Zuma unlikely to last his full term in office - OAM

President Jacob Zuma. (Walso Swiegers, Bloomberg)
President Jacob Zuma. (Walso Swiegers, Bloomberg)

This article has been updated to reflect that the call to either remove or recall President Zuma from officer over the weekend was made by the South African National Defence Union, and not the South African National Defence as was erroneously stated.

Cape Town - President Jacob Zuma is unlikely to last his full term in office, says Overberg Asset Management (OAM) in its weekly overview of the SA economic and political landscape.

As President Zuma clings to power by passing blame onto his erstwhile support, his system of patronage will unwind.

Calls for his resignation from within the ANC and the tripartite alliance are likely to gain momentum as more infringements come to light. ANC secretary general Gwede Mantashe has encouraged whistle-blowers to come forward and the Office of the Public Protector has announced it will investigate the “state capture” issue.

In the past week ANC elder and Rivonia trial survivor Ahmed Kathrada published an open letter appealing to President Zuma to submit to the will of the people and step down. Over the weekend the South African National Defence Union formally encouraged lawful action to either recall or remove President Zuma from office. This call was, however, strongly condemned by the South African National Defence Force.

And on Tuesday President Zuma lived to lead South Africa for another day after a DA motion to have him removed failed by 243 votes to 133 in the National Assembly.

South Africa economic review

• Foreign investors bought a net R0.6bn worth of SA government bonds in the past week following net purchases of R14.2bn in March, taking total net purchases since the start of the year to R17.2bn. By contrast net equity outflows reached -R6.9bn last week and –R11bn during March lifting total net outflows since the start of the year to –R18.9bn.

• The Barclays manufacturing purchasing managers’ index (PMI) jumped unexpectedly higher from 47.1 in February to 50.5 in March, above the key 50-level which separates expansion from contraction for the first time since July last year. The PMI index is well above January’s 43.5 multi-year low and the 48.0 consensus forecast.

Among the sub-indices the current production index increased from 37.5 to 47.7 and the forward-looking new sales orders index from 47.9 to 53.1 indicating improved production over the next two to three months.

The expected business conditions index improved from 44.8 to 51.1 suggesting a stabilization in the manufacturing sector. The overall improvement is attributed to enhanced export competitiveness and increased import substitution as a result of the weaker rand.

• Producer price inflation (PPI) accelerated from 7.6% year-on-year in January to 8.1% in February the highest rate since June 2014 although below the 8.5% consensus forecast. Food price inflation, which accounts for 25% of the PPI basket, was one of the key culprits rising from 7.8% to 9.0%.

Meat price inflation gained from 0.8% to 4.5% as the effect of livestock culling began to dissipate. Inflation in grain milling products, and oils and fats increased from 15.6% to 16.6% and from 26.1% to 28.6% respectively.

However, there is evidence of broader-based inflationary pressure: PPI excluding food, beverages and tobacco increased from 7.6% to 8.1% which in the context of tepid economic growth suggests a knock-on effect from the weaker rand. The data is likely to prompt the SA Reserve Bank into further monetary tightening.

• Growth in private sector credit extension (PSCE) increased from 8.5% year-on-year in January to 9.0% in February above the 8.6% consensus forecast. Credit extension to the corporate sector increased from 13.1% to 13.2% driven largely by renewable energy investment spending.

Household credit extension grew for a third straight month from 4.6% to 4.8% the fastest pace since March 2014. Mortgage advances, which comprise around 60% of all household credit, grew 4.7% on the year the fastest growth since 2010.

While the latest data is relatively upbeat credit growth is likely to flatten out in the months ahead in response to further interest rate increases and the impact of rising inflation on household disposable income. Corporate credit demand will likely remain constrained by weakness in economic growth and investor confidence.

• The trade deficit narrowed from R17.96bn in January to R1.07bn in February, below the R4.65bn consensus forecast. Although large declines in the trade deficit are traditionally expected in February as exports pick up after the festive season, the R19.03bn cumulative deficit for the first two months of the year is nonetheless well below last year’s R30.96bn equivalent.

Among the main export categories vehicles and transport equipment increased 109.1% year-on-year, precious stones increased 51.9%, electrical equipment 28.1%, and base metals 4.8%. Among the import categories mineral products fell 29.4% due to depressed oil prices.

Agricultural imports only increased 4.4% significantly below the 25% increase over the previous three months, helped by better than originally expected domestic agricultural production. While trade data is especially volatile the trend so far this year suggests an improvement in the current account deficit to around 4.5% of GDP in 2016.

• After remaining unchanged in the fourth quarter (Q4) last year the Bureau for Economic Research (BER) manufacturing survey index fell from 34 in Q4 to 18 in Q1 the lowest level since Q3 2009.

The survey shows that eight out of ten manufacturers are currently dissatisfied with current business conditions. The transport and basic metals sectors reported the lowest readings. The biggest constraint on companies’ willingness to invest is the general political climate pushing the related index measure to 83 the highest on record.

• Domestic vehicle sales fell sharply in March by 14.1% year-on-year, far worse than February’s 8.1% decline and the 8.1% consensus forecast. Passenger car sales fell for a 12th straight month by 13.6% on the year compared with a 6.0% decline in February.

Unfortunately vehicle exports offered little respite falling 18.5% on the year, accelerating from the 1.6% fall in February. While the severity of the overall decline may be distorted by the timing of the Easter holidays the data is nonetheless discouraging. For the first quarter as a whole domestic car sales fell 37.5% quarter-on-quarter annualized.

South Africa political review

• The Constitutional Court had been expected to confirm the Public Prosecutor’s constitutional powers and the binding nature of its recommended remedial measures regarding “undue” benefits President Zuma received at his Nkandla home. However, the unanimous Constitutional Court declaration that President Jacob Zuma had “failed to uphold, defend, and respect the Constitution” was unexpected and adds significant impetus to his likely removal from office. (See Bottom Line for more in-depth analysis).

The week ahead

• Gross Reserves: Due Thursday, April 7. According to consensus forecast gross reserves are expected to tick up marginally from $45.75bn in January to $45.95bn in February reflecting the slight increase in the gold price and stabilisation in the rand.

• Manufacturing production: Due Thursday, April 7. Manufacturing production has been on a downward trend since June last year and in January contracted by 2.5% year-on-year. According to consensus forecast the rate of decline in manufacturing production will moderate to -2.1% on the year in February, although the recent Barclays/ BER purchasing managers’ index (PMI) suggests a further contraction may be avoided. The PMI increased to an eight-month high of 50.5 in February, exceeding the key 50 level, which demarcates expansion form contraction, for the first time since July last year.

Technical analysis

• The rand remains below successive support levels suggesting a continuation in the rand’s depreciation.

• 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.

• Despite the recent uptick in bond yields the long-term JPMorgan global bond index bull trend remains intact, with the yield targeting a new low during the fifth and final wave.

• The US 10-year Treasury yield has broken above key resistance levels of 1.8% and 2.0%. However, there is unlikely to be a major bear trend in US bonds as the deleveraging phase is still in its early stages.

• The benchmark R186 SA Gilt yield broke out of its long-term bull trend as a result of “Nenegate”. The new bear trend for the R186 is underpinned by resistance at 9.0% with a risk of further upside to 10.50%. While SA bond yields may fall in line with global bonds they are unlikely to return to the bull trend.

• The MSCI World Equity index has broken downward from a rising wedge formation which has been intact since the 2008/09 global financial crisis. Given the magnitude and duration of the 2009 - 2015 bull market, the overall correction is likely to reach a downside target for the MSCI World Equity index of 1 400.

• Since the 1950s the Dow Jones and S&P 500 have displayed 7-year up-cycles and the top of the current US equity cycle is likely to have just occurred. The next major wave down will complete the 16-17 year secular bear market that started in 2000. The secular bottom should occur around June 2016.

• The S&P 500 index has broken downward from a rising wedge pattern, which is traditionally a trend-changing pattern. The downward trend is likely to remain intact unless the index decisively regains the 2070 level. A further negative signal is that the Dow Jones Transport Index, traditionally a lead indicator for the broader market, is leading the broader market lower on the downside.

• Despite the recent price rally, Brent crude’s break below the key $30 support level in February suggests a continuation of the weakening long-term trend to a downside $25 target.

Copper is regarded a reliable lead indicator for industrial commodity prices and barometer of global economic growth. Despite its recent rally the copper price broke below the key $4 500 support level in February suggesting further downside ahead.  

• Gold has broken its recent downtrend by rising decisively above the $1 100 resistance level. An extended break above $1 250 is needed to confirm the end of gold’s bear market.

• The JSE All Share index needs to break decisively above the 24-month moving average at 50 400 in order to end the recent period of consolidation. Alternatively the JSE All Share index is likely to break to the downside to an initial target of 45 000 and an ultimate target of 43 000.

Bottom line

• The Constitutional Court had been expected to confirm the Public Prosecutor’s constitutional powers and the binding nature of its recommended remedial measures regarding “undue” benefits President Jacob Zuma received at his Nkandla home. However, the unanimous Constitutional Court declaration that President Zuma had “failed to uphold, defend, and respect the Constitution” was unexpected and adds significant impetus to his likely removal from office.

• The Democratic Alliance has initiated the process to have the president impeached but in order to succeed requires endorsement by two-thirds of parliament and therefore considerable support from ANC members of parliament. Impeachment is unlikely as the ANC will want to make any leadership changes internally rather than in the public eye. ANC members of parliament will tow the party line and continue to support the president in parliament.

• While the ANC will continue to support the president in public Zuma’s support base has been rapidly unravelling ever since his firing of Finance Minister Nhlanhla Nene and more recently “Guptagate” which erupted two weeks ago amid allegations by senior government officials of “state capture”.

• As a result of President Zuma’s declining popularity the ANC is likely to suffer a severe loss in support at the upcoming local elections. Once the local election results are out the ANC will be on the look-out for a scapegoat and will likely increase calls for Zuma’s removal from office. According to TNS, a market research company, the percentage of black urban voters supporting the president has declined from 43% a year ago to 27%. This poll was taken prior to Mcebisi Jonas’ statement that the Guptas had offered him the job of Finance Minister.

• Although it may still be too early to make bold predictions news flow on political developments needs to be closely scrutinised in determining optimal portfolio weightings. The first quarter Bureau for Economic Research manufacturing sector survey reported the highest ever response rate from firms rating the current “political climate” as a constraint on investment.

• Clearly a change in political leadership would have major repercussions for both local and foreign investor confidence. Standard & Poor’s would likely postpone its expected downgrade of SA’s sovereign debt to “junk status”. Bond yields would come down, the rand would strengthen and interest rates would no longer need to increase. After underperforming badly over the past two years, domestically-biased sectors may be set to outperform, especially sectors benefiting from a recovery in investment confidence. The construction and construction materials sectors would be obvious beneficiaries.

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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