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Cape Town - Investor favourite President Cyril Ramaphosa's strength and conviction when it comes to his reforms is likely to build momentum, according to Overberg Asset Management (OAM).
In its weekly economic and market overview, OAM said even though few expected Ramaphosa to take over as the president so soon, the speed with which Ramaphosa implemented change is cause for celebration.
"Financial market optimism has surged over the past three months in positive response to Ramaphosa’s ascendency."
OAM noted that since Ramaphosa’s election as head of the ANC the rand has strengthened against the US dollar by over 20%.
South Africa economic review
• Retail sales growth slowed in December to 5.3% year-on-year from 7.9% in November but exceeded the consensus forecast of 4.0%. Some pullback had been expected following the surge in retail spending in November, linked to Black Friday discounting. Among retail categories, textiles, clothing, footwear & leather goods increased in December by 5.9% on the year, pharmaceuticals, medical goods, cosmetics and toiletries by 5.6%, and household furniture, appliances and equipment by 10.0%.
Retail sales grew in the fourth quarter (Q4) by 2.2% quarter-on-quarter, accelerating from 1.5% in Q3. Retail sales likely contributed around 0.5 percentage points to Q4 GDP growth. Retail sales are expected to gain further momentum during 2018 in line with rising consumer confidence. Real incomes will benefit from benign inflation and an expected decline in interest rates. At the same time credit extension to the household sector is likely to increase amid stronger demand and a relaxation of credit standards.
• The Labour Force Survey shows that despite a decline of 21 000 in total employment the unemployment rate fell in the fourth quarter (Q4) to 26.7% after remaining unchanged in the prior two quarters at 27.7%. This is due to a decline in the labour participation rate. The number of discouraged job seekers increased over the quarter by 4.2%. During the quarter, employment in the formal sector fell by 135 000 outweighing the 119 000 gain in informal sector employment.
The community and social services sector showed the strongest employment growth over the quarter at 75 000 while the agricultural sector added 39 000 jobs helped by the continued recovery from the drought. Jobs growth is likely to rebound in 2018, driven by economic policy reform and a return in business confidence and investment.
• Net foreign investor inflows into South Africa’s equity market surged in the past week in positive response to [Jacob] Zuma’s resignation and the swearing-in of Cyril Ramaphosa as South Africa’s new president. Net equity inflows reached R7.42bn in the past week lifting the month-to-date total to R12.94bn and the year-to-date total to R22.47bn. The positive trend is in stark contrast to 2016 and 2017, when foreigners pulled a net R124.83bn and R43.10bn from South Africa’s equity market.
Foreign investors have shown a greater appetite for equities than bonds since the start of the year with net year-to-date outflows from the bond market measuring R3.78bn. Equity market inflows are expected to maintain the positive trend during the year amid rising financial market optimism and positive economic policy reforms. (See Bottom Line for further analysis).
The week ahead
• Reserve Bank composite business cycle leading indicator: Helped by greater policy certainty, the Reserve Bank composite business cycle leading indicator, a measure of business conditions 6-9 months ahead, is expected to build on its solid November reading, the equal highest since 2013.
• Consumer price inflation: Due on Wednesday, February 21. Consumer price inflation (CPI) is expected to decelerate from 4.7% year-on-year in December to 4.4% in January, according to consensus forecast, helped by fuel price declines.
A stronger rand and mild administered price increases such as utility and municipal rates should keep CPI well below the upper limit of the Reserve Bank’s 3-6% target range during 2018.
• 2018 Budget: Due on Wednesday, February 21: Following the shock deterioration in budget deficit forecasts given at the Medium-Term Budget Policy Statement in October, the 2018 Budget will be closely assessed for its commitment to fiscal consolidation, both on the revenue side and the expenditure side.
At the same time credit rating agencies will require assurance that economic growth is not being sacrificed.
Technical analysis
• Having broken key resistance levels at R/$12.50 and R/$11.70, the rand has returned to its appreciating trend, targeting a break below R/$11.00 over coming months.
• 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 £/$1.35 promoting further near-term currency gains to a target range of £/$1.40-1.50. • 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 decisively above key resistance at 2.5%, targeting the next key resistance level at 3.0%. A break above long-term resistance at 3.6% would indicate an end to the multi-decade bull market in bonds. • The benchmark R186 2025 SA Gilt yield has broken below key resistance at 8.6%% indicating a new target trading range of 8.0-8.5%. • 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 broken above key resistance at $60 and likely to remain in a trading range of $60-70 over the foreseeable future. Base metal prices are in a bull trend confirmed by copper’s increase above key resistance at $7 000 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 in the JSE All Share index above key resistance levels at 56 000 and 60 000 signal the early stages of a new bull market.
Bottom line
• Last week marked a historic “end of an error” for South Africa. Zuma resigned and the next day President Ramaphosa was officially sworn-in. The Nelson Mandela Foundation summed-up Zuma’s presidency: “Systematic looting by patronage networks linked to president Zuma have betrayed the country Nelson Mandela dreamed of as he took his first steps of freedom 28 years ago.”
• President Ramaphosa gave a statesmanlike speech in his State of the Nation Address (SONA). The speech earned a standing ovation even from opposition parties. The whole first hour of President Ramaphosa’s SONA was dedicated to the economy.
The emphasis bodes well. Strong economic growth will bring down unemployment, eradicate poverty, reduce the budget deficit and fund social upliftment.
• The commitment to land expropriation without compensation should not cause undue concern. Land expropriation is likely to be centred on tribal land. Tribal land is seldom developed and remains unproductive as those living on the land do not have ownership and do not qualify for bank loans.
The motivation behind land expropriation is to redress inequality and increase agricultural productivity. The distribution of tribal land would help meet these objectives.
• Financial market optimism has surged over the past three months in positive response to Ramaphosa’s ascendency. Since Ramaphosa’s election as head of the ANC the rand has strengthened against the US dollar by over 20% and around 15% versus the euro and sterling.
The benchmark R186 bond yield has firmed from 9.50% to 8.15%. Net foreign investor inflows into South Africa’s equity market have exceeded R40bn.• Despite the strong outperformance by the rand and South African gilts versus other emerging markets, they remain cheap on a relative basis. The R186 bond yield is still around 400 basis points above inflation, a much higher real yield than most emerging markets. There is considerable scope for further tightening in yield spreads versus other emerging market bonds and for further strengthening in the rand.• The speed with which President Ramaphosa has implemented change is cause for celebration. Few expected Ramaphosa to take over as the nation’s president so soon. The strength and conviction of his reforms is likely to build momentum.
• One of the concerns often expressed is just how much needs to be done to stabilise South Africa’s economy. Yet, having a lot to do means there is a lot that can be done. Hence, we can expect a rapid succession of positive policy announcements, each a potential catalyst for further improvement in business, investor and consumer confidence.• News from the Budget, credit rating agencies, state-owned enterprises, cabinet reshuffles, corruption court hearings and economic policy reform, each hold the potential to prompt a further upgrade of “South Africa Inc.” Like the changes that have occurred so far, the pace of improvement is likely to take many by surprise. 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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