Economic Overview: August 2015

Economic overviews image

Economic Overview: August 2015


The South African second quarter real GDP grew at a meagre 1.2% year on year (YoY). Consensus was expecting 2%. Quarter on quarter (QoQ) real GDP was down -1.3%. The big shocker was agriculture as the industry had two negative quarters driven by a severe drought (Q1 2015 -4.4% QoQ and Q2 2015 -4.7% QoQ). Mining and quarrying, electricity and manufacturing all had a negative quarter. This detraction was mainly driven by energy supply.

The GDP stagnation was driven by weaker world trade, lacklustre commodity prices, rising input cost and unreliable inputs (especially labour). Labour and electricity are unreliable and have high price acceleration. This is disrupting the economy to such an extent that, together with government policy, the South African Reserve Bank expects the potential GDP to be below 2%.

In the global space, the slow down in China is starting to have a more prominent effect in the market than the potential rate hike in the United States. The graph below paints a picture of the trend in the major Chinese economic sectors. Retail is doing alright but, like with industrial production and fixed investment, the trend is down. China passenger vehicle sales are down 3.85% YoY, placing pressure on copper and platinum. The Chinese authorities are aggressively addressing the weakness by increased spending on infrastructure and monetary stimulus.

graph 1

The intervention in the Chinese Yuan in mid-August caused chaos in the markets. The Shanghai Stock Exchange Composite Index plunged 28% in a week after a 22% correction from the top in June 2015. The effect on world markets was severe, causing huge volatility across asset classes. The Chinese authorities started intervening by pumping billions of Yuan into the market. The magnitude of the intervention in the currency and equity market is unknown, but the Chinese foreign exchange reserves dropped by over $400 million over the last year.

To support the Yuan they had to buy Yuan and sell Dollars (reserves). This caused a second problem: buying Yuan extracts money from the system in an environment where authorities want as much stimulus as possible. Therefore, the bank reserve ratio, as well as deposit and lending rates, had to be cut further.

graph 2

The United States is humming along nicely. The unemployment rate is at 5.1% and they are creating around 200 thousand jobs a month with some pressure emerging from labour costs. This will drive the Federal Reserve board to start hiking rates. The market expects US policy rates to increase by a placid 0.73% over the next year (from 18/9/2015).

graph 3

Market Overview

Total return to 31/08/2015

picture 4 (chart 3)

Markets across the globe were weak in August, drawing down aggressively with high levels of volatility. South Africa and Asia have been leading the drawdown and recovered somewhat in September.

Sector performance

Total return to 31/08/2015

Picture 5 (chart 4)

Telecomm, health care and consumer goods sectors had large drawdowns in August but consumer goods and telecomm recovered somewhat in September.

Asset class returns as at 31 August 2015

picture 6 (chart 5)


The table below indicates our view of the relevant assets, based on expected performance, using a scale from -2 (implying we aren’t in favour of these assets) to +2 (implying we are strongly in favour of these assets).

Picture 7

We reduced our view of Japan equities to +1 due to China risk. We increased Asia ex. Japan to +1 (high risk) due to the aggressive sell off. We also moved South African bonds to neutral after the sell off.


table 8


Real GDP expectations (using IMF forecasts) are set out below:

Table 9


Until next month, enjoy the rest of the Rugby World Cup!

Eugene Goosen

Eugene Goosen



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