Economic Overview: May 2015

Economic overviews image

Economic Overview: May 2015


Economic Overview and drivers

Placing some perspective on the size of regional economies is useful to gauge their potential impact on world markets. The USA, EU, Japan and China represent close to 60% of global nominal GDP, thus these economies are the drivers of global trade. The US Dollar is still viewed as the global reserve currency and has a huge impact on markets.


US growth has been steadily improving after the great recession. The medium term, year-on-year measurement is towards the higher end of the five year growth channel at 2.7%, whereas the quarter-on-quarter growth was weak due to cold weather and port disruptions. The market is expecting year-on-year growth to grow by around 3% over the next three years.

US real GDP & Consumer sentiment

US real GDP & Consumer sentiment

Given the current expected growth rate and the level of employment and inflation, we expect the Federal Reserve to start increasing short term interest rates gradually from September 2015.


European growth has bottomed out and is steadily improving year-on-year. The region grew by 1% at the end of the first quarter of 2015, and quarter-on-quarter it improved by 0.4%. The ultra low interest rates and European Central Bank (ECB) quantitative easing seems to have had a positive impact on consumer sentiment and business confidence. Growing the Eurozone by 1% equates to 33% of the South African nominal GDP.

European Union real GDP, consumer sentiment & IFO business expectations

European union real GDP, consumer sentiment & IFO business expectations.

Exports are a sizable portion of the EU economy and play a major role in the repair of the economy. The knock-on-effect can be substantial; however a weak Euro will be critical if one wishes to sustain the export momentum. The volume of Euros created by the ECB via the Quantitative Easing (QE) programme will ensure oversupply and, as a result, a weak Euro over the next two years.


Growth in Japan has been volatile after the great recession. Japanese interest rates are nearing zero and have not been effective in inflating the economy. The 2014 increase in VAT had a severe effect on disposable income, depressing consumer confidence

Japan real GDP

Japan real GDP

The Bank of Japan has been very aggressively expanding the monetary base by applying QE to inflate the economy. The QE has managed to weaken the currency, thus stimulating this export driven economy. Operating margins on the Nikkei 225 index are nearing similar highs to those seen before the great recession. This should stimulate job creation in a fairly tight labour market, and in return inflate wages and expand disposable income.


The pace of economic growth in China has been tapering down since the great recession. The re-engineering of the economy from focussing on fixed capital formation, to a consumption led economy has led to reduced spending on infrastructure and residential property development. Property prices have been under severe pressure placing strain on the financial system. Capacity utilisation in China has dropped, this is causing deflation to be exported to trading partners and is placing commodity prices under pressure, especially base metals.

China GDP & Bloomberg estimate

China GDP & Bloomberg GDP estimate

South Africa

Over the past five years, South African growth has been hijacked by government policy, strikes and capacity constraints. The constraint caused by electricity production is evident in the chart below.

South Africa GDP and Electricity Production

South African GDP and Electricity production

Thanks to strikes and capacity constraints, South African exports have not managed to capitalise on the extremely weak Rand. The inflationary effect of the weaker currency has eroded disposable income, and the effect of the lower oil price has been partly negated by fuel levy tax increases. This has dampened both consumer and business confidence.

Market Overview

Total return to 5/6/2015


The graph above paints a great picture of market performance over the past three years.

The past three months hugely contributed to the Hang Seng Index performance in Hong Kong. European markets had a similar tendency, though performance was mainly generated over the past year as the economic recovery gained momentum, the European markets had some profit taking over the past three months. The Nikkei index in Japan has been performing consistently over the past year.

Domestic markets have been appreciating steadily over the past three years, taking some profit in the last three months.

Total return to 5/6/2015

Sector performance

Sub sectors as at 5/6/2015

Sub sectors as at

Asset class returns as at 31 May 2015

Asset class returns as at 31 May 2015 10


Equity markets had a healthy correction over the past month and a half. The bottom-up three year total return on stocks we cover directly, expect an annualised total return of 18.2% for the SWIX 40 index.


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).

Asset AllocationTable




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



Until next month!

Eugene Goosen

Eugene Goosen


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