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Cape Town - Ten years after the start of the global financial crisis, the world economy is finally exhibiting sustainable synchronised growth, Overberg Asset Management (OAM) says in its weekly economic overview.
Healthy global growth, combined with low worldwide inflation and low interest rates, is a winning recipe for emerging market assets.
"Emerging markets such as South Africa, with a high dependence on trade and commodity exports, are in the sweet spot," said OAM.
"Growing global demand for commodities coupled with a weakening rand have greatly improved South Africa’s terms of trade."
OAM also noted that, despite the strong global growth environment, steady jobs growth, and rising wages inflation has been consistently below SA Reserve Bank (SARB) target levels.
SA economic review
• The Absa manufacturing purchasing managers’ index (PMI) edged up slightly from 44.0 in August to 44.9 in September although still well below the key 50-level which demarcates expansion from contraction. The PMI for Q3 so far has averaged 43.9 compared with 47.6 in Q2. The decline indicates a decline in manufacturing momentum.
Among the PMI sub-indices, the forward-looking new sales orders gained from 40.1 to 43.2 albeit below 50, while the employment index fell from 47.0 to 44.1 signaling a lack of new investment or capacity expansion. At the same time, the prices index climbed higher from 67.2 to 71.4 reflecting the inflationary impact of petrol and diesel price hikes over the month.
While export demand is robust in line with firming global conditions, domestic demand remains depressed. However, overall conditions are expected to improve. The expected business conditions index moved strongly higher from 46.6 to 52.4 regaining the crucial 50-level.
• The South African Chamber of Commerce and Industry (Sacci) Business Confidence Index (BCI) increased sharply from 89.6 in August to 93.0 in September, its largest month-on-month recovery since January, albeit from its lowest level of the year. Seven of the thirteen sub-indices making up the BCI showed month-on-month improvement led by higher merchandise import and export volumes.
On a year-on-year basis, the BCI gained by 2.7 points with six sub-indices driving the improvement led by higher merchandise export volumes, lower inflation, a higher real value of building plans passed and improved vehicle sales. Despite the September uplift, Sacci concludes that: “The South African economy is experiencing a myriad of challenges.
Although some matters like inflation, monetary policy and certain BoP aggregates reflect easier circumstances, aspects like slow economic growth, shortage of capital formation and restrained public finances need a strong resolve to succeed and create the necessary business and investor confidence.”
• Total new vehicle sales increased in September by 7.0% year-on-year, the fourth consecutive month of annual sales growth. On a month-on-month basis total vehicle sales grew 3.0%, the fifth straight monthly increase. Total vehicle sales climbed in September to 50 675 units the highest number since November 2015 while for the quarter sales grew by 5.9% quarter-on-quarter the strongest growth since the second quarter (Q2) 2013.
By vehicle type, total passenger sales increased 5.9% on the year and 4.7% on the month while commercial sales increased by 9.3% on the year but dropped 0.1% on the month. New vehicle exports grew 11.0% on the year and 21.5% on the month reversing the 13.8% monthly decline in August.
On a quarter-on-quarter basis, new vehicle exports grew in Q3 by 19.4% building on the 19.7% expansion in Q2. The new vehicle sales data reflect the first green shoots of a recovery in the durable goods cycle, helped by lower interest rates and a gradual willingness to see past the current period of political and policy uncertainty.
The week ahead
• Manufacturing production: Due on Tuesday 10th October. Forward-looking surveys including the manufacturing purchasing managers’ index (PMI) and BER business confidence survey indicated that manufacturing production would fall in the third quarter (Q3).
Manufacturing production will likely fall in August by a similar amount to July’s decline of 1.4% year-on-year.
• Mining production: Due on Thursday 12th October. Mining production has performed well since the start of the year, rising in the seven months to end July by 4.5% year-on-year. However, the base effect of high year-ago comparative levels make continued growth increasingly hard to achieve. Base effects may result in nil year-on-year growth in August.
Technical analysis
• The rand needs to break through key resistance at R/$13.00, which if broken would target further gains to R/$12.50 and thereafter R/$12.00.
• The US dollar index has tried but failed to break through a major 30-year resistance line suggesting the three-year bull run in the dollar may be over.
• The British pound has broken above key resistance at £/$1.30 promoting further near-term currency gains to a target range of £/$1.35-1.40.
• The JPMorgan global bond index is testing the support line from the bull market stemming back to 1989, which if broken will project further sharp increases in bond yields.
• The US 10-year Treasury yield has failed to break below key resistance at 2.0% raising the probability that the multi-year bull trend in US bonds is over.
• The benchmark R186 2025 SA Gilt yield is trading in a tight trading range of 8.5-9.0%. A break above 9.0% is required for the yield to move decisively higher towards the 10.5% target level.
• Key US equity indices, including the S&P 500, Dow Jones Industrial, Dow Jones Transport, Nasdqaq and Russell 2000, have simultaneously set new record highs, confirming a bullish outlook for US equity markets.
• The Brent oil price has broken above key resistance at $50 and likely to remain in a trading range of $50-60 over the foreseeable future. Base metal prices are in a bull trend confirmed by copper’s increase above key resistance at $6 000 per ton.
• Gold has developed an inverse “head and shoulders” pattern, which indicates further upward momentum and a test of the $1 400 target level.
• The break above 54 200 on the JSE All Share index projects an upward move to 60 000 marking a new high for the JSE.
Bottom line
The Barclays global manufacturing confidence index increased in September to its highest level since 2012 amid broad-based improvement across developed economies and emerging economies.
• Solid world economic growth is being sustained by a combination of household consumption and business investment spending. Household consumption is being led by employment growth, wage increases, and rising asset prices while business investment spending is being led higher by business confidence and low interest rates.
At the same time, fiscal policy is being relaxed across the world. President Trump has proposed the boldest tax reforms since the Reagan presidency. The Eurozone has pulled out of its protracted period of austerity following greatly improved budget finances across member states.
• Despite the strong global growth environment, steady jobs growth, and rising wages inflation has been consistently below central bank target levels, kept low through globalisation and technological innovation. While the world’s major central banks will end their emergency quantitative easing programmes, interest rates are likely to adjust upwards very gradually.
Even in the US, it is doubtful that the fed funds rate will rise by 100 basis points by the end of 2018 as currently projected by the Federal Reserve.
• South Africa is among the emerging markets particularly well positioned for a cyclical upturn. The year-to-date trade surplus has grown to R43.5bn compared to a deficit of -R13.7bn in the same period last year.
• The prolonged period of slack economic growth in South Africa between 2014 and 2016 has generated significant spare capacity in the economy which will ensure low inflation and low interest rates in the upcoming two to three years. Meanwhile record harvests, as well as boosting GDP growth, will keep a lid on food prices, the main component of consumer price inflation.
• The prolonged period of slack economic growth in South Africa between 2014 and 2016 has created substantial pent-up demand at household and business level. Pent-up domestic demand needs a catalyst to be converted into actual economic activity. The ANC’s elective conference in December is likely to provide the much-needed catalyst.
• The JSE All Share index has gained for seven straight days breaching the 57 500 level for the first time. Equity markets are forward-looking. The record-breaking JSE All Share index is discounting better times ahead, for emerging markets generally and for South Africa’s domestic economy.
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.
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