Continued divergence in local market
Last week has been fairly quiet on world markets which is probably a good thing after several weeks of volatility.
Locally, the divergence between sectors remains large, though resource shares had a better November. For the year so far, financials have returned 24% and industrials 14%, while resources are marginally negative. The JSE Resources Index has been pulled down largely by platinum and general mining shares.
Commodity prices have fallen sharply across the board, only marginally offset by the further 8% depreciation of the rand against the US dollar. The rand itself largely shrugged off South Africa’s downgrade by Moody’s to Baa2 (the cut was not entirely unexpected as the Moody’s rating was two notches above Standard & Poor’s). The rand instead has reacted to the stronger US dollar and has appreciated against the euro year-to date.
The JSE Industrials Index is dominated by shares that are actually not very industrial in nature. So far this year, healthcare and consumer services have led the Industrials Index. Retailers, despite the tough trading environment as confirmed by Truworths and Foschini results last week, have delivered 20% so far this year.
The strong performance of the JSE Financials Index has been led by banks. The Banks Index has risen by 11% so far in the fourth quarter, taking returns for the year to 26%. Expectations for lower interest rate increases have benefited banks, listed property and bonds. The bond market was also not too phased with the downgrade. The All Bond Index has returned around 9% so far this year, with longer bonds returning 11%, almost as much as the JSE All Share Index. Local cash returns are still lagging inflation.
Small caps against large caps
JSE listed small caps have outperformed large cap shares, the opposite of what is happening globally. In the US, the large cap S&P 500 has outperformed the small cap Russell 2000 Index by around 10%. Much of the performance of global markets has been driven by the defensive utilities and health care sector, and the slightly speculative IT sector. Investors are still paying up for companies with defensive earnings and stable dividend growth, partly as an alternative to the ultra-low yields on offer in the fixed interest market. (This includes JSE listed multinationals such as SABMiller and British American Tobacco). The more cyclical (or sensitive to economic growth) sectors such as industrials and consumer discretionary are negative year-to-date in US dollar (according to MSCI indices). Global energy and resource shares have fallen out of bed, as can be expected with the collapse in commodity prices.
Globally, there is also a divergence between major markets. European equity indices such as the DAX, the CAC40 and the resource-heavy FTSE100 are all negative year-to-date, lagging the US market. Japan’s shares have finally put the disastrous first quarter behind them, with the Nikkei 225 having returned around 5%. The weak yen has helped boost the margins of Japan’s exporters, even though export volumes have not risen materially.
A key question to ask for 2015 is to what extent does falling commodity prices - particularly oil prices, which fell below $78/barrel last week – reflect weaker economic growth, and to what extend does it reflect a supply glut? On the growth side, it is clear that China is cooling, while Europe and Japan have big question marks hanging over them. But even the sluggish Eurozone economy managed to post positive economic growth in the third quarter (0.8% annualised). Germany avoided a technical recession, with marginal growth in the third quarter. France beat expectations with 1.4% annualised growth, and Italy is still in a recession.
If lower oil prices mainly reflect a supply glut, it will be a great benefit to consumers worldwide, while giving central banks room to keep rates low. Take the case of South Africa: if the current over-recovery holds for the rest of the month, petrol prices will be 5% lower in December compared to a year ago. That gives the Reserve Bank breathing space. For consumers, the 10% - 12% reduction in the petrol price since August will save them more than R1 billion a month .If the lower prices last for a year, it will offset the R12 billion tax increases the Treasury has pencilled in for next year.
Chart 1: JSE Sectors in 2014 (including dividends)
Modest third quarter for local economy
Data on the country’s main local economic sectors released last point to very modest third quarter growth, but at least some acceleration from the barely-positive second quarter.
Mining and manufacturing production positive in September
Manufacturing production rebounded strongly by 8% year-on-year in September, after a 1.2% decline in August. However, 5.8 percentage points of September’s growth was due to a 122% year-on-year increase in production in the motor industry, off a strike-affected base. Food and beverage production also posted strong growth. However, seasonally-adjusted manufacturing production declined by 1.3% in the third quarter compared to the second. This was the third consecutive quarterly decline.
In a separate survey, StatsSA reported that capacity utilisation among manufacturers has fallen over the past year, while under-utilisation has increased, mainly due to insufficient demand. With plenty of available spare capacity, there is no reason for manufacturers to invest in new factories and productive capabilities.
Mining production turned positive on a year-on-year basis for the first time since April, increasing by 5.3% in September. The August growth rate was -9.2%. Between August and September, mining production rose 7%, indicating positive momentum. The main contributor to the 5.3% increase was a rebound in iron ore production off a low base. While platinum production has started to recover, it was still lower compared to September 2013.
Seasonally-adjusted mining production increased by 0.7% in the third quarter compared with the previous quarter. The growth rate in the second quarter was 0%. Mining will therefore make a modest positive contribution to overall third quarter growth. The fourth quarter could be even better if platinum production – the largest mining sector – returns to normal.
Trade sectors mixed in September
Real retail sales increased by 2.3% year-on-year in September, up from 2% in August. Year-to-date growth in real retail sales is 2.1%. Month-on-month seasonally-adjusted growth was -0.8%, down from 0.5% in July. Seasonally-adjusted real retail sales increased by 0.9% in the third quarter, compared to the second quarter. This was up from 0.1% second quarter growth, suggesting a positive boost to third quarter GDP.
Real wholesale trade increased by 5.9% year-on-year in September from -1.8% in August. However, seasonally-adjusted real wholesale sales were negative in the third quarter compared with the second. Motor trade sales - including car sales, workshop income, fuel sales and forecourt convenience stores - increased by 8.1% year-on-year and 1.3% month-on-month. Quarter-on-quarter, motor trade sales increased by 2.9%. This sector is showing positive momentum. Even petrol sale volumes are picking up after falling for two years.
The actual third quarter gross domestic product numbers could be slightly surprising, as StatsSA are rebasing the reference year of GDP to 2010 from 2005. This is standard international practice, but means GDP growth will be calculated off a different base, as the historic series will be revised. StatsSA will also be making use of the latest global System of National Accounts (SNA 2008) as opposed to SNA 1993.
The third quarter is history and what is more relevant arguably is whether the local economy grows faster in 2015 than in 2014. The most recent indicators suggest that momentum in economic activity is picking up rather than slowing down. Hopefully this trend continues.
Chart 2: Key South African economic sectors over the past 5 years (seasonally-adjusted and smoothed)
Photo Caption: Izak Odendaal, Investment Analyst at Old Mutual Wealth.
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