This week the JSE All Share Index convincingly broke through to new highs beyond the psychologically important 30 000 level.
Since the market lows in mid-August the local market is up about 17% in rands and 25% in dollars.
South African markets are following the energetic march of global emerging markets. Since mid-August, the Morgan Stanley Emerging Market Index is up 26% in dollars while developed market equity indices have managed less than half that.
When concerns about the health of the United States and European financial systems rocked global markets in the past two months, emerging markets felt an initial wobble but quickly recovered once investors began to see that their concerns should be contained to where the problem was.
South Africa, as an emerging market, is enjoying favourable sentiment along with its share of strong emerging market investment flows into our equity, bond and currency markets.
But whether the local financial markets can sustain these gains depends on whether the underlying economic fundamentals justify the euphoria.
This week total new vehicle sales plunged. Although the passenger vehicle sales category moved into negative growth territory at the beginning of the year, commercial sales were buoyant. The industrial sector of the economy was keeping things ticking over.
The aspect of most concern about the latest vehicle sales report is that light commercial vehicle sales have turned sharply negative and heavy commercial vehicle sales growth was flat for the month. Given the reliability of this sector as a an indicator of economic activity, the outlook for growth is no longer rosy. Recent manufacturing, business activity and retail sales indicators reinforce this trend.
With this unfavourable turn in the economic data, speculation is growing about what to expect from the South African Reserve Bank’s monetary policy committee meeting at the end of next week.
Although the bank’s target consumer inflation index, the CPIX, came in lower than the markets were expecting last week, the 6,3% annual growth rate is still outside of the bank’s inflation band of 3% to 6%.
There is strong evidence that the bank’s 3% in interest rates hikes since mid-2006 has slowed consumer spending and now also the broader economy. The prudence of tightening monetary policy even further is being questioned, especially as the main culprit that led to the inflationary pressure was not rampant consumer spending but higher oil and food prices, exacerbated by a weak rand.
In mid-2006 the government and the Reserve Bank began to talk about a preferred “weaker” level for the rand. The bank has been active in the currency markets to prevent the rand from strengthening. It is this bias that has contributed directly to our inflation woes. Hiking interest rates further will only put more pressure on the broader economy, which has already begun to dampen.
We should leave the rand, which has recovered nicely, to do the inflation-fighting work for us and give the economy some relief by halting any further interest rate increases. We need to steer the economy back on to a solid growth path or financial markets will cease to look to our positive potential and begin to price in the bad news.
Réjane Woodroffe is head of international portfolio management at Metropolitan Asset Managers