The JSE All Share Index increased by 3.5% on 26 January, driven mainly by a boost in financial and retail shares. These benefited from renewed rand strength and retail sales which improved by 8.2% in November 2017. The ZAR is currently trading below R12 to the US dollar for the first time since May 2015. This is on the back of dollar weakness and positive perceptions of Cyril Ramaphosa being nominated president of the ANC at the ANC’s December conference.
After the report by Viceroy in December highlighting Steinhoff’s dubious accounting practices, a similar report by Viceroy on Capitec bank rattled the SA equity market. However, Capitec responded to the allegations immediately, thereby limiting the effect of the price movement on its largest shareholder PSG’s share price (the report has nevertheless created nervousness). This coincided with a dip in international markets which were rattled by a potential increase in US interest rates. In addition, the spike in US treasury yields caused pressure on equity prices, resulting in the SA equity market producing flat returns for the month.
Moody’s, which has kept South Africa on investment-grade status, is set to deliver its opinion of the country’s outlook after the budget speech on 21 February 2018. Moody’s has announced that they will be focusing on projected reduced expenditure and higher revenue, together with borrowing projections. In addition, emphasis will be placed on progress on the governance of state-owned enterprises, as well as proposed reforms to prevent a drain on the fiscus. Should SA be downgraded, it could have dire consequences for the rand, albeit off a relatively low base.
On the economic front, consumer price inflation increased 4.7% in December up from 4.6% in November. Core inflation which excludes the cost of food, non-alcoholic beverages, petrol and energy, decreased to 4.2% in December 2017 from 4.4% in November. Producer Price inflation also increased 5.2% year on year. A stronger rand and lower food inflation should lead to inflation being lower in 2018, presenting an opportunity for a rate cut by the SARB later in the year and providing much-needed relief for local consumers.
Internationally, developed markets continue to reach new highs, on the back of projected GDP growth forecasts of around 3.5% for 2018. US tax reforms are also seen as supportive of markets for the next two years, adding an additional underpin to markets. Equity valuations, especially in the US market, are looking increasingly expensive. The recent spike in US long bond yields before the Federal Reserve meeting on interest rates had the immediate effect of creating a slight pull-back in US equity markets.
The ECB held its benchmark refinancing rate at 0% on January 25th, as expected, and confirmed that the net asset purchases are intended to run at a monthly pace of €30 billion until the end of September, or beyond, if necessary. Policymakers voiced concerns over weak inflation and a surging euro. The latest economic data and survey results indicate continued strong and broad-based growth momentum and the prevailing strong cyclical momentum could lead to further growth surprises in the near term.
This is signalling that future increases in US interest rate, will affect the US equity market, as long bond yields and dividend yields of stocks will converge. This would make the safety of US treasuries more appealing versus the risk associated with equities.
The Bank of Japan has reduced their quantitative easing programme and we expect the European authorities to ease off in the latter part of 2018. We also expect the recent uptick in oil prices to be inflationary to the global economy. This should provide some scope for central banks to proceed on the path of policy normalization.
Economic highlights for the month:
- SA CPI increased 4.7% in December, up from 4.6% in November
- The SARB kept interest rates on hold in January, in line with expectations
- SA retail sales increased 8.2% year-on-year in November
- The German economy expanded at the fastest pace since 2011 in 2017 (2.2%)
- The Eurozone economy grew by 2.7% year-on-year in the fourth quarter of 2017
- The ECB kept interest rates unchanged at 0%, voicing their concerns over weak inflation
- The US Fed kept rates unchanged at 1.25 – 1.5%, expects inflation to rise in 2018
- UK Inflation Rate eases from 6-Year High in December (3% from 3.1%)
- The Chinese economy expanded 6.8% year-on-year in the fourth quarter of 2017