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SA's political uncertainty tainting economy, analysts warn

Cape Town - The International Monetary Fund mission, consisting of over 100 academics at universities around the world, have warned that despite global favourable conditions, and SA's institutional strength, political uncertainty will make for a challenging outlook.

This is according to Overberg Asset Management's (OAM) latest overview of the economic landscape.

South Africa economic review

• Retail sales grew in September by an unexpectedly strong 5.4% year-on-year unchanged from August’s rate of growth and ahead of the 3.6% consensus forecast. On a quarter-on-quarter basis retail sales grew in the third quarter (Q3) by 1.4% down slightly from 2.0% in Q2 but nonetheless sufficient to make a meaningful contribution to GDP growth.

The retail sector contributes around 6.3% to GDP. Six of the seven retail categories showed gains on a year-on-year basis, led by the “all other” category at 19.4%, followed by “textiles, clothing, footwear and leather” at 8.6%, and “household furniture, appliances, equipment” at 5.9%.

“Hardware, paint and glass” suffered a 4.5% year-on-year contraction. The overall data is positive, reflecting the benefits of the July interest rate cut and a benign inflation environment.

• Net foreign inflows into the South African equity market surged to R5.29bn in the past week, capping seven consecutive weeks of positive inflows. This is the longest winning streak since July 2015 signalling an upturn in foreign investor sentiment.

Net foreign equity inflows for the month-to-date increased to R6.72bn helping to reduce the year-to-date outflow to -R55.41bn. Net bond inflows remain positive for the year-to-date at R60.74bn, but momentum appears to be waning ahead of the credit rating decisions from Moody’s and Standard & Poor’s scheduled for Friday.

The South African bond market suffered net foreign outflows of R1.82bn in the past week while month-to-date net inflows registered just R1.84bn.

The week ahead

• Consumer price inflation: Due on Wednesday 22nd November. Consumer price inflation (CPI) is expected to retreat from 5.1% year-on-year in September to 4.8% in October, helped by lower fuel prices during the month.

• Reserve Bank interest rate decision: Due on Thursday 23rd November. The Reserve Bank Monetary Policy Committee is expected to keep the repo interest rate unchanged at 6.75% owing to the country’s current political and policy uncertainty as well as upcoming credit rating decisions on Friday.

• Credit rating decisions: Due on Friday 24th November. Credit rating agencies Moody’s and Standard & Poor’s are scheduled to deliver their credit rating updates. Financial markets are expecting the rating agencies to lower South Africa’s local currency ratings to junk status following signs of fiscal slippage in the medium-term budget policy statement.

However, before taking the drastic step the ratings agencies may elect to wait for the outcome of the ANC elective conference in just over three weeks’ time.  

Technical analysis

• To return to its medium-term appreciating trend of the past 18 months the rand needs to break through key resistance at R/$14.00 and R/$13.50, which if broken would target further gains to R/$12.50.

A range of R/$13.50-14.50 is more likely signalling a gradual and controlled depreciation in the rand.

• 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 has broken above key support at 9.0% indicating the potential for a rapid upward move to the 10.5% target level. A break back below the new resistance level of 9.0% is required to remove the danger of a further upward spike in bond yields.

• 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 $50 and likely to remain in a trading range of $50 to $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 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

• An IMF mission which visited South Africa to discuss recent economic developments found that “the subdued economic growth of 0.7%, projected by the authorities for 2017, is not likely to improve much in 2018”. This may be overly pessimistic.

• Despite the manufacturing and mining sectors suffering a month-on-month contraction in September, strong growth in July and August together with respectable third quarter (Q3) retail sales figures should ensure solid GDP expansion of around 2% in Q3.

• The global growth environment is conducive to a pick-up in South African economic growth. The Markit global composite purchasing managers’ index (PMI) increased in October to its equal highest level of the year at a level consistent with world GDP growth of around 4%. The current 54.0 reading is well above the neutral 50.0 level, pointing to robust expansion.

• The outlook for global trade is constructive. The CPB Global Trade Monitor reports global trade volumes increased in August by 1.2% month-on-month despite the hurricane-induced drop in US exports, which fell in August by 0.8% on the month.

• Trade data from Asian economies, traditionally viewed as barometers for world trade, point to continued positive momentum. The Baltic Dry Index, which measures the cost of shipping bulk commodities, and a useful indicator of sea freight demand, increased in August to its highest level in three years.

• Inflation remains subdued worldwide ensuring that the retreat by central banks from ultra-accommodative monetary easing will be gradual. Even in the US, where the interest rate hiking cycle is already underway, the Fed’s preferred measure of consumer price inflation remains well below the 2% target.

• The IMF mission cautioned that: “Despite South Africa’s institutional strength and favorable global conditions, increasing domestic political uncertainty and stalled reforms point to a challenging economic outlook.”

• However, the IMF’s caveat that “Growth would recover only gradually in the medium-term, unless the pace of implementation of structural reforms accelerates quickly” will soon be tested at the ANC elective conference. The outlook in this regard is increasingly positive.

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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