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Ramaphoria, which welcomed the first few weeks of Cyril Ramaphosa’s presidency has made way for a growing sense of impatience - and concern that he wears a paper crown lacking the authority to push through his economic reform agenda.
Real transformation policies are vital to boosting business confidence.
"With both the state and household sectors of the economy afflicted by over-indebtedness it is incumbent on the corporate sector to provide the funds to spark a cyclical economic recovery," says Overberg Asset Management (OAM) in its weekly economic and market overview.
However, due to recent events, Ramaphosa’s share price has been boosted as the KZN provincial elective conference outcome signalled a resounding vindication of his strengthening political capital within the ANC.
According to OAM, the provincial elective conference in KZN, significant due to its size and its erstwhile support for Zuma, swung decisively towards a "unity" vote, giving Ramaphosa greater support in the key province.
South Africa economic review
• The Reserve Bank composite business cycle leading indicator, which signals expected economic conditions 6-9 months ahead, remained unchanged in May at 105.9. Having spiked to a multi-year high in February, indicating a pick-up in economic activity in the second half of the year the recent stalling in the leading indicator suggests economic growth may subside again into the start of 2019.
Among the ten components making up the leading indicator, six improved and four deteriorated. The largest positive contributors were a widening in the interest rate spread and increased number of hours worked in the manufacturing sector. The largest detractors were declines in job advertising space and in the BER Business Confidence Index.
Other positive contributors include an increased number of building plans passed, increased vehicle sales and money supply growth as well as an improvement in the leading indicators of South Africa’s major trading partners.
Other detractors include falling manufacturing order volumes and falling commodity prices.
• Following months of gradual deceleration, growth in private sector credit extension (PSCE) increased sharply in June by 1.0% month-on-month lifting year-on-year growth from 4.5% to 5.7%. Credit extension to both households and companies registered a significant increase in growth.
Credit extension to households grew 0.4% on the month lifting annual growth from 4.2% to 4.5%, while to companies PSCE grew a robust 1.9% on the month lifting annual growth from 3.3% to 5.3%.
Credit demand is expected to pick-up in the months ahead supported by lower and stable interest rates and benign inflation. A stronger upward move is likely in 2019 after the general election with improved political certainty and policy clarity expected to boost business and consumer confidence.
• Producer price inflation (PPI) accelerated in June to 5.9% year-on-year up from 4.6% in May well above the consensus forecast of 5.2%. On a month-on-month basis PPI also increased by a higher than expected 0.9%.
The "coke, petroleum, chemical, rubber and plastic products" category was the biggest culprit, contributing 3.1 percentage points to annual PPI and 0.7 percentage points to the monthly PPI measure. PPI is likely to rise in the months ahead pushed higher by fuel prices, a volatile rand, and expected food price increases.
However, weak domestic demand should keep increased PPI from translating into sharply higher consumer price inflation (CPI). Amid weak economic growth and a benign CPI outlook the Reserve Bank will likely refrain from lifting its benchmark repo interest rate at least for the next 12 months.
The week ahead
• Quarterly Labour Force Survey: The official unemployment rate increased by 0.5% to 27.2% in the second quarter of 2018, up from 26.7% in the first three months of the year.
The increase in the unemployment rate was due to a decline of 90 000 people in employment, as well as an increase of 102 000 people who became unemployed. Additionally, the number of discouraged job seekers rose to 2.9 million people, between the first and second quarters of 2018.
• Trade balance: The trade surplus is expected to have lifted in June to R5.0bn according to consensus forecast up from R3.5bn in May, with weakness in the rand improving export competitiveness. At the same time lacklustre domestic demand will supress import growth.
• New vehicle sales: Following a stronger than expected 3.0% year-on-year increase in new vehicle sales in June, growth is expected to have slipped slightly in July, hampered by increased VAT, higher fuel costs and generally weak domestic demand.
At the same time, new vehicle exports may have already been affected to some extent by US trade protectionism.
• Absa manufacturing purchasing managers’ index: The manufacturing purchasing managers’ index (PMI) is likely to have lifted slightly in July from its June reading of 47.9 although expected to have remained below the neutral 50-level for a third straight month.
The PMI, a forward-looking indicator, will be closely watched for clues on the likely health of the manufacturing sector in the third quarter.
Technical analysis
• Although the rand has broken its spell of recent declines and now consolidating in a trading range of R13.00/$ to R13.50/$ the likelihood of continued strength below R13.00/$ is limited. The trading range is likely to persist for the foreseeable future.
• The rally in the US dollar index has reached its medium-term goal suggesting a correction from current levels. The dollar remains below a major 30-year resistance line suggesting the bull run in the dollar may be over.
• The British pound has broken back below key resistance at £1.35/$ suggesting a trading range of £1.30/$ to £1.35/$. The £1.30/$ level is expected to provide strong resistance.
• 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 is struggling to break decisively above key resistance at 3.0%. However, a break above this level is expected and would open the next target of 3.6%.
• The benchmark R186 2025 SA Gilt yield has retraced earlier weakness and fallen back below the key 9.0% level. A trading range of 8.4% to 9.0% is expected over the foreseeable future.
• Key US equity indices, including the S&P 500, Dow Jones Industrial, Dow Jones Transport, Nasdaq and Russell 2000, have simultaneously set new record highs, confirming a bullish outlook for US equity markets.
• The Brent oil price has struggled to break above key resistance at $75 per barrel, indicating a likely trading range of $65 to $75 per barrel. The outlook for base metals prices is less certain after the copper price retreated sharply from the key $7 000 per ton level. A break below $6 000 per ton would herald a bear market in copper and base metals’ prices.
• Gold has developed an inverse "head and shoulders" pattern, which indicates a price recovery and a test of the $1 400 target level.
• Despite the consolidation since the start of the year the break in the JSE All Share index above key resistance levels at 56 000 and 60 000 in December signals the early stages of a new bull market.
Bottom line
• Ramaphosa’s share price has been boosted by events of the past fortnight. The KZN provincial elective conference outcome is a resounding vindication of Ramaphosa’s strengthening political capital within the ANC.
The provincial elective conference in KZN, significant due to its size and its erstwhile support for Zuma, swung decisively towards a "unity" vote, giving Ramaphosa greater support in the key province.
• The Brics Summit, attended by heads of state of all Brics partners and from other African countries as well as Turkey, was a significant success. China pledged an investment of $14.7bn in South Africa. While unclear what the timeframe will be or whether it will comprise loans, foreign direct investment or developmental assistance, the amount is a clear boost to Ramaphosa’s investment drive.
• The $14.7bn Chinese investment pledge comes close behind pledges earlier in July from the United Arab Emirates and Saudi Arabia to invest $10bn each, bringing the total close to $36bn, including $700m from Mercedes Benz. Given the targeted total of $100bn over five years, these inward investment pledges totalling $36bn are impressive and should solidify ANC support for Ramaphosa’s economic agenda.
• Ramaphoria, which welcomed the first few weeks of Ramaphosa’s presidency, has made way for a growing sense of impatience, and concern that he wears a paper crown, lacking the authority to push through his economic reform agenda. The events of the past fortnight will solidify Ramaphosa’s support within the ANC, and for his economic reform agenda, boosting his ability to push through structural reforms and real transformation of the economy.
• Real transformation policies are vital to boosting business confidence. With both the state and household sectors of the economy afflicted by over-indebtedness it is incumbent on the corporate sector to provide the funds to spark a cyclical economic recovery.
• South Africa’s corporate sector has very low debt levels by global standards, and substantial cash reserves, resulting largely from the investment strike over the latter part of Zuma’s presidency. Meaningful long-lasting structural reforms will create an environment which is conducive to investment, providing the catalyst to mobilise the wall of corporate money.
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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