The anomaly arising from the combination of falling equity prices while the economic outlook is showing dramatic improvement, presents an exceptional investment opportunity.
Confidence in South Africa is booming.
“Consumer confidence has never been so high. Business confidence has seldom risen at such a rapid pace,” says Overberg Asset Management (OAM) in its weekly economic and market overview.
“The SA Reserve Bank’s leading economic indicator, which projects expected economic conditions 6 to 9 months ahead, is at multi-year highs.”
Will the boom in consumer and business confidence translate into actual economic activity? The analysts at OAM believe it will.
“Confidence is a prerequisite for increased spending. If confidence levels can be maintained at their current elevated levels, actual spending and investment is bound to follow.”
South Africa economic review
• Growth in private sector credit extension (PSCE) picked up from 5.7% year-on-year (y/y) in February to 6.0% in March, beating the consensus forecast for no change. The main driver was corporate credit growth which increased from 7.3% to 7.7%, while household credit growth remained unchanged at 3.9%.
Credit growth is expected to maintain its gradual recovery into 2018 in line with falling interest rates, strong improvement in business confidence and surge in consumer confidence. Credit extension is a prerequisite for converting the current boom in confidence into an actual increase in economic activity.
• The trade balance swung back into an unexpectedly strong surplus of R9.47bn in March, compared with a deficit of R0.6bn in February. On a month-on-month basis exports increased by 9.2% while imports fell 2.0%.
For the year to date, the cumulative trade balance remains in deficit to the tune of R18.63bn compared with a surplus of R4.22bn in the same period last year. The chief culprit is the more than 20% increase in imports of mineral products driven by higher oil prices.
While favourable global conditions should continue to support export volumes, the ongoing trade dispute between the US and China poses a risk. Meanwhile, improving domestic business and consumer confidence will boost consumer spending and fixed investment spending, underpinning import growth. As a result, the trade surplus is likely to narrow in 2018 compared with 2017.
• Total vehicle sales growth accelerated from 1.1% y/y in March to 3.6%, in April despite the slowdown in total export sales from 24.5% to 0.8%. Passenger vehicle sales growth recovered strongly from -7.1% to 6.4%. The contraction in commercial sales growth moderated from -3.3% to -1.4%.
The outlook for vehicle sales growth is steadily improving, underpinned by lower borrowing costs, subdued vehicle price inflation, and rapidly rising consumer confidence. The National Association of Automobile Manufacturers of South Africa forecasts total domestic vehicle sales will increase in 2018 by 3%, helped by the overall economic recovery.
• The BER/ABSA manufacturing purchasing managers’ index (PMI) bucked the global downward trend, jumping from 46.9 in March to 50.9 in April, well above the 48.0 consensus forecast and regaining the expansionary 50-level.
Among the PMI sub-indices, the purchasing price index gained from 60.7 to 66.9 due to rising oil prices and higher imported mineral prices. The suppliers’ performance index fell from 53.4 to 47.8 amid concerns over supplier reliability.
However, the other sub-indices showed improvement. The business activity index increased from 46.0 to 49.1, albeit still below 50. The forward-looking new sales orders index surged higher from 44.5 to 56.5, indicating rising demand in the months ahead.
In addition, the PMI leading indicator, which is the ratio of orders over inventories, remained above 1, rising from 1.1 to 1.2 signalling that demand continues to outstrip supply.
While the expectations of business conditions index softened from 73.7 to 69.6, it remains elevated by historical standards. The PMI data bodes well for the manufacturing sector in the second quarter and into the second half of the year.
The week ahead
• South African Chamber of Commerce and Industry business confidence index: The South African Chamber of Commerce and Industry business confidence index is expected to maintain its positive momentum in April after slipping slightly in March from 98.9 to 97.6. Greater political and policy certainty should keep the business confidence on an upward trajectory.
• Mining production: Following unexpectedly strong y/y growth of 3.07% in February, mining production is expected to have shrunk by -2.60% in March according to consensus forecast. The decline is attributed to the base effect of high year-ago comparative data.
However, the outlook is improving, helped by the combination of buoyant international commodity prices and the imminent resolution of uncertainties surrounding the Mining Charter.
• Manufacturing production: The Absa manufacturing purchasing managers’ index (PMI), which fell back into sub-50 contractionary territory in March, indicates manufacturing growth remained muted during the month.
According to consensus forecast, manufacturing production increased in March by 1.0% y/y, up only slightly from 0.6% in February. However, as the year progresses manufacturing activity is likely to lift in line with strengthening domestic demand.
Technical analysis
• Having broken the key resistance levels at R12.50/$, the rand has returned to its appreciating trend, targeting a break below R11.00/$ over coming months.
• The US dollar index has tried but failed to break through a major 30-year resistance line suggesting the three-year bull run in the dollar may be over.
• The British pound has broken above key resistance at £1.35/$, promoting further near-term currency gains to a target range of £1.40/$ to £1.50/$.
• The JPMorgan global bond index is testing the support line from the bull market stemming back to 1989, which if broken will project further sharp increases in bond yields.
• The US 10-year Treasury yield has broken decisively above key resistance at 2.5%, targeting the next key resistance level at 3.0%. A break above long-term resistance at 3.6% would indicate an end to the multi-decade bull market in bonds.
• The benchmark R186 2025 SA Gilt yield has broken below key resistance at 8.6%% indicating a new target trading range of 8.0 to 8.5%.
• Key US equity indices, including the S&P 500, Dow Jones Industrial, Dow Jones Transport, Nasdaq and Russell 2000, have simultaneously set new record highs, confirming a bullish outlook for US equity markets.
• The Brent oil price has broken above key resistance at $70 and likely to remain in a trading range of $65 to $75 over the foreseeable future. Base metal prices are in a bull trend confirmed by copper’s increase above key resistance at $7 000 per ton.
• Gold has developed an inverse “head and shoulders” pattern, which indicates further upward momentum and a test of the $1 400 target level.
• The break in the JSE All-Share index above key resistance levels at 56 000 and 60 000 signals the early stages of a new bull market.
Bottom line
• Confidence in South Africa is booming. Consumer confidence has never been so high. Business confidence has seldom risen at such a rapid pace. The Reserve Bank leading economic indicator, which projects expected economic conditions 6 to 9 months’ ahead, is at multi-year highs.
• The FNB/BER Consumer Confidence Index (CCI), surged in the first quarter (Q1) from -7 to an all-time high of +26, exceeding its previous record of +23 reached in Q1 2007. The dramatic improvement signals a considerable recovery in consumers’ willingness to spend.
Put in context, this is the first reading since Q2 2014 that has been above “0”. It is also the highest reading since the data series began 36 years ago.
• The RMB/BER Business Confidence Index (BCI) surged in Q1 by 11 points from 34 to 45. Although still below the key 50-level, which separates expansion from contraction, the BCI has seldom risen so rapidly. Since 1975, when the data series began, the BCI has risen by 11 points on only 15 occasions. The BCI implies a much-improved economic growth performance in 2018.
• Will the boom in consumer and business confidence translate into actual economic activity? It will, according to the Reserve Bank composite leading business cycle indicator, which provides a reliable barometer for expected business conditions 6 to 9 months’ ahead.
• The latest SA Reserve Bank composite leading business cycle indicator is signalling a dramatic pick-up in economic activity in the second half of the year. The indicator has capped its third consecutive monthly increase, rising to 108.3 its highest level since June 2011 also 108.3, and close to the all-time high of 108.9 recorded in February and March 2011.
• Confidence is a prerequisite for increased spending. If confidence levels can be maintained at their current elevated levels, actual spending and investment is bound to follow.
• How will the surge in consumer and business confidence and the anticipated dramatic improvement in economic activity affect performance of the JSE?
The brightening economic outlook is unequivocally good news for the JSE, especially for domestically focused shares. Yet the euphoria which swept through the South African equity market in December in celebration of the change in government leadership has largely evaporated since the start of the year. The JSE All-Share Index has declined 3% year-to-date.
• The anomaly arising from the combination of flat to falling equity prices while the economic outlook is showing dramatic improvement, presents an exceptional investment opportunity.
