Cape Town - Stocks on the Johannesburg Stock Exchange have fallen 9% in two weeks, one of the steepest declines since the global financial crisis, according to Overberg Asset Management (OAM).
In its weekly economic and market overview OAM said the US stock market has had one of its worst two-week selloffs since the global financial crisis pushing the S&P 500 index down by over 10%. It further notes that since the US selloff has infected the JSE it is important to examine the outlook for US markets. (See bottom line)
"As the adage goes, if Wall Street sneezes the rest of the world catches a cold."
South Africa economic review
• The South African Chamber of Commerce and Industry (Sacci) business confidence index surged in January from 96.4 to 99.7, its highest level since October 2015. According to Sacci: “Political developments have vastly improved the business mood.” Among the 13 sub-components making up the Sacci index, nine were positive and six showed an improvement, led by better trade imports, a stronger rand, increased retail sales, and a sharp gain in trade exports.
Financial conditions were also reported to be much easier than a year ago. There is traditionally a two-quarter lag between a gain in business confidence and increased private sector business investment. The gain in the Sacci business confidence index bodes well for GDP growth in the second half of the year.
• After a relatively strong 1.5% year-on-year increase in November, manufacturing output unexpectedly gained further momentum in December with a gain of 2.0% on the year, despite a negative reading in the manufacturing purchasing managers’ index (PMI). Seven of the ten manufacturing sub-components showed positive annual growth, led by glass and non-metallic products at 12.1% and motor vehicles at 8.0%.
In the fourth quarter (Q4), manufacturing output grew by a steady 1.5% quarter-on-quarter, up strongly from 0.9% in Q3, despite a PMI which signalled continued contraction. Manufacturing will have made a sizeable contribution to Q4 GDP growth, adding an estimated 0.7 percentage points to the headline number. With the PMI rising sharply in January, actual manufacturing activity should exhibit further upward momentum in Q1, helped by improved political and policy certainty.
• Mining production growth slowed sharply in December to 0.1% year-on-year from 6.5% in November. The slowdown is attributed to the base effect of high year-ago comparative data. Among the mining sub-components, the biggest culprits in volume terms were gold production which fell 12.4% on the year and coal which fell 5.5%.
Other base metals showed strong growth with iron ore rising 15.9%, manganese 10.1% and nickel 11.2%, but not in sufficient volumes to stem the overall decline. In addition to recording a year-on-year decline, mining production also contracted in the fourth quarter (Q4) by 1.6% quarter-on-quarter, estimated to have shaved around 0.4 percentage points from Q4 GDP growth.
• Mining output is expected to improve in 2018, boosted by strong global demand for base metals, rising international commodity prices and greater certainty over South Africa’s mining legislation. South Africa’s controversial mining charter is currently suspended pending judicial review.
The deputy minister of mineral resources, Godfrey Oliphant, announced at the African Mining Indaba in Cape Town that: “The leaders of this industry must talk to each other. Government leaders must talk to the Chamber of Mines and we have started discussions.”
Oliphant’s consultative approach is in stark contrast to the unilateral approach shown by Mining Minister Mosebenzi Zwane, with whom the Chamber of Mines refuses to engage.
The week ahead
• Quarterly Labour Force Survey: Released on Tuesday. StatsSA reported that the unemployment for the fourth quarter dropped 1 percentage point to 26.7%.
• South African Chamber of Commerce and Industry (Sacci) Trade Conditions Survey: Due on Tuesday, February 13. The Sacci trade conditions survey, after gaining sharply in December to a four-month high, is expected to post additional gains in its January reading, boosted by strong demand in key export markets. In 2017, the trade surplus registered R80.55bn its highest since 2010 and well above the 2016 surplus of R1.1bn.
• Retail sales growth: Due on Wednesday, February 14. Having surged in November by 8.2% year-on-year due to Black Friday discounts, retail sales are expected to have given back some momentum in December. According to consensus forecast retail sales are expected to gain in December by a more modest 4.5% on the year.
Retail sales are expected to pick-up momentum in 2018 amid greater consumer confidence, a strengthening rand, reduced inflation and lower interest rates.
• Having broken key resistance levels at R13.50/$ and R12.50/$, the rand has returned to its appreciating trend, targeting a break below R11.70/$ 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 £1.40-1.50/$.
• 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 the potential for a new target trading range of 8.0-8.5%.
• 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 $60 and likely to remain in a trading range of $60-70 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 signal the early stages of a new bull market.
• The JSE has lost 9% over the past fortnight, one of the sharpest declines since the 2008/09 global financial crisis. The reason for the decline is the sharp selloff in US equity markets over the same period.
• The JSE Top 40 and New York Stock Exchange have a very close correlation with an R-square reading of 0.833. This means 83.3% of the movement in the JSE Top 40 can be explained by the movement in the New York Stock Exchange.
• The US stock market has had one of its worst two-week selloffs since the global financial crisis pushing the S&P 500 index down by over 10%. Since the US selloff has infected the JSE, it is important to examine the outlook for US markets. As the adage goes, if Wall Street sneezes the rest of the world catches a cold.
• Despite the US market selloff, economic fundamentals remain in rude health. Companies are expected to continue delivering double-digit earnings growth, helped by US tax cuts, rising productivity, synchronised global growth and a weaker US dollar.
The consensus earnings forecast for this year is a heady 18%. The selloff coincided with one of the strongest US company earnings seasons on record with a very high percentage of companies surprising on the upside, prompting a sharp upward revision in analysts’ earnings forecasts.
• The forward price-earnings (PE) multiple of the S&P 500 index has fallen back to its long-term average of 15x, down from its peak of 20x in December. The combination of a falling equity market and rising earnings forecasts has restored the forward PE valuation back to 2014 levels.
• It is extremely rare for an equity bear market to occur during a period of economic expansion. The IMF last month upgraded its global economic growth forecast for 2018 from 3.7% to 3.9% citing the “broadest synchronised global growth upsurge since 2010”.
Moreover, periods of synchronised growth tend to be virtuous cycles usually lasting 3-4 years. This one only started in 2017. The latest economic data suggest world GDP growth will beat the IMF forecast, potentially reaching 4.5% in 2018.
• The US market selloff is blamed on inflation fears and concerns over higher interest rates. However, in a global context inflation remains far from threatening. While the US is at or close to full employment, there is still significant slack in other major economic regions.
The Eurozone, which registered consumer inflation of just 1.3% in the past month, still has an unemployment rate of 8.7%. In Japan, despite full employment, inflation remains almost non-existent. The Bank of Japan continues to battle the risk of deflation.
• In the US, concerns stem from the 2.9% year-on-year wage increase in the latest jobs data. However, most of the wage increase was concentrated on the professional services sector which is notoriously volatile. Moreover, wages were boosted by an unusually large decline in recorded weekly hours worked, also suggesting a technical correction in upcoming data.
• Provided economic prospects improve faster than inflation and interest rates expectations, equity markets will remain on an upward trajectory. Based on the brightening economic outlook and the absence of global inflation, the outlook for US equity markets and hence the JSE remains upbeat.
For the full report, including a look at international markets, click here.
* 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.
Disclaimer: 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.
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