Monthly Market Update

– Rich Mashayanyika, Director Cornerstone Asset Management

The South African GDP grew 3.1% in the second quarter of 2019, following a downwardly revised 3.1% contraction in the first quarter of 2019.[1] This was above market expectations of a 2.4% expansion. It was the strongest growth rate since the last quarter of 2017, partly due to low base effects and the positive impact of reduced power cuts in mining and manufacturing sectors.

The release of a policy discussion document by the National Treasury also dominated the news in August. Generally, the document supports many well-discussed micro economic reforms aimed at lifting South Africa’s potential growth rate. The proposal includes a greater role for the private sector than the often state-centred policy proposals from other government departments[2]. As might be expected, the proposals received a fiery negative response from the trade union movements, with some opposition parties labelling it as a direct attempt to privatise South Africa. Perhaps a good barometer that the proposed economic reforms are credible and genuinely aimed at changing SA economic trajectory.

On the other hand, both local and global markets have ended the month in the red on the back of the news of global economic slowdown, a possible Brexit “no-deal” and escalating trade tensions between the US and China. The U.S. and China have been involved, to a greater or lesser extent,  in trade wars since early 2018, with both countries imposing tariffs on billions of dollars’ worth of goods. This has led to worries over global corporate profit growth and fears of a broader economic slowdown.

Implications of the news

  • Local GDP

GDP expenditure rebounded by seasonally adjusted 3.1% quarter-on-quarter (q-o-q) in the second quarter following a 3,1% contraction in the first quarter. All the categories of spending recorded growth over the quarter, but the highest contributor was inventory accumulation, which rose by R26 billion, adding 5,1 percentage points to GDP[3]. Household spending rebounded following a contraction in the first quarter, while government consumption spending accelerated, boosted by election-related spending.

Source: Cornerstone Asset Management; www.statssa.gov.za

The GDP figures reflect some normalisation in economic activity as the country’s electricity supply stabilised. However, there is no real evidence of any meaningful upward momentum developing in any of the major sectors. The economy remains vulnerable to disruptions in electricity supply, adverse turns in the global business cycle, rising domestic cost pressures and fragile confidence[4].  Considering that most of these factors are likely to persist for some time, growth prospects will possibly remain subdued. This suggest that demand pressure on prices is likely to remain low, but there is considerable downside for the rand given the deteriorating fiscal outlook, with rising probability of a Moody’s sovereign risk rating downgrade to junk status and an uncertain global environment increasing pressure on the rand.

  • The policy discussion document by the National Treasury

While Trade Union Movements and some opposition parties reacted negatively to the policy discussion document, a closer look into the contents and implications suggest that the document is a great blueprint for economic growth.  The document highlights that the combination of low growth and rising unemployment means that South Africa’s economic trajectory is unsustainable.  Therefore, the government should implement a number of growth reforms that promote economic transformation, support labour-intensive growth, and create a globally competitive economy.

They indicated five fundamental building blocks of sustainable long-run growth and then identify a series of specific and detailed reforms to raise potential growth. These growth reforms are organized according to the following themes:

  • modernizing network industries;
  • lowering barriers to entry and addressing distorted patterns of ownership through increased competition and small business growth;
  • prioritizing labour-intensive growth in sectors such as agriculture and services, including tourism;
  • implementing focused and flexible industrial and trade policy;
  • promoting export competitiveness and harnessing regional growth opportunities.

The National Treasury estimated the impact of the proposed interventions over time, based on their practical implementation, and concluded that these interventions could raise economic growth by as much as 2–3% points and create over one million job opportunities[5]. Economic growth and jobs which South Africa is desperate for!

Markets During the Month

  • Local equity market (as measured by the JSE All Share Index) had a lacklustre performance, down 2.4% in August 2019, depressed partly by the continued trade dispute between China and the US.
  • Global equities were down 2.0% for the month as investors remain cautious on trade talks between China and the US.
  • Listed property (SAPY) was down 3.6% for the month as subdued distribution growth, oversupply, low demand and slow economic growth continue to be the headwinds in the sector.
  • Bond index (ALBI) ended the month up 1.0%, despite a weaker rand
  • Cash posted a modest +0.6% for the month.

Source: Cornerstone Asset Management; Morningstar

The rand depreciated against all major global currencies with the bulk of the decline coming after the Fed’s interest rate decision, which was viewed as neutral and strengthened the dollar. Local issues also added pressure on the currency, as political infighting persisted, and policy uncertainty remains high. Further, the National Treasury policy discussion document on growth did not garner much support from politicians, and the fiscal outlook continued to worsen. All these factors were not favourable for the rand which ended the month down:

  • 7.0% against the USD
  • 6.3% against the GBP
  • 5.7% against the EUR

In summary

The GDP figures reflect the impact of some normalisation in economic activity (up from the previous quarter’s very low base) thanks largely on the stabilisation of electricity supply. However, there is no real evidence of any meaningful upward momentum developing in any of the major sectors. The economy remains vulnerable to disruptions in electricity supply, adverse turns in the global business cycle, rising domestic cost pressures and fragile confidence. Lastly, the recently released economic policy document published by national treasury, suggests that, if implemented successfully, could lead to a 2 to 3% increase in economic growth and desperately needed employment if implemented successfully.

[1] http://www.statssa.gov.za/publications/P0441/P04412ndQuarter2019.pdf

[2] https://www.ber.ac.za/BER%20Documents/BER-Weekly/?doctypeid=1082&year=2019#11378

[3] http://www.statssa.gov.za/?p=12471

[4] https://www.nedbank.co.za/content/dam/nedbank/site-assets/AboutUs/Economics_Unit/Research/Economic%20Commentary/GDP%20Q2%202019.pdf

[5]http://www.treasury.gov.za/comm_media/press/2019/Towards%20an%20Economic%20Strategy%20for%20SA.pdf

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