The economy is off to a good start

The economy couldn’t have asked for a better start to the year — the rand is stronger than it has been in years, commodity prices are soaring and the JSE is booming.

Globally, too, markets are performing well. The MSCI’s emerging market benchmark index this week traded at its strongest level since mid-2011. This was buoyed by positive manufacturing data coming out of several Asian countries, which saw Asian stocks and the Hong Kong Stock Exchange reach levels last seen in 2007.

In the United States, the Nasdaq, the Dow and the S&P 500 reached record highs this week.

Global business confidence is also at a record high, according to accounting firm Grant Thornton.

As dire as 2017 might have seemed at times, in some respects South Africa performed well. According to Charlie Bilello of Pension Partners, every major country’s exchange-traded fund was positive for 2017, with an average return of 28%. South Africa ranked 11th in performance and delivered a return of 36%.

The JSE ended 2017 at 17.5% higher for the year. Kumba Iron Ore gained the most, with its market valuation growing 138%, according to Sasfin’s David Shapiro.

Economist Thabi Leoka said: “The markets have been quite strong, especially toward the end of the year.”

This was partly attributable to better-than-expected growth in US, an interest rate hike by its Federal Reserve and an expectation of at least three more hikes in 2018, she said.

In South Africa, a market rally leading up to the end of the year had little to do with the fundamentals of the economy but rather in anticipation of Cyril Ramaphosa being elected ANC president and then because he won.

“Looking into this year, it’s a mixed bag,” said Leoka. “It all depends on what Ramaphosa as ANC president does for the country. It would be a big win for him if he removes Jacob Zuma as South African president. The market would be very happy; it would be a sign of better things to come and would boost business confidence, which has been low over the past 18 months.”

The ANC’s newly elected national executive committee (NEC) will hold its first meeting this weekend and new political direction could emerge from it.

A strong rand has already led to a drop in the fuel price, despite a higher oil price and, if sustained, it could lead to an interest rate cut this year.

The rand strengthened to 12.75 to the dollar on the back of Ramaphosa’s win at the ANC’s electoral conference in mid-December and has continued to improve, with the exchange rate hovering at 12.30 on Thursday. It was last as strong in June 2015.

Ralph Mathekga, a political economist and the author of When Zuma Goes, said the market appeared to be getting used to the ANC’s rhetoric and the rand did not even lose its gains when the NEC was shown to be split between Ramaphosa’s camp and that of presidential contender Nkosazana Dlamini-Zuma. It also did not react much to policy decisions to nationalise the South African Reserve Bank and to pursue land expropriation without compensation.

‘The one thing coming out clearly … is that there is a numbness in the financial community. There is crisis in mainstream politics across the world. And so you are seeing currencies are becoming more resilient to political upheavals,” Mathekga said.

The ANC’s recent conference left many questions unanswered and “much of what has been said must be translated into what must happen”. There was still uncertainty about the political push and pull within the ANC and who will ultimately win the day.

Jordan Weir, a trader at Bayhill Capital, said trades dropped off over the festive season when big business went on holiday.

But there was a general trend to invest in “SA Inc” stocks (those companies whose fortunes are closely tied to that of the economy) and less trading of dual-listed 
stocks. Meanwhile, global markets are showing strong signs of growth, Weir said.

“SA Inc is still running now into January. Local traders are starting to get a bit worried about the run on SA Inc, particularly in the run-up to the [February] budget speech. Who is to say what happens there?”

The concern is that these stocks are becoming overblown, with bank shares reaching levels not seen in a year or two, he said.

There is also a fear that the rand has gone too far and will slide back to 13.20 to the dollar when the hype dies down.

But the outlook for 2018 is not bad, said Weir. “The bottom line is, if you stripped out politics and all that noise, the world is doing well.”

Listed property is a stock to watch, as well as anything linked to agriculture, in anticipation of another good harvest, and businesses that benefit from a high oil price.

Peter Major, the director of mining at Cadiz Corporate Solutions, said several commodities were at multi-year and even all-time highs.

But, although some analysts view this as the start of an upturn in prices, Major warned that the prices are already too high and are unlikely to be sustained.

“I don’t think any commodity is going to be this high at the end of the year, except maybe uranium,” he said.

There was an unprecedented boom in commodity prices from 2001 to 2011. “At that stage, we kind of knew the party was over. The prices were still high but you couldn’t raise money.”

By the end of 2015, there was a “capitulation”, when prices dropped so incredibly low that in 2016 people began buying all they 
could in anticipation that they would rise.

“Guys came in and bought the hell out of them” and that growth has continued for two years in a row, Major said.

“There is no way it’s going to last more than a couple of months. They are all too high, there is too much exuberance and the world is not growing.”

For example, the coal price, at $121 a tonne, is soaring. “That should be public enemy number one.”

Iron ore, at $74 a tonne, is not doing too badly either. Copper is at $7.15 a tonne (last seen in 2014) and zinc was at $3.35 this week, its highest level in a decade. In 2017, palladium prices rose 55%.

The drivers behind this could include that the fact that two powerhouses, accounting for 40% of the world gross domestic product, are still growing and consuming resources. Growth in China is at 6.8% and the US is growing at 3.2%.

The dollar is now weaker at 1.20 to the euro and bodes well for the profitability of mining companies, as commodities are sold in dollars, whereas expenses are incurred in local currencies.

In South Africa, although the local currency is strong and resource stocks are booming, Ramaphosa cannot undo the damage caused by mine closures in past years, Major said.

On Thursday the price of Brent crude oil was close to $68 a barrel, a level last seen more than two and a half years ago, in May 2015.

The oil price started going up towards the end of 2017 following meetings during the year of the Organisation of Petroleum Exporting Countries (Opec), which decided to extend the cut-back in oil production, said Chris Bredenhann, PWC’s Africa oil and gas advisory leader.

For eight years, Opec had refused to cut back on production, which saw the market becoming oversupplied and oil prices coming down, and Opec’s major competitors, namely the shale oil producers in the US, had to close up shop. But at the end of 2016, Opec began to cut back on supply.

“The impact of that decision is to bring us back to more closely reflect market fundamentals,” Bredenhann said.

Oil at $68 a barrel is small fry when compared with 2014 when the price soared past $110 a barrel, but Bredenhann said he would be surprised if it ever reached those levels again.

‘Since the oil price reduction started in 2014, the industry has experienced a number of technological advances and improvements, giving it an ability to operate at levels of $50 and below, and so the market has adjusted.

“If we do see $100 a barrel, [it will be] on the back of what the market looks like and costs creeping up into oil businesses again.”

He said there are two wild cards that could affect the current price.

The first is what the American shale oil producers do. “As the price goes up, so does their profitability … And so if the price stays at these levels, the American element can have a dampening effect on the Opec decision.”

The second critical factor is geopolitics, he said. For example, currently prices have been buoyed by anti-government rallies in Iran and, in Libya, by a damaged pipeline, which the oil company concerned described as a “terrorist” attack.

Advertisting

Salie-Hlophe accuses Goliath of lying and racism

In response to Goliath’s gross misconduct complaint, Salie-Hlophe says Goliath has ‘an unhealthy obsession with my marriage’

Treasury is still seeking SAA funds

The government has committed an additional R2-billion to the airline, but has yet to pay it out

‘There were no marks on his neck’, Neil Aggett inquest...

The trade unionist’s partner at the time he was detained at John Vorster Square says she now believes his death was not a suicide
Advertising

Press Releases

Boosting safety for cargo and drivers

The use of a telematics system for fleet vehicles has proved to be an important tool in helping to drive down costs and improve efficiency, says MiX Telematics Africa.

Silencing the guns and firearms amnesty

Silencing the guns and firearms amnesty

Gender-based violence is an affront to our humanity

Gender-based violence is an affront to our humanity

UK-Africa investment summit 2020: Think Africa Invest SA

UK-Africa investment summit 2020: Think Africa Invest SA

MTN unveils TikTok bundles

Customised MTN TikTok data bundles are available to all prepaid customers on *136*2#.

Marketers need to reinvent themselves

Marketing is an exciting discipline, offering the perfect fit for individuals who are equally interested in business, human dynamics and strategic thinking. But the...

Upskill yourself to land your dream job in 2020

If you received admission to an IIE Higher Certificate qualification, once you have graduated, you can articulate to an IIE Diploma and then IIE Bachelor's degree at IIE Rosebank College.

South Africans unsure of what to expect in 2020

Almost half (49%) of South Africans, 15 years and older, agree or strongly agree that they view 2020 with optimism.