8.9% in March, above the 8.5% consensus forecast.
The increase is attributed to corporate credit growth, which increased by 13.9% on the year and 2.5% on the month. However, household credit growth remained lacklustre at just 3.6% on the year and 0.2% on the month.
Robust corporate credit growth seems at odds with weak domestic fixed investment spending and is probably explained by domestic borrowing for investment into the rest of Africa.
Producer price inflation
Producer price inflation (PPI) accelerated from 2.6% year-on-year in February to 3.1% in March above the 2.7% consensus forecast.
The higher than expected reading is attributed to rising prices in beverages, wood and paper products, as well as chemical products.
On a month-on-month basis PPI increased by 1.8% with half the increase contributed by the coke, petroleum, chemical, rubber and plastic category.
Fortunately, PPI for intermediate goods slowed from 1.5% on the year to 0.9% indicating little pipeline inflationary pressure. Month-on-month PPI for water and electricity declined by -1.2% following the -1.5% drop in the price of electricity.
Trade deficits
Following two larger than expected trade deficits in January and February the trade balance registered a surplus of R482.5m in March. Exports increased from R76.6bn in February to R91.3bn in March, while imports increased from R85.3bn to R90.9bn.
A return to normal production, a weaker rand and improving demand from external markets helped exports to increase across most categories. Exports of vehicles and equipment increased by 43.9% year-on-year, while exports of precious or semi-precious stones increased 34%, followed by electrical equipment which increased 13.5%.
Among import categories, the import of mineral products which comprise mainly oil fell by -40.1% due to sharply lower crude oil prices. Oil is SA’s largest import.
Improving terms of trade are expected to help the current account deficit narrow to around -4.5% of gross domestic product (GDP) in 2015.
Vehicle sales
According to the National Association of Automobile Manufacturers of South Africa (Naamsa) total vehicle sales fell in April by -3.3% year-on-year, worse than the -2.5% consensus forecast.
Passenger vehicle sales fell -1.9% to the lowest level since April 2012, held back by weak consumer confidence and tight credit conditions. Total commercial vehicles fell by -6.0% due to subdued business confidence and a poor investment climate.
Although domestic demand remained weak vehicle exports continue to perform well rising 38.5% on the year, up slightly from the 38.3% increase recorded in March.
Naamsa forecasts a marginal improvement in vehicle production volumes in 2015 with exports expected to rise 25% for the year as a whole, although unstable energy supply remains a constraint.
Manufacturing
SA’s Kagiso manufacturing purchasing managers’ index (PMI) fell sharply from 47.9 in March to 45.4 in April, well below the 47.6 consensus forecast and the lowest since August 2009.
The PMI has been below the key 50 level, which separates expansion from contraction, for three straight months. Blame is being placed on public holidays and energy cuts.
The month of April experienced 12 straight days of load shedding. Among PMI sub-indices business activity, new sales orders, purchases, expected business conditions, and employment all suffered large declines.
The forward-looking new sales orders index fell from 49.0 to 42.3 the lowest level since August 2009. The price index bucked the downward trend rising from 67.9 to 69.0 reflecting a slight build-up in inflationary pressure.
Political review
Labour
The National Union of Mineworkers of South Africa (Numsa) announced that its political party the United Front would be officially launched in June. The party will follow a Marxist-Leninist ideology. The socialist worker party is aiming to contest next year’s local government elections.
Despite widely differing ideologies the DA in the Eastern Cape is already considering a local-level coalition with the United Front in time for the 2016 local elections. However, in this and other provinces the United Front is more likely to partner with the EFF than the DA with some commentators speculating over the possibility of a broad coalition between the United Front, AMCU and EFF.
DA power struggle
Mmusi Maimane remains the firm favorite to succeed Helen Zille as leader of the DA at this weekend’s upcoming elective conference. So far more than 50% of delegates in Gauteng have pledged their support for Maimane and most of the delegates in the Western Cape, the two provinces which constitute the bulk of the DA’s voter base.
Maimane also has strong support in three of the more marginal provinces. The party’s leadership contest will be decided this weekend between Maimane and DA federal chairperson Wimot James, following their televised debate on Monday evening.
For the full report, including a look at international markets, click here.
Technical analysis
• The rand remains below successive support levels suggesting a continuation in the rand’s depreciation. A break below the R10.80/$ level is needed to signal a disruption of the depreciation trend line which has been in place since 2011. A break above the key “Fibonacci” level of R12.15/$ would open up a further depreciation in the rand to the R13.00/$ level.
• 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.
• 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 below key resistance levels of 2.40% and 2.0% indicating a trading range of 1.70-2.2% over the medium-term. 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 has resumed its bull trend breaking below key resistance at 7.80% targeting a low of 7.20%.
• 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.
• In the meantime the S&P 500 is displaying a bullish short-term pattern. The index is moving into an advanced triangle pattern which normally signals the continuation of an upward trend. If the S&P 500 breaks above resistance at 2 070 a further upward move to 2 150 is likely. This view is corroborated by the “downward flag” of the Dow Jones index, which is also associated with an upward break-out.
• Although enjoying a temporary respite Brent crude had previously broken below key support levels at $60 and $50 suggesting 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 2011 low of $6 500 and key support of $6 000 suggesting a further downside move to $5 500.
• Despite recent advances gold is in a protracted bear market signalled by rapid declines through successive support levels at $1 400, $1 300 and $1 250. Gold’s next target is $1 100 and is likely to breach $1 000 before the bear market ends.
• The All Share-index has broken to new highs exceeding the 55 000 level for the first time indicating a continuation of the long-term upward trend.
Bottom line
• Despite a strong rally in Resource counters over the past month (+9.49% in the past month) the longer-term sector leadership remains firmly in the hands of Industrial and Financial stocks.
• Since the start of the year the Industrial 25 index is up by +9.62% powered by the dual-listed “Big-3”, British American Tobacco, SABMiller and Naspers. The Financial 15 index has done even better than Industrials with a gain of +13.74%, although both indices beat the All Share-index with its gain of +9.38%. The All Share-index has been hampered by resource stocks with the Resources 20 index only gaining +5.50% year-to-date.
• The Mining Resource sector remains prone to global over-supply and the slowdown in China’s demand for raw materials. China is undergoing a concerted realignment from resource hungry infrastructure-led growth towards consumer-led growth. At the same time SA’s domestic regulatory uncertainty and rising production costs will provide added headwinds to the mining resource sector.
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.
