Real global economic growth has tilted up and is approaching the long-term trend of 3.5% per annum, and yet global interest rates remain at depressed levels. At 1.25% the Federal Reserve’s Fed funds rate is high when measured against its peers (Bank of England’s clearing bank rate at 0.25% and the European Central Bank’s repo rate effectively at 0%). Yet it is by no stretch of the imagination high when measured against historical levels. Monetary policymakers, especially outside of the US, are particularly dovish and very careful to not stifle economies with near-term interest rate increases. There is however pockets of strong growth around the world – the aggregate real GDP growth of emerging markets average nearly 5% at the moment. Sadly, South Africa is the worst performing of these markets at around 0.5%.
This global low interest rate environment, which has been in place since 2009, has fuelled asset price inflation and has managed to lift most global markets to record (or at least near-record) highs. December is likely to see an interest rate hiking cycle kick off in earnest in the US, followed by the UK and perhaps even Europe. Global investors should taper their return expectations for global growth assets.
Steadily rising oil prices may throw a spanner in the works of the continuing global recovery. Another factor that is particularly tough to predict but will most certainly influence markets is the global political backdrop. It has been a big month for political events, with the German elections, the announcement of a snap election next month in Japan, and the release of the Trump tax plan.
Against this background the US Dollar and US Treasury yields should continue to rise in the near term. More generally, further near-term upside for the dollar may induce some profit-taking in Emerging Market assets, which have had a solid run this year.
Stanlib’s Kevin Lings reports that in August 2017, South Africa’s trade balance recorded another impressive surplus of R5.9 billion. This compares with a revised surplus of R9.3bn in July and a surplus of R10.6 billion in June 2017. Although trade data is extremely difficult to forecast accurately on a month-by-month basis, especially since the data is not seasonally adjusted and prone to revisions, these positive numbers surprised on the upside because the market was only expecting a trade surplus of around R2 billion for the month.
South Africa has recorded a trade surplus in nine of the last twelve months. This is an impressive turnaround and a glimmer of light in what is otherwise a murky outlook. On the flipside South Africa’s tax collection of import duties still remains well behind budget (see Commentary below), and is expected to disappoint further. The country’s trade balance has generally improved over the past year, helped by a combination of slowing import growth and some pick-up in exports. Higher international industrial commodity prices have provided some relief to South Africa’s current account balance in 2016 and early 2017. Unfortunately, the slowdown in import growth largely reflects the weakness in the South African economy, rather than an improvement in import substitution. This overall trend is expected to continue during 2017, which should help to contain South Africa’s current account deficit. Ultimately this reflects a struggling economy.
The cost of energy (as measured by the oil price) in recent months has been increasing at a faster pace than industrial commodity prices implying that further rand weakness could be expected as we are an importer of the former and an exporter of the latter. Although political shenanigans in the build-up to the ruling party’s conference in December will continue to make headlines, it’s not the only factor that could weaken the rand. Some of the more recent political dramas are detailed in our Commentary below.
For the year to the end of September growth assets (property and equity) have provided a more conventional return on risk as growth assets outperformed income assets over this period. The South African stock market, as measured by the FTSE/JSE All Share Index, has delivered a little over 10% to investors but within the broad sectors, the performance of financials (7.0%) and mid and small caps (-2.8% and -0.1% respectively) are indicators of a struggling local economy. The quick turnaround in the SA equity market illustrates the point that investors need to be circumspect of exchanging growth assets for cash in times of pedestrian returns. Performance in stock markets can turn fairly quickly. These past few months clearly illustrate that.
Global equities performed particularly well in US Dollar terms (MSCI AC World up 17% over the year) and given a nearly flat Rand over twelve months this has benefited investors with allocation to global and emerging market (ex-SA) shares. Global bonds have detracted from absolute returns over twelve months, as valuations on this asset class remain expensive and global economies continue to recover towards trend growth.
|Market indices||30 September 2017|
|(All returns in Rand)||3 months||12 months|
|SA Equities (JSE All Share Index)||8.9%||10.2%|
|SA Bonds (SA All Bond Index)||3.7%||8.2%|
|SA Cash (STeFI)||1.8%||7.6%|
|Global developed equities (MSCI World Index)||8.2%||16.7%|
|Emerging market equities (MSCI Emerging market index)||11.3%||20.7%|
|Global Bonds (Barclays Global Aggregate)||4.9%||-3.0%|
Commentary – Pressures on the Finance Minister
As the political noise in the country raises to deafening levels, the new Finance Minister’s first Medium Term Budget Policy Statement (MTBPS) looms on the horizon. Cyril Ramaphosa’s ANC presidential hopes received another significant boost early in the month, with close ally Oscar Mabuyane elected to lead the Eastern Cape at a chaotic conference at the East London International Conference Centre. Several delegates were injured when a fight broke out between supporters of Mabuyane and outgoing chairman Phumulo Masualle – with the latter’s supporters being driven out of the venue. Mabuyane received 935 votes against Masualle’s 7. This new setback for the ANC comes on the heels of a recent High Court judgement in Pietermaritzburg that declared unlawful the 2015 election of its Zuma-aligned leadership in Kwa-Zulu Natal. The ANC’s top six leaders now have to deal with party crises in two provinces. Across town, the furore around KPMG and its role in state capture continued as former Finance Minister Pravin Gordhan considered legal action and two regulatory bodies continued investigations that could have serious implications for the future of the audit and advisory firm. While all of this was going on, Dan Matjila, CEO of the PIC, was fighting for his job, defending the institution that manages around R1.9 trillion in government employees’ assets. “I’ve got the keys. They’re looking for the keys to the big safe”, he is alleged to have said. This was apparently after he turned down a request from SAA chairperson Dudu Myeni for a R6 billion loan to keep the bankrupt national carrier from going under. Myeni, a close friend of President Zuma, was reportedly furious.
Finance Minister Gigaba desperately needs to find billions of Rand to bail out SAA, the SABC and other state-owned entities that are facing financial difficulties as a result of years of mismanagement and corruption. On Friday 29 September, the Treasury transferred R3 billion to SAA to settle a loan that was due to be repaid to Citibank. In July the Treasury paid out R2.2 billion to settle a loan with Standard Chartered. It is estimated that the government must find R100 billion to recapitalise Eskom, the SABC, SAA, the National Empowerment Fund and others, before the October medium-term budget framework is delivered.
To compound these pressures on the Finance Minister, the latest SA trade figures point to further problems. Kevin Lings, chief economist at Stanlib, points out that the pronounced weakness in the South African economy over the past 18 months, especially the ongoing recession in private sector investment spending, has led to a noticeable slowdown in import demand. While this has helped South Africa move from persistent monthly trade deficits to regular trade surpluses, it has also meant that import duties are now massively under-performing budget. For example, over the past twelve months the average annual growth in import duties is -9.9% year-on-year versus a budget growth estimate of almost 16%.
Although import duties represent only between 4.5% and 5.0% of SA total tax revenue, the current under-collection means that this category of tax revenue could contribute around R10 billion of the current R40 billion to R50 billion estimated tax revenue shortfall in 2017/2018. At this stage it seems clear that most of the revenue shortfall will have to be funded through additional government debt, increasing the likelihood of further credit rating downgrades.
Mr Lings then reminds us that there is a crucial and positive relationship between increased private sector investment, higher economic growth, job creation and growing tax receipts with rising business confidence the catalyst for creating this virtuous cycle to the benefit of society as a whole.
Mr Gigaba will be very closely watched and his every word scrutinised on 25 October.
NB – Please remember to reserve your seat for the Pretoria Investment Seminar on 22 November 2017. Interesting new speaker this year!