A review of the South African economy and equity market in 2019

Central Bank easing aids gains in global equity markets in 2019

Global equity markets have (for the most part) traded well into positive territory year to date, as central banks have taken a more accommodative monetary stance in 2019 and trade war tensions have started to ease in the latter part of the year.

While the US Federal Reserve was looking to unwind its balance sheet and raise lending rates in 2018, 2019 has seen the central bank reversing course to cut lending rates and add liquidity to financial markets once again. For now, the Fed looks to have paused monetary easing as the labour market shows signs of improvement and the world’s largest economy looks to have averted an economic recession for the time being. Inflation does however remain low and the ongoing trade dispute remains an ongoing threat to global economic growth.

The European Central Bank (ECB) lent a hand to financial markets by cutting the interest rate on bank reserves to -0.5% this year. The ECB has also commenced with a renewed bond buying program in November, to the sum of EUR20bn a month.

2019 has seen all the BRICS (Brazil, India, China & South Africa) nations as well as other major economies such as Australia and England embarking on or continuing some form of monetary easing as well.

Local Economic Conditions in 2019

Gross Domestic Product (GDP) data shows muted growth but no recession

The year got off to a rocky start with first quarter GDP showing a larger than expected contraction of 3.2% quarter on quarter. The second quarter did see a better than expected recovery of 3.1% q/q growth (est 2.4% q/q). A weak domestic economy with macro-economic threats (such as the ongoing trade war narrative) has seen the South Africa Reserve Bank lowering its outlook for economic growth in 2019 at each Monetary Policy Committee (MPC) meeting, arriving at its latest forecast of 0.5% annualised for 2019.

Inflation contained within a narrow range

Consumer Price Index data (CPI) has shown inflation for 2019 to have traded in a narrow range between the 4% and 4.5% levels, well within the Reserve Bank’s 3% to 6% targeted range. For the current financial year, the SARB expects CPI inflation to be realised at 4.2%.

Unemployment rate a worrying trend

In the last four quarters (Q2 2018 to Q2 2019) has seen the unemployment rate steadily ticking higher to reach an 11 year high of 29.1% in Q2 2019. Job losses have been noted across both the formal and informal sectors with increases in the unemployment rate realised across genders and age groups.

Consumer confidence an increasing concern

The Bureau of Economic Research (BER) has shown that consumer confidence in the third quarter of 2019 for South Africa has reached its lowest index reading of -7 (since the last quarter of 2017). Rising taxes, unemployment and electricity prices have been amongst the substantial negative inputs to the index reading.

Business confidence off its worst levels, although still depressed

The Business Confidence Index (as reported by the BER) has been on a steady decline since the second quarter of 2018 reaching a 20 year low in Q3 2019. The index reading has however rebounded in the last quarter of 2019 with the BER reporting slightly improved sentiment in the construction, retail and manufacturing sectors.

South Africa’s Credit Ratings on negative watch

Major ratings agencies S&P Global, Moody’s Investor Relations and Fitch have all downgraded the outlook of South Africa’s sovereign debt from ‘stable’ to ‘negative’ in 2019. While Fitch and S&P already have the country’s debt ratings at sub-investment grade (‘junk’), Moody’s continues to have SA’s localised debt at one notch above ‘junk’ status. Moody’s will review their current rating in February 2020 after the Finance Minister’s Budget Speech.

The best and worst performing Jse sectors

The decliners

Weak economic conditions and a constrained consumer are reflected on the JSE by the significant underperformance of the general retailer sector, which has fallen more than 20% year to date (as of the 28^th of November 2019). Besides the domestic considerations, retailers have had the added pressure of a weak economic climate in other jurisdictions in which they operate as well, such as the UK, Australia and the rest of Africa (hyperinflation). With a continued pressure on consumers, weak economic growth and no sign of a recovery just yet, it seems unlikely that the sector will see a meaningful recovery in the near term.

Other notable sector declines linked to the state of the domestic economy would be that of financial and construction counters. The construction sector would have found a further negative impetus from low infrastructure spend by government. The decline of the construction sector, which has seen counters such as Group Five and Aveng collapsing, is particularly concerning as the sector accounts for a significant contribution to employment within South Africa.

The gainers

Gains on the All-Share index have been led by resource counters, most notably producers of Platinum Group Metals (PGMs).

Renewed gains in dollar denominated PGMs, combined with a slightly softer rand would have created a positive backdrop for local miners of these metals, who have been producing strong recoveries in earnings from what has been a previously a depressed base.

M & A activity within the sector has seen Lonmin acquired by Sibanye-Stillwater, while Impala Platinum has announced the further acquisition of North American Palladium.

Within the industrial/base metal space, the price of iron ore (Nymex 62% FE / metric ton) has moved from $65/mt to a high of $100/mt, following a series of supply disruptions from major producers. A fatal dam collapse at Vale’s operations in Brazil as well as cyclones off the coast of Australia affecting Rio Tinto and the BHP Group‘s operations, have been among the catalysts for the strong move in iron ore. The latter part of the year has seen recoveries in production of the steel making ingredient temper the extent of gains from those companies which derive a strong proportion of earnings from the metal (BHP Group, Kumba Iron Ore, Anglo American Plc, Assore, African Rainbow Minerals to name a few).