Economic Commentary – February

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February 2018


We’re one month into the New Year and there are still no signs of the synchronised global recovery slowing down. Overall there is a lot of evidence that the momentum in global growth is sustainable and global lead indicators have been improving since the middle of 2017. Just a word of caution – China may be the one exception.

The consensus forecast for global economic growth in 2018 is 3.7%. This is a moderate increase on the 3.6% growth in 2017, but still trending up from 2016’s economic growth rate of 3.2%. The outlook for the US economy is particularly optimistic. Robust momentum in economic activity, coupled with the front-loaded benefits of tax cuts should take growth to around 2.5% in real terms. As mentioned earlier, Chinese growth may be a spanner in the wheels. In absolute terms, the world’s second largest economy is still growing at 6.5%. That’s according to the government growth forecast and the official growth number will at least meet this target. Underlying real growth is likely to be between 5% and 6%, where it has been over the last few years. Having said that, it won’t contribute as much too global growth as it has since the early 2000s and a relative slowdown in especially their housing market may be detrimental for commodities.

Accommodative fiscal policies will continue to support economic expansion in 2018 and even into 2019 with quantitative easing from the European Central Bank and the Bank of Japan more than off-setting the slow unwinding of the US Federal Reserve’s balance sheet. Up to three US interest rate hikes are expected and the market is likely to absorb this with relative ease, even if it creates some short-term volatility as we’ve seen in recent days.

There are a few risks to this generally buoyant economic outlook. One, now much publicised, is that the US economy is at risk of overheating. A second risk is that financial markets are fundamentally expensive measured against their long-term valuations, and this in itself could cause a market crash. Such an event would harm emerging market assets and currencies and could even cause a slowdown in global economic growth. Lastly, concerns over political turmoil in the Middle East, North Korea, and Europe (Brexit, Catalonia and Italy) could also weigh on global growth.

South Africa

There are high hopes that the shift in South Africa’s political environment heralds the start of a new direction for the local economy. GDP growth rates are expected to improve over the next few years, but not yet to inspiring levels. The global economic backdrop (as described above) should remain supportive of growth prospects in South Africa. In spite of an apparent reduction in political risks, the sovereign credit rating remains under threat of further downgrades. This in itself adds a touch of uncertainty over confidence levels (business and consumer) and as a result could prevent a positive departure from lacklustre economic conditions.

From a currency perspective, the rand should sustain a mild strengthening bias this year, with support from improving local fundamentals. Further out and into 2019, the rand could come under pressure again as the pace of global growth starts to decelerate and the current account starts to widen again.

GDP growth could reach 1,3% in 2018 and 1,6% in 2019, mainly driven by cyclical factors and confidence levels coming off historical lows. The South African Reserve Bank is expected to keep rates unchanged in the short term. Headline inflation is expected to average just below 5% for the year, given no significant currency shocks.

The South African economy looks set to show an improvement in its pace of growth, but it’s useful to remember that it’s off a very low base and severely lagging the rest of the world. Having said that, a positive surprise in GDP numbers could augur well for locally focused companies.

Market performance

January was a far more muted month in growth assets as the FTSE/JSE All Share Index ended the month just about flat. Local property securities were hit hard after various rumours surrounding further Viceroy Reports on select South African companies and shed almost 10% during the month. Fortress Income Fund B (-28,7%), NEPI Rockcastle (-24,7%) and Resilient (-23,0%) were some of the large property shares which took the brunt of the negative sentiment.

The US dollar continued to weaken against most other currencies and this benefited emerging market currencies (the rand included). Emerging market stocks had a strong start to the year as the stock market delivered its best January in six years. Equity markets around the globe saw solid returns this month with most of the indices reaching new heights even though rising bond yields in developed markets caused some volatility.

From a South African investor point of view, US dollar weakness detracted from strong performance in global equities – over the last year, the MSCI World Index gained over 26% in US dollars but only 11,4% in rand.

In the local market, financial stocks (-3%) struggled the most this month while industrial counters remained relatively flat and resource stocks (3,2%) shined. South African Government Bonds (1,9%) was the top performing broad asset class for the month.

South African Multi-Asset High Equity funds delivered an average of 8,4% to investors during the last 12 months with their low equity counterparts ending up 7,4%. In both instances the average fund in these sectors ended the month broadly flat.


Market indices 31 January 2018
(All returns in rand) 3 months 12 months
SA Equities (JSE All Share Index) 1.2% 16.1%
SA Property (SAPY) -4.3% 3.9%
SA Bonds (SA All Bond Index) 6.6% 10.8%
SA Cash (STeFI) 1.8% 7.5%
Global Developed Equities (MSCI World Index) -8.4% 11.4%
Emerging Market Equities (MSCI Emerging Market Index) -5.5% 24.6%
Global Bonds (Barclays Global Aggregate) -13.8% -5.3%
Rand/Dollar -16.0% -11.9%
Rand/Sterling -10.1% -0.4%
Rand/Euro -10.2% 1.5%

Commentary – Lies, damn lies, and statistics

Mark Twain popularised this saying in Chapters from My Autobiography in 1906: “Figures often beguile me,” he wrote, “particularly when I have the arranging of them myself; in which case the remark attributed to Disraeli would often apply with justice and force: ‘There are three kinds of lies: lies, damned lies, and statistics.’”

There is so much that can be hidden in statistics, which is “(t)he practice or science of collecting and analysing numerical data in large quantities, especially for the purpose of inferring proportions in a whole from those in a representative sample.” In short, statistics is the process of reducing data. The result is that fewer numbers (or even a single number) represents large data sets without losing too much of the characteristics of the original data.

Sometimes, as we argue next, this is not achievable. Investors could be excused for showing some measure of disappointment when they hear that the South African equity market (as measured by the FTSE/JSE All Share Index) went up by 21%, but their latest quarterly statement shows an annual improvement closer to half of that. This is because of the influence that a share like Naspers had on a concentrated market like our local bourse. In the last year, Naspers contributed just about half of the returns of the FTSE/JSE All Share Index. If it’s excluded, this benchmark would have ended the year only 11% higher. This is not an uncommon experience for South African investors. Dimension Data, Anglo American, and BHP Billiton all played similar roles before their eventual fell from grace:



From a robust portfolio construction point of view, it’s difficult to justify putting 25% of your investments in one company, Naspers in this instance. So even though it has contributed just about half of SA’s equity market growth in one year, it’s not unfathomable that it could detract the same quantum from market performance just as easily. In March 2009, nine months after their prices peaked, Anglo American and BHP Billiton were between 60% and 70% lower.

In order to further illustrate the risks associated with putting all your eggs in one basket, we’ll end off with a real-life example: towards the end of 2017, one of our investment partners was approached by a recent retiree from a long career at Steinhoff. This investor has no debt and have built up a portfolio in excess of R15 million which, for most South Africans, would equate to a comfortable retirement. As it happens, the investor did not heed the advice to diversify into a broader number of securities, as “Steinhoff has never disappointed me”. The now well-publicised events around Steinhoff early in December swiftly changed this into a retirement portfolio of less than R2 million in a matter of days.

Sometimes a concentrated bet can pay off handsomely. But that’s exactly what it is: a bet. More often than not, however, diversification provides the protection of wealth built up with a lot of effort and over many years. You’ll agree that this is a lesson that our retiree above would have been willing to pay a few million rand for.