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Cape Town - President Jacob Zuma's State of the Nation Address (SONA) speech was predictably more populist, aimed at providing a distraction to his own shortcomings and the ANC’s current challenges and shoring up the ANC’s loss of support to the EFF, said Overberg Asset Management (OAM) in its weekly overview of the SA economic landscape.
Following the EFF’s removal from Parliament during SONA, the DA together with Cope also left. While there were few left to listen to Zuma’s address, he nonetheless pushed ahead with the delivery.
The SONA was a public relations disaster for Zuma and will undermine his ability to push aside Finance Minister Pravin Gordhan or to further his political agenda and choice of successor as leader of the ANC, according to OAM.
The finance minister’s much anticipated budget speech on February 22 is likely to provide a stark contrast to Zuma’s address in terms of security presence and level of parliamentary support.
South Africa economic review
• Manufacturing production fell in December by a larger than expected 2.0% year-on-year worse than the 0.4% consensus forecast decline. However, the decline was exacerbated by two fewer working days in December compared with the same month last year. On a seasonally adjusted month-on-month basis manufacturing production increased by 0.3%.
Among manufacturing sectors, food and beverages fell 6.2% on the year, and electrical machinery by 4.3%. Production of motor vehicles, parts and accessories and other transport equipment gained by 3.1%.
Forward-looking indicators, including the manufacturing purchasing managers’ index (PMI) and the South African Chamber of Commerce and Industry’s business confidence index, signal an improvement in manufacturing conditions in the first half of 2017.
• The decline in mining production slowed from -4.5% year-on-year in November to -1.9% in December while on a seasonally adjusted month-on-month basis production increased by 0.7%.
Among the mining sectors, gold production fell 7.1% on the year and platinum group metals by 15.1%. Iron ore and copper production gained by a slender 1.3% and 0.2% on the year.
In the fourth quarter (Q4) mining production fell by 2.7% quarter-on-quarter. While regulatory uncertainty will hamper production volumes during 2017 the industry should benefit from firming commodity prices and rising global demand.
• This year’s SONA was once again marked by vociferous and violent objections with the opposition drawing strength from the Constitutional Court’s Nkandla ruling last year that Zuma had breached his oath of office.
A further visible difference was the increased security presence, which included barricades of police armoured vehicles. The security presence epitomizes the legitimacy challenge facing Zuma’s leadership.
Following the EFF’s removal, the DA also left parliament together with Cope. While there were few left to listen to Zuma’s address, he nonetheless pushed ahead with the delivery. Zuma’s SONA speech was predictably more populist, aimed at providing a distraction to his own shortcomings and the ANC’ s current challenges and shoring up the ANC’s loss of support to the EFF.
The week ahead
• South African unemployment: Due Tuesday 14th February. The household Labour Force Survey is expected to show that unemployment subsided slightly from 27.1% in the third quarter (Q3) to 26.9% in Q4. A small seasonal uptick in employment is likely owing to temporary jobs growth in the retail and hospitality sector.
READ: Slight drop in SA's unemployment rate
• Consumer price inflation: Due Wednesday 15th February. According to consensus forecast consumer price inflation (CPI) is expected to show no change from December’s 6.8% year-on-year rate in January. While the reweighted CPI basket should temper the inflation rate food and fuel prices are likely to have an upward effect.
• Retail sales growth: Due Wednesday 15th February. According to consensus forecast retail sales growth is expected to slow from 3.8% year-on-year in November to 2.0% in December as the boost from Black Friday discount shopping fades. Consumer confidence is constrained by high inflation, weak credit extension and poor jobs growth.
Technical analysis
• While the rand has broken below key resistance levels versus the dollar at R/$ 14.20 and 13.80 the strengthening trend is not confirmed by momentum indicators, signalling that the currency is overbought.
• 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.
• Following the Brexit vote the British pound hit its weakest level against the US dollar since 1985. The key £/$1.30 level support level has been broken opening up a £/$1.20-1.24 target.
• 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 broken back above the key support level of 2.0% endangering the multi-year bull trend in US bonds.
• The benchmark R186 SA Gilt yield is now testing the key support level of 9.0% endangering the mini-bull market in bonds which has been in place since the start of the year.
• 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 crude price is well supported at $40 a barrel and having broken key resistance at $50 is targeting further gains to the next key level at $60. Base metal prices are in a bull trend confirmed by copper’s increase above key resistance at $5 000 per ton.
• Gold has developed an inverse “head and shoulders” pattern, which indicates further upward momentum and a test of the $1400 target level.
• The JSE All Share index is testing an important resistance line but if this remains unbroken the index is likely to move back below the 24-month moving average at 50 900 in turn opening a downside target of 45 000. A break above 54 200 on the JSE All Share index would project an upward move to 60 000 marking a new high for the JSE.
The bottom line
• This year’s SONA was once again marked by vociferous and violent objections with the opposition drawing strength from the Constitutional Court’s Nkandla ruling last year that Zuma had breached his oath of office.
A further visible difference was the increased security presence, which included barricades of police armoured vehicles. The security presence epitomizes the legitimacy challenge facing Zuma’s leadership.
• Following the EFF’s removal, the DA also left parliament together with Cope. While there were few left to listen to Zuma’s address, he nonetheless pushed ahead with the delivery.
• Zuma’s proposed “radical socio-economic transformation” would be brought about by a mix of legislation and state funding and although short on detail would include the following key pillars:
- Greater use of the government’s procurement and infrastructure budgets to assist black-owned enterprises;
- Dismantling high levels of concentration in the economy to make way for smaller and black-owned businesses;
- Increasing the share of the property market owned by black people;
- Continuing with redistribution of agricultural land;
- Increasing black ownership in the mining sector.
• Despite the left-leaning rhetoric and promise of greater populism, financial markets barely reacted to Zuma’s SONA. The rand hardly budged while bond and equity markets actually firmed. The rand moved over the week from R/$13.22 to 13.41, from R/€14.27 to 14.25 and from R/£16.54 to 16.74.
Government bonds strengthened with the yield on the R186 2025 firming from 8.82% to 8.79%. Equity markets also strengthened, with the benchmark All Share, Industrial, Financial and Resources indices all rising over the week by 0.8%, 0.7%, 1.7% and 0.2%, respectively.
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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