Not even a month ago, at the end of August, the Johannesburg Stock Exchange (JSE) was trading at 60 000 points. We were flying, and it seemed that all of the past four years of pessimism was starting to turn into cautious optimism.
Overnight, the JSE fell by more than 8%.
Media attributes this to weak economic growth, corruption, expropriation without compensation and the negative second quarter Gross Domestic Product (GDP) number. Although all the above mentioned does indeed play a role, not much has changed on the local front since the start of the year.
We still have the same president, the same cabinet, the same economic problems and the same high level of unemployment.
What has changed dramatically is the external factors. Most notably the trade war between the United States of America and China. Early rounds of tariff increases have not caused any damage to the economic growth numbers in either country. However, the rhetoric by Donald Trump is of more damaging tariffs to come.
Of course, China will retaliate. The biggest losers in all the rhetoric were that of emerging markets and emerging market currencies. This is not the first time in history that there is a selloff in emerging markets and it won't be the last.
Emerging markets are currently trading at a 30% discount to that of developed markets. Should common sense prevail, and the rhetoric eases off, we can very well see the JSE back to 60 000 points. Investors and central bankers alike should look past all the negative headline news flow. It is best to focus on the value.
The central banks of Argentina and Turkey increased interest rates to try and protect the currency. Turkey increased rates to 24% while Argentina increased theirs to 60%. Unfortunately, these moves were done out of fear and it doesn't seem to be working. When you look at the graph below we can see that both currencies declined by 38% and 51% respectively.
We can see that the rand only devalued by 16% against the dollar while our interest rates remain on hold. Its seems as if the South African Reserve Bank has remained calm. We will come out of this emerging market selloff much stronger than the rest.
Locally the GDP contraction was not as bad as indicated in the headline number. On a year-on-year basis GDP managed growth of 0.5% in Q2 and 1.5% in Q1. If agriculture, extremely volatile at the best of times, is stripped out, annualised GDP would have increased by a slender 0.1% in Q2. Output from agriculture, forestry and fishing fell in Q2 by an annualised 29.2% and in Q1 by 33.6%.
By contrast the sector grew in Q3 and Q4 last year by 41.7% and 39.0%. The volatility of agricultural output suggests that the sector is quite likely to rebound in the second half of the year, reversing the negative effect it has had on GDP in the first half.
If one looks at all the above objectively one would see that the EM selloff will not last forever and that the SA technical recession is just that, a technical recession. Expect the GDP number to improve in the third quarter.
*Kirk Swart is an analyst at Overberg Asset Management, an Authorised Financial Services Provider (No 783) which specialises in the private management of local and global discretionary portfolios as well as pension products.
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