11 May Economic Overview: April 2015
MARKET OVERVIEW AND DRIVERS
The South African economy has been plagued with bad news over the past three years. Strikes choked the economy in 2013 and 2014 and the Euro crisis added fuel to the fire, while 2015 growth seems to be retarded by load shedding. The cost of load shedding is being felt in the corporate sector from various angles, for example:
- Elevated capital spend on generators will reduce ROE as assets (the generators) are being purchased just so that turnover can be maintained.
- Production disruptions are affecting general productivity, increasing wastage and unit labour costs and thus squeezing margins.
We expect both the CPI and PPI to pick up after enjoying subdued inflation, driven mainly by the plunging oil price from the June 2014 peak.
The growth retarding effect of load shedding has been flowing through to both business- and consumer confidence as can be seen on the chart below.
Load shedding has affected business- and consumer confidence negatively
The various asset market returns were very divergent. Resource stocks were hammered as commodities were priced at five year lows, mainly due to additional supply and placid Chinese demand – iron ore, oil and platinum were the major offenders. The chart below plots a group of standardised commodities (source: Bloomberg).
Performance of standardised commodities
As was the case last month, global markets are still being driven by US and European growth (and the Dollar and interest rate effect thereof), Japanese monetary stimulus and the Chinese market dynamics.
- The first quarter US GDP was a shocker. The March 2015 consensus survey expected 2.2% quarter on quarter, and the April survey expected 1.4%, the number printed 0.2%. Nett exports disappointed, driven by Dollar strength, but private consumption was also weak over the quarter. We think weather had a huge impact as has been the case in seven of the past ten years. We expect second quarter GDP to normalise to around 3% quarter on quarter and the average for 2015 to be around 2.8%. The strong Dollar will hamper earnings growth on multinationals that will limit the S&P 500 Index performance somewhat. However, consumer confidence is high which is supporting consumption.
- The Euro/Dollar performance will drive the European markets in conjunction with the Euro stimulus being pumped into the market. We expect Euro weakness to persist until there is very strong evidence of both strong European growth and inflation. The same drivers will affect the Japanese market.
- Chinese market dynamics are becoming interesting, monetary policy stimulus via rate cuts and the cutting of bank capital requirements is gaining momentum and should help growth. However, the securities regulator has been amending trading margin requirements to reduce bubble risk in the equity market.
The table below indicates our view of the relevant assets, based on expected performance, using a scale from -2 (meaning we aren’t in favour of these assets) to +2 (meaning we are strongly in favour of these assets).
Real GDP expectations (using IMF forecasts) are set out below:
If you have any questions, feel free to comment below.