Unfortunately February 29th, the extra calendar day of trading this leap year, did not have any positive significance for the local markets as most closed in the red, led by losses in banking and financial sector stocks. The JSE All Share Index marginally fell to close at 49,415.31 (up by 0.6% for the month) and Year-to-Date, the JSE ALSI is down 2.5%. The JSE Financial and Industrial Index (FNDI), which makes up about 82% of the JSE All Share Index, has been the engine of the JSE bull market since March 2009, while the Resources Index has been in a vicious bear market since 2011. The FNDI Index is currently trading on the same level as a year ago. It fell about 13% from November to January and based on the graphs looks like it has been forming a bottom. The charts seem to suggest that the Financial Index, which fell by 22% during ‘Nene-gate’ and is still 17% down from its April 2015 high, looks to be preparing for a recovery, although there is no certainty.
Market and economic news for the month was undoubtedly dominated by Finance Minister Pravin Gordhan’s much-anticipated Budget Address on 24 February. Following the turmoil of the ministerial position late last year, Gordhan’s first budget after his return a mere two months ago was relative-ly calm and workmanlike, this amidst expectations of tax hikes and spending cuts during the tough economic times SA is currently facing. The Minister stressed the need to reaffirm the government’s commitment to close the gap between spending and revenue, implementing a plan for stronger economic growth and cooperation between government and the business sector. The single most important and encouraging announcement in the budget aims to finally curtail the massive public sector wage bill by R50 billion over the next three years. The problem, however, is that government will have to realise lower compensation numbers for the market to believes it.
One interesting addition to this year’s budget speech was the introduction of a ‘Sugar Tax’ on all sugar-sweetened beverages, similar to other sin taxes on cigarettes and alcohol. It was recently reported that a 20% tax on sugary drinks, could bring in an estimated R7-billion in additional revenue each year, but criticism of the new tax includes the fact that this would unfairly discriminate against poor communities and would not necessarily have much a positive impact on obesity rates in SA.
Not everyone was convinced that the 2016 budget will strengthen the economic position of South Africa, though, and the rand weakened immediately after Gordhan’s budget was published from R15.23 to R15.58 against the US Dollar. Some commentators highlighted that the weaker rand was not only caused by Gordhan’s budget speech, but in all likelihood by Moody’s decision to cut Brazil’s sovereign rating to junk, which signalled the ominous possibility that SA might be next. Although the Minster showed a clear intent to keep the current investment grade rating intact, economists and experts are not entirely convinced that enough has been done to stave off a ratings downgrade in June this year.
One of the main factors to the rand’s downward performance is poor productivity trends when compared to its main trading partners and competitors. Second in importance is the country’s Net International Investment Position, otherwise known as the accumulated current account position, which is the net amount of money flowing into or out of a country. Global Commodity prices would be the third most important factor affecting the rand. All of these factors combined have resulted in a vicious drop in the value of ZAR, but analysts still feel the rand remains expensive at an overvaluation level of 8%. Since the rand historically rallies after reaching deep discounts, it would be a safe approach for investors to bet on further rand weakness to come, based on the fundamentals surrounding the valuation of the currency.
The 30% plunge in the rand against the US dollar over the last year, which includes the 14% collapse since December has taken the country to the edge of recession. With the economy expected to grow just 0.9% this year, the outlook for growth over the next three years is the worst it has been since 1997. The weaker outlook is as a result of lower commodity prices, higher borrowing costs, diminished business and consumer confidence and drought. As a result of low growth expectations and rising debt costs, the international ratings agencies are prowling, looking for any sign that suggests the country is not good for its debts.
As such government seems to be more open to promoting co-investment in capital projects, improving policy certainty, reducing regulatory hurdles for business and introducing regulatory reform – for instance around labour laws. State owned enterprises, once the vehicle for state-led growth, are no longer sacrosanct, but political debate around this continues. While government appears committed to the likes of Eskom, Transnet and SAA (with R14.4 billion in government guarantees it cannot afford to let the airline fail), small and medium sized entities could be sold or quietly shut down.
Although it may appear to be ‘old news’ by now, the effects of the worst drought in more than a century continue to impact very negatively on the economy and the suffering of many drought-stricken communities all over the country remains a huge problem. The drought has resulted in a massive reduction of South African farming output and has hurt manufacturing, curbing growth in the continent’s second-largest economy to an annualised 0.6% in the fourth quarter. This has prompted Finance Minister Pravin Gordhan to reduce his GDP growth forecast for 2016 by almost half to 0.9%. The drought has a negative impact both in terms of employment and industrial output, contributing to rising government debt, leading credit-rating companies including, Standard & Poor’s, to downgrade the nation’s debt close to junk. The central bank, International Monetary Fund and World Bank all forecast growth of less than 1% for this year. South Africa needs annual expansion of 7.2% from 2018 to achieve the government’s goals of reducing the jobless rate to 6% by 2030, the World Bank said last month. The unemployment rate was 24.5% in the fourth quarter.
In one of the sharpest uninterrupted trends seen in a long time, gold shares have really ‘outshined’ with the JSE Gold Index up by a massive 93% so far in 2016, reaching its highest level in three years. What seems like a ‘stairway to heaven’ on the charts, Harmony’s share price has gone from R15.60 at the end of 2015 to R52 rand this week (1 March), brushing by R8 a share in November last year.
The platinum index, by comparison, has been sedate, up only 38% so far in 2016 (versus 93% gain for the Gold Index). Anglo Platinum is up by 76% so far in 2016 and at another high for the year today, but Impala Platinum has so far been a big drag on the index, up only 28% in 2016. Amplats constitutes 32% of the Platinum Index and Impala 31.9%. Analysts are not getting excited about these share prices, however, and believe the gains seen in resources are simply a rebounding from over-sold levels rather than gaining on long-term prospects, so buying in at these levels would most likely not be recommended.
In property news: the past month also saw the emergence of a shocking ruling by the Supreme Court of Appeal (SCA) that could result in property owners owing large sums of money to municipalities in debt incurred by previous owners dating back up to 30 years. Before one can register a transfer one has to provide a registrar with a deeds clearance issued by the municipality. According to Bobby Bertrand’s property lawyer and director, Bowman Gilfillan, the SCA ruled last month that new property owners can be held liable for historic debts dating back three decades. Gilfillan said as the law stood, before a seller was liable only for debts incurred over the past two years for electricity, water and other services, and 30 years for rates in terms of section 118 of the Local Government Municipal Systems Act in order to obtain a clearance certificate. The matter is currently heading to the Constitutional Court, but if this comes into effect, it could spell absolute disaster for the SA property market and we can only speculate as to the potential negative consequences this could mean for the economy as a whole.
The biggest news on the global front and the latest attempt to keep growth on track in the world’s second largest economy, is that China’s central bank cut the proportion of funds banks must set aside as reserves. The People’s Bank of China, the central bank, said it would trim the so-called “reserve requirement ratio” by 0.50 percentage points. This news caused both UK and Asian markets to trade higher, led mostly by an advance in commodity-trading stocks. The UK’s FTSE100 marginally advanced to close at 6, 097. The manufacturing data readings in China (PMI), which is down to 49.0 suggests a softening in demand, which may explain why the Chinese government decided to cut the required reserve ratio (RRR) for banks by 50 basis points the day before.
An interesting snippet of information: this year is only the 18th time in the history of the S&P 500 that February 29 (leap day) has fallen on a day that the market was open. Even though it serves as an extra day of trading, historically it has not been kind to stock markets. True to its track record, US markets ended the month in negative territory amid subdued trading in the final session of February. The S&P 500 Index declined 0.8% to settle at 1,932.23, which is the 3rd consecutive negative month for the S&P. The Dow Jones Industrial Average Index lost 0.7% to close at 16,516.50, while the NASDAQ Index also fell 0.7% to finish at 4,557.95. Despite the +3% gain in the oil price, band and health-care shares led the decline in the market, which is very unusual when the oil price is up. It is possible that markets have been depressed due to worries about the slowdown in the global economy, but the US market has also not factored in the positives.
Interestingly, in contrast to historically negative market results of leap day itself, Leap Years in general tend to be good for stock markets, but possibly because they happen to be election years when stock markets have historically turned in positive returns. We foresee this to be true for the US especially with its national elections, and possibly to a lesser extent here in SA with municipal elections taking place later this year.
Helping the US consumer are strong employment, low interest rates which benefit debt consolidations and mortgage expenses, and low energy prices, which reduces fuel and heating costs. Due to the fact that the consumer makes up two-thirds of the economy, this should help them spend their increased savings on new cars, furniture, vacations and entertainment. The strong data released last week suggests that the US economy is recovering better than expected, which also raises expectations that the Federal Reserve might hike interest rates later this year.In the Eurozone, with the continuation of falling of prices, the threat of deflation in the currency bloc becomes ever more imminent and will most likely ensure another round of policy easing expected from the European Central Bank on March 10th. Although consumer spending, virtually the only engine of growth, is holding up relatively well, an array of weak business sentiment surveys and poor PMI data indicate that the 19-member currency bloc is increasingly suffering from the emerging markets slowdown. Combined with weak sentiment and output data, the dismal inflation figures suggest that the bloc’s tepid growth is slowing, adding to calls for fiscal and monetary policy action to prop up an economy that has yet to grow back to its precrisis size.