Economic Overview: July 2015

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Economic Overview: July 2015


Global markets have been behaving unusually. Growth in the manufacturing sector has been much softer globally in comparison to the services sector. This has been the case in most major regions. The effect is certainly noticeable in the USA and is driven by more demand for services than goods. The behaviour will have an effect on the prices of goods, and eventually on commodities.

Chart 1

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Chart 2

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Chart 1 clearly depicts reasonable growth expectations over the medium term, although still not at the pace experienced in 2013 and 2014. The softer growth is mainly driven by softer Chinese growth.

July was dominated by Greek crisis talks, causing volatility across asset classes. The US earnings reporting season for the 2nd quarter started in July. Few companies offered surprises. Overall sales growth was down 4.5% and earnings growth was down 2.7%, both surprising somewhat to the upside. Consensus analysts have been lowering their expectations since March 2015.

The US Federal Reserve Banks had an open market committee meeting at the end of July, keeping to the established guidance. The market expects the FED to start lift off at the September 2015 Federal Open Market Committee meeting. The Dollar Index appreciated somewhat over the month, weakening the Rand and commodity prices. The lower oil prices supported consumer stocks on the back of lower inflation expectations, but the rest of the commodity basket caused commodity stocks to weaken further.

A range of themes have been used in the investment and risk management process. Domestically, load shedding has had a devastating effect on the economy. The initial impact was disruptions in the manufacturing sector, but the services sector was also hammered. As a result of higher energy-cost running generators, companies have been allocating capital to ensure energy security and margins have been trimmed. Another threat is the dumping of aluminium by Chinese producers in the South African market. Both Hulamin and Arcelor Mittal applied for import tariffs and are expecting an announcement this quarter (Q3 2015). Subsequently, comments on Government policy and Chinese relations from Jeff Radebe and Ebrahim Patel placed serious doubt on the success of the application.

The European growth is on track in terms of recovery. European GDP grew 1% year-on-year at the end of the 1st quarter; compared to the low of -1.1% 1st quarter 2013. Household consumption has accelerated to 1.7% year-on-year from an earlier low of -1.4% – a huge improvement.

The Japanese recovery has been slow. The country is perhaps where Europe was in 2013; however there are early signs of improvements. The currency has been stimulating exports and close to full employment has been achieved.

Currency wars are heating up as China allowed the Yuan to depreciate on the 10th August 2015. The currency dropped 3%. The aim is to stimulate their ailing export industry. The domestic impact will be two fold, and given a stable Rand, our exporters will lose and domestic manufacturers will experience fierce competition from Chinese imports. The picture below illustrates the size of imports from China to the various regions. The importing countries will suffer if their currencies do not weaken in line with China. Note the size of South African imports from China in 2014: we are number 9 at $44.7 billion and our exports to China were $17 billion.

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Market Overview

Chart 3: Total return to 12/8/2015

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Most global markets performed negatively in July 2015 leaving only the Euro Stoxx 50, S & P 500 and Nikkei 225 with positive performances in the last three months.

Sector performance

Chart 4: Total return to 12/8/2015

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Very few JSE sectors produced positive returns in July 2015. Consumer goods’ performance was driven by British American Tobacco, Richemont and SAB, as demand for Rand hedges picked up. The Financial sector experienced a positive month as companies like Brait, JSE, Reinet and Old Mutual performed well. Property stocks – which also form part of the Financial sector – had a strong month.

Chart 5: Asset class returns as at 31 July 2015

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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).

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

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Eugene Goosen

Eugene Goosen


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