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Market and Economic Update
Investment Weekly
16 March 2015
MARKET and Economics
Dollar surges amid tightening tantrum
Some analysts are calling it the “tightening tantrum”, an echo of the May
2013 “taper tantrum” when yields spiked as the market seized on the idea
that the Federal Reserve might taper its bond buying programme. Fast
forward almost two years and the Fed has stopped buying bonds completely
and markets are now waiting for it to increase interest rates. A strong February
jobs report has convinced the market that the Fed will start lifting rates
mid-year. As a result, US bond yields have risen and the dollar has surged,
while equities have sold off. Meanwhile, with the European Central Bank
having launched quantitative easing, the euro has also sold off rapidly. At
this rate, the euro will soon cost only $1. While concerns over Greece linger,
the euro is falling because of interest rate and monetary policy differences
and not because of investors fearing a break-up or another economic
downturn. Locally, the rand touched R12.40 against the US dollar.
Equities under pressure as investors weigh strong dollar impact
The pull-back comes as the current bull markets in US (and SA) equities
celebrate their sixth birthday, having started out in March 2009. Not all
equity markets have sold off. European and Japanese stocks have extended
gains in local currencies as exporting companies benefit from a weak euro
and yen respectively. With some positive momentum returning to the
Eurozone economy, non-exporting companies can also potentially increase
earnings off a low base.
Investors need to reconsider what the impact of a stronger dollar and
somewhat higher interest rates will be on company profits. The jitters are
primarily related to the impact of a strong dollar on US corporate earnings,
with about 40% of the S&P 500 earnings earned outside the US. Together
with the plunge in the oil price, these factors have seen estimated 2015
earnings growth for the S&P 500 reduced. Share prices are reacting to this,
but none of these factors call for a sustained slump. The other 60% of the
S&P 500 earnings generated inside the US should continue to grow as the
US economy improves. The impact of lower oil prices should fade out of
earnings growth numbers towards the end of the year and Energy shares
make up only 10% of the S&P 500 index.
The impact of higher short-term interest rates should be minimal as companies
are generally not heavily indebted and larger companies have been able to
lock in lower borrowing costs for longer periods. In fact, so far this year, US
companies have borrowed a record $28billion from bonds in euros according
to Dealogic, benefiting from lower European rates and currency appreciation.
In contrast, the companies that are most at risk are those in emerging
markets that borrowed in dollars to benefit from lower US interest rates.
Like the rand, most other emerging market currencies have plunged.
enough to warrant higher rates. Previous bull markets have not ended
because the Fed started hiking rates, but rather after several successive
rate hikes led to a sharp slowdown, and fall, in economic activity. There is
no inflation pressure on the horizon, meaning rate hikes are likely to be
gradual while real rates should remain well below their long-term average.
An interest rate shock halting economic growth and leading to falling company
profits, resulting in a major bear market, is unlikely.
Where does this leave South African investors?
South African investors should consider the following factors: what does
the resumed weak rand mean for the JSE, inflation, interest rates and the
broader economy? One should also remember that, on a trade weighted
basis, the rand is broadly unchanged since it appreciated against the euro.
For local equities, the weak rand is generally good as JSE-listed companies
have diversified operations globally. In terms of inflation, further rand
weakness should put some upward pressure on domestic consumer prices,
but the impact has been generally muted (taking into account that the rand
has been weakening against the dollar since 2011, not just over the past two
weeks). It will generally depend on how willing firms are to pass on higher
input costs to consumers. The tough competitive environment generally
makes them reluctant to do so.
Turning to interest rates, this is exactly the scenario the Reserve Bank feared:
a stronger dollar and sharply weaker rand as investors re-price global interest
rates. However, most other central banks are cutting rates including most
recently emerging markets, such as Korea, India and Thailand (although
Brazil hiked its rates). Unless the rand weakens significantly further, the
Reserve Bank is likely to maintain the current policy of a long pause in the
upward cycle. Finally, for the broader economy, further rand weakness is
not as disruptive as for other emerging economies because of limited
foreign-currency denominated debt. However, some sectors will do better
than others, as imports become more expensive and exports more competitive.
Chart 1: The US dollar against other major currencies (rebased, higher values
indicate USD strength)
135
Euro
Japanese Yen
Australian dollar
UK pound
SA rand
Brazilian real
Turkish lira
130
125
120
115
110
105
100
95
Feb-15
Mar-15
Jan-15
Feb-15
Jan-15
Dec-14
Dec-14
Dec-14
Nov-14
Oct-14
Nov-14
Oct-14
Sep-14
Sep-14
Aug-14
Jul-14
Aug-14
Jul-14
Jul-14
Jun-14
Jun-14
May-14
Apr-14
May-14
Apr-14
Mar-14
90
Mar-14
Is this the start of a major bear market?
While market volatility could persist for a few weeks, this is unlikely to be
the start of a major bear market. Past bear markets have coincided with
recessions, where outright declines in earnings took place (as opposed to
slower-than-expected earnings growth). When the Fed hikes rates, whether
in June or later, it will be because they assessed the US economy to be strong
Source: Datastream
Adviceworx is a juristic representative of Acsis License Group (FSP 33002)
and an authorised Financial Services Provider (FSP 44914)
Market and Economic Update
Investment Weekly
16 March 2015
MARKET and Economics
Business confidence remains low
The RMB/BER Business Confidence Index (BCI) fell by two index points to 49
in the first quarter, meaning that the 2 900 firms surveyed are more or less
import share of new cars has surged over time; ten years ago, only 50% of
evenly split between those who are satisfied and those unsatisfied with
new cars sold were imported. This pattern of local producers losing local
current business conditions. Fifty index points is the neutral level of the
market share is widespread throughout the economy and a weak currency
index, while the 30-year average is 44 points. As the chart shows, the index
can help change that, if they can produce.
has hovered around this long-term average since the post-recession recovery.
This clearly illustrates the sluggish nature of the local economy over the past
five years: no slump, no boom, just muddling along. Of course there are
certain sectors that have experienced slumps (e.g. platinum mining) and
booms (like for-profit private schools) and some busts (unsecured lending)
over this period, but the private sector as a whole has grown slowly. The
reasons for this include consumer deleveraging, strikes, electricity supply
constraints, policy and regulatory uncertainty, sharply rising input costs and
slow growth in our international trading partners. These are factors that
have intensified over the past five years. Other long-term constraints include
the familiar low skills, inadequate infrastructure and excessive regulations.
Mining output slides even more
Mining production decreased by 4.7% year-on-year in January 2015.
Seasonally-adjusted production fell by 5.4% between December 2014 and
January 2015, while seasonally-adjusted mining production decreased by
0.6% in the three months ended January 2015. This was largely due to a
27% year-on-year plunge in gold production, including a 24% month-onmonth that can only be explained by load-shedding or a problem with the
data. Production of platinum group metals (PGMs) has increased steadily
over the past six months as normality returned after the five-month long
strike in the first half of 2014. It is, however, still 14% below where it was a
year ago. Iron ore production increased by 9% year-on-year and has also
Confidence differs at sector level
steadily increased over the past year, despite the sharp fall in the iron ore
The BCI covers five sectors. Confidence among retailers rose to 60 points
price. With the latest set of economic activity numbers out of China (retail
from 55. The BER notes that retailers serving high-income customers and
sales, industrial production and fixed investment) missing economists’
selling durable items are outperforming those selling to lower income groups
forecasts, one shouldn’t expect commodity prices to improve any time soon.
confidence remains net negative at 44. Wholesaler confidence remains high
at 61 points. The BER noted that wholesalers of non-consumer goods
If anything, the strong dollar provides further headwinds.
Chart 2: South African business confidence
experienced a marked deterioration in business conditions while conditions
100
improved for those selling consumer goods. Building confidence fell from
90
66 to 49 index points, with the improvement in residential activity in the
80
second half of last year losing momentum. Manufacturing confidence fell
further, from 42 points to 30. The rebound from the strike-related interruptions
70
60
50
towards the end of the year has stalled, with load-shedding in January and
40
February playing a significant role.
30
Manufacturing output slides
Manufacturing businesses are facing a tough time as confirmed by the latest
production numbers from StatsSA. Manufacturing production fell 2.3%
year-on-year in January. Seasonally-adjusted production fell 1.5% between
December and January 2015, indicative perhaps of increased load-shedding
during January.
RMB/BER Business Confidence Index
Long-term average
20
10
0
Q1 1975
Q2 1976
Q3 1977
Q4 1978
Q1 1980
Q2 1981
Q3 1982
Q4 1983
Q1 1985
Q2 1986
Q3 1987
Q4 1988
Q1 1990
Q2 1991
Q3 1992
Q4 1993
Q1 1995
Q2 1996
Q3 1997
Q4 1998
Q1 2000
Q2 2001
Q3 2002
Q4 2003
Q1 2005
Q2 2006
Q3 2007
Q4 2008
Q1 2010
Q2 2011
Q3 2012
Q4 2013
Q1 2015
and on credit. New vehicle dealers also saw improved sentiment, but
Source: Bureau for Economic Research
There was some good news for local manufacturers. A new KPMG study
showed that the percentage of imported new passenger cars sold in South
Africa in 2014 dropped for the first time since 1999, from 75% to 72%. The
Adviceworx is a juristic representative of Acsis License Group (FSP 33002)
and an authorised Financial Services Provider (FSP 44914)
Market and Economic Update
Investment Weekly
INDICATORS
16 March 2015
Best - The “real” Cricket World Cup kicks off this
week with the knock-out matches of the quarter
finals starting on Wednesday.
Worst - The rand lost further ground against the US
dollar and British pound last week, but is still stronger
against the euro on a year-to-date basis.
Equities - Global
Description
Index
Global
MSCI World
Currency
US$
Index value
1 720.0
Week
-1.26%
Month-to-date
-2.99%
Year-to-date
0.58%
1 Year
3.24%
United States
S&P 500
US$
2 053.0
-0.87%
-2.47%
-0.29%
9.90%
Europe
MSCI Europe
US$
1 616.0
-2.59%
-5.22%
0.50%
-8.55%
Britain
FTSE 100
US$
9 936.0
-4.38%
-7.32%
-2.85%
-9.69%
-2.87%
Germany
DAX
US$
1 117.0
-0.45%
-2.45%
4.98%
Japan
Nikkei 225
US$
157.9
0.27%
15.37%
15.37%
9.75%
Emerging Markets
MSCI Emerging Markets
US$
940.0
-3.19%
-5.05%
-1.67%
-0.53%
Brazil
MSCI Brazil
US$
1 446.0
-8.88%
-17.32%
-21.07%
-26.71%
China
MSCI China
US$
67.4
-0.72%
-3.37%
2.01%
16.92%
India
MSCI India
US$
527.7
-3.89%
-3.18%
6.38%
25.93%
South Africa
MSCI South Africa
US$
523.0
-5.25%
-8.41%
-3.68%
0.00%
Equities - South Africa (TR unless indicated otherwise)
Description
Index
All Share (Capital Only)
All Share (Capital Index)
Currency
Rand
Index value
51 799.0
-2.90%
Week
Month-to-date
-2.90%
Year-to-date
4.07%
1 Year
9.77%
All Share
All Share (Total Return)
Rand
6 764.0
-2.65%
-2.62%
4.46%
13.02%
TOP 40/Large Caps
Top 40
Rand
5 988.0
-2.60%
-2.43%
4.69%
10.79%
Mid Caps
Mid Cap
Rand
13 942.0
-2.99%
-3.84%
3.45%
26.19%
Small Companies
Small Cap
Rand
18 093.0
-2.28%
-2.42%
2.93%
20.40%
Resources
Resource 20
Rand
2 316.9
-6.34%
-10.98%
-2.91%
-24.09%
Industrials
Industrial 25
Rand
11 843.0
-1.95%
-0.44%
6.02%
22.99%
Financials
Financial 15
Rand
8 072.0
-0.92%
0.11%
8.23%
38.29%
Listed Property
SA Listed Property
Rand
1 927.3
-1.53%
-1.57%
9.07%
44.37%
Fixed Interest - Global
Description
Index
Global Government Bonds
Citi Group WGBI
Currency
US$
Index value
936.7
Week
Month-to-date
6.48%
4.71%
Year-to-date
3.97%
1 Year
0.59%
Fixed Interest - South Africa
Description
Index
All Bond
BESA ALBI
Currency
Rand
Index value
488.1
Week
-0.12%
Month-to-date
-1.96%
Year-to-date
1.49%
1 Year
12.55%
Government Bonds
BESA GOVI
Rand
484.4
-0.15%
-1.93%
1.15%
11.95%
Corporate Bonds
SB JSE Credit Indices
Rand
209.6
-0.06%
-0.48%
0.57%
5.04%
Inflation Linked Bonds
BESA CILI
Rand
223.8
0.35%
0.47%
0.18%
11.42%
Cash
STEFI Composite
Rand
315.3
0.12%
0.24%
1.22%
6.10%
Commodities
Description
Index
Brent Crude Oil
Brent Crude ICE
Currency
Index value
US$
55.0
Week
Month-to-date
Year-to-date
-7.92%
-12.70%
-3.51%
1 Year
-49.07%
Gold
Gold Spot
US$
1 159.0
-0.69%
-4.45%
-2.03%
-15.15%
Platinum
Platinum Spot
US$
1 118.0
-3.54%
-5.97%
-7.53%
-24.10%
Currencies
Description
Index
ZAR/Dollar
ZAR/USD
Currency
Rand
Index value
ZAR/Pound
ZAR/GBP
Rand
18.39
ZAR/Euro
ZAR/EUR
Rand
13.09
Dollar/Euro
USD/EUR
US$
1.05
12.47
Week
Month-to-date
-3.44%
Year-to-date
1 Year
-6.52%
-8.17%
-13.38%
-1.74%
-2.45%
-2.39%
-2.50%
-0.32%
-0.24%
6.86%
14.73%
2.86%
6.57%
15.24%
32.38%
Dollar/Pound
USD/GBP
US$
1.47
1.99%
4.48%
5.83%
12.62%
Dollar/Yen
USD/JPY
US$
0.01
1.22%
2.44%
1.22%
18.29%
Source: I-Net, provided as at date stipulated above
Adviceworx is a juristic representative of Acsis License Group (FSP 33002)
and an authorised Financial Services Provider (FSP 44914)
Market and Economic Update
Investment Weekly
16 March 2015
THE WEEK AHEAD
Remember, while these data releases and policy decisions may cause short-term noise and activity, investors are reminded to stick to a well-diversified,
valuation-driven investment philosophy and remain focused on the long term.
South Africa
•
The Reserve Bank releases its Quarterly Bulletin for the fourth quarter of 2014. The most important data point in this bulletin is the current account
deficit, but it also includes data on household debt and income and fixed investments.
•StatsSA releases retail sales numbers for January and February’s consumer inflation numbers.
US
•Industrial production.
•
Building permits, housing starts.
•
Federal Open Markets Committee (FOMC) monetary policy decision.
Europe
•German ZEW sentiment index.
•Eurozone February consumer inflation.
•Eurozone unemployment.
•Eurozone current account.
•UK monetary policy decision.
Japan
•Trade balance.
China
•
Consumer and producer inflation.
•
Fixed asset investment.
•Retail sales.
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Adviceworx is a juristic representative of Acsis License Group (FSP 33002)
and an authorised Financial Services Provider (FSP 44914)