Cape Town - Encouraging data from the South African Reserve Bank indicate an expected upturn in the economy in 2017, says Overberg Asset Management in its weekly overview of the SA economic landscape.
The SARB composite leading business cycle indicator increased from 94.9 in October to 95.6 in November gaining for a fourth straight month and rising on a year-on-year basis by 2.6% to its highest level since March 2015, it said.
Both the purchasing managers’ index (PMI) and SARB leading indicator indices are forward looking, which bodes well for the expected upturn in the economy in 2017, according to OAM.
The economic outlook is expected to improve and with it the earnings power of companies making up the JSE.
South Africa economic review
• New vehicle sales unexpectedly increased in January by 3.7% year-on-year, rising for the first time since November 2015. Sales growth was recorded in both passenger and commercial vehicles. The recovery occurred despite exports declining by 10.3% on the year following three months of expansion, attributed to extensive factory refurbishment at BMW plants.
The outlook for vehicle sales is gradually improving, helped by the low comparative base in 2016, the boost to consumer confidence from lower inflation and prospective interest rates, and the benefit of rising commodity prices and agricultural output on commercial demand. The National Association of Automobile Manufacturers (NAAMSA) forecasts average vehicle sales will improve in 2017 by 3.5%.
• The trade balance moved from a -R1.7bn deficit in November to a larger than expected R12bn surplus in December, the largest trade surplus in six months.
While exports fell by 6.1% month-on-month imports declined by 19.6% as inventory restocking ebbed during the festive season. Exports of mineral products and base metals were a standout feature, rising by 56.8% and 8.0% on the year, respectively.
For 2016 as a whole imports increased 0.6% on the year due to weak domestic demand while exports fared better with a gain of 5.6%, reducing the total trade deficit to -R2.9bn from -R52.2bn in 2015. The shrinking trade deficit should help to reduce the current account deficit in the fourth quarter.
• Growth in private sector credit extension (PSCE) surprised to the upside, rising from 4.6% year-on-year in November to 5.1% in December. Household credit demand increased by just 0.2% on the month leaving the annual growth rate unchanged at a depressed 0.7%.
However, corporate credit demand grew 1.1% on the month lifting annual growth from 8.5% to 10.8%. While PSCE remains weak compared to 2015 when it grew by over 10%, the recent lift in corporate credit extension signals green shoots.
Credit growth should recover gradually in 2017 helped by the low comparative base in 2016, prospects for lower interest rates, and rising business and consumer confidence.
The week ahead
• SACCI Business Confidence Index: Due Tuesday 7th February. According to consensus forecast the South African Chamber of Commerce (SACCI) business confidence index is expected to remain unchanged in January from December’s level of 93.8.
• Mining production: Due Thursday 9th February. According to consensus forecast mining production is expected to contract in December by 3.8% year-on-year a slight improvement on the 4.2% decline in November.
The December mining output figure will cap a dismal year beset by rising domestic cost pressures, infrastructure constraints and regulatory uncertainty. 2017 should show considerable improvement in mining output with the World Bank forecasting an 11% increase in metals prices during the year.
• Manufacturing production: Due Thursday 9th February. According to consensus forecast manufacturing production is expected to decline in December by 0.4% year-on-year following the larger than expected 1.9% growth in November. The gloomy manufacturing forecast is based on the manufacturing purchasing managers’ index (PMI), which slipped during the same month from 48.3 to 46.7.
• President Jacob Zuma’s State of the Nation Address: Due Thursday 9th February. Despite persistent rumours that President Zuma is planning a sweeping cabinet reshuffle after the State of the Nation Address, it is unlikely that Finance Minister Pravin Gordhan will be moved from his post.
Besides the limited time before the State Budget speech on 22nd February President Zuma has lost the authority to survive the backlash from a move against Gordhan.
• While the rand has broken below key resistance levels versus the dollar at R/$ 14.20 and 13.80 the strengthening trend is not confirmed by momentum indicators, signalling that the currency is overbought.
• The US dollar index is testing a major 30-year resistance line, which if broken will pave the way for further strong gains in the currency.
• Following the Brexit vote the British pound hit its weakest level against the US dollar since 1985. The key £/$1.30 level support level has been broken opening up a £/$1.20-1.24 target.
• 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 back above the key support level of 2.0% endangering the multi-year bull trend in US bonds.
• The benchmark R186 SA Gilt yield is now testing the key support level of 9.0% endangering the mini-bull market in bonds which has been in place since the start of the year.
• Key US equity indices, including the S&P 500, Dow Jones Industrial, Dow Jones Transport, Nasdqaq and Russell 2000, have simultaneously set new record highs, confirming a bullish outlook for US equity markets.
• The Brent crude price is well supported at $40 a barrel and having broken key resistance at $50 is targeting further gains to the next key level at $60. Base metal prices are in a bull trend confirmed by copper’s increase above key resistance at $5000 per ton.
• Gold has developed an inverse “head and shoulders” pattern, which indicates further upward momentum and a test of the $1400 target level.
• The JSE All Share index is testing an important resistance line but if this remains unbroken the index is likely to move back below the 24-month moving average at 50 900 in turn opening a downside target of 45 000. A break above 54 200 on the JSE All Share index would project an upward move to 60 000 marking a new high for the JSE.
The bottom line
• The Absa manufacturing purchasing managers’ index (PMI), prepared by the Bureau for Economic Research, jumped from 46.3 in December to 50.9 in January well above the 47.5 consensus forecast and above the expansionary 50-level for the first time since July 2016.
• The stand-out among the PMI sub-indices was the forward-looking “expected business conditions” index, which surged from 53.2 to 70.3, its highest since 2010.
• The economy is bottoming out and the equity market, being forward looking, will increasingly discount better times ahead.
• Although sentiment towards the share market remains negative seasoned investors will be increasing their exposure, taking comfort from the upturn in key forward-looking economic indicators. According to investment guru Warren Buffett: “Most people get interested in stocks when everyone else is. The time to get interested is when no-one else is. You can’t buy what is popular and do well.”
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* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.
Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report.