The first half of 2019 came and went in a flash. Global trade dynamics have ruled market fundamentals for over a year now and the news continues to be dominated by the United States (US). In any given week the market goes from being hopeful that a resolution is imminent, to hopeless on the back of another headline stating that trade talks between the US and China have stalled again. One thing is certain though, there is always a tweet from President Donald Trump to keep us all on our toes.
Locally, the focus during the second quarter was on local National Elections. The people of South Africa (SA) went to the polls and got their chance to have a say. The ANC secured a comfortable majority nationally of 57.5%, with the DA at 20.8% and EFF at 10.8%. Gauteng, which was a major concern for many political analysts, was a close call. It was believed to be the decider as to whether President Cyril Ramaphosa would have the mandate from the people to effect the necessary changes. ANC got 50.19% of the votes, DA clinched 27.45% and EFF managed 14.69% of the votes in Gauteng. Below is a chart showing the number of seats in parliament gained or lost by each party and at the bottom, the total number of seats held.
Source: Absa WIMI (July 2019)
President Cyril Ramaphosa elected a slightly leaner cabinet (28 Ministries, down from 34) and delivered his second State of the Nation Address (SONA) of the year. Moody’s released a credit opinion post the new Cabinet announcement. They continue to highlight the need for structural reforms and more importantly, concrete plans for higher potential growth.
The third quarter of 2019 kicked off with a temporary truce between the US and China on the trade talks which set markets off on a solid start. Unfortunately, the World Bank released its new forecasts, revealing that they have revised their global GDP expectations for 2019 from 2.9% to 2.6%. The chart below shows that the Chinese economy continued to slow down in the second quarter of 2019. This is the weakest pace of growth for China since the quarterly data tracking began in 1992, showing the strain caused by sluggish domestic output and continuing trade tensions with the US.
Locally, Q1 GDP data was shocking, coming out at -3.2%, down from 1.4% in the previous quarter. We are currently tracking Q2 data for signs of a recovery. High-frequency data, which gives some indication of where GDP for the quarter might print has been a mixed bag. The data is indicating that there is a subdued rebound and reduced risks of a technical recession. Headline CPI continues to track around the mid-point of the target band of 3-6%, printing 4.4% (Year-on-Year) YoY in April and 4.5% in May, with Core CPI at just 4.1%. USD:ZAR rate has been performing well in the last month, appreciating by close to 7%. Year-to-date (YTD), the local currency is in the top five best-performing currencies in the emerging markets basket. This will not only bode well for inflation numbers but it will also help ease pressures on consumers.
Glimmers of hope
The Department of Home Affairs has announced new measures to make traveling easier for business travelers and also for tourists. When presenting the budget for Home Affairs on the 10th of July, the deputy minister Njabulo Bheka Nzuza spoke of improved security systems such as an advanced passenger processing system; the establishment of a National Targeting Centre which will do risk assessment of visitors and will be linked to new E-gates which will open automatically as each individual arrives in SA; and also the launch of E-visas in November 2019 which will allow for visitors to apply for visas online. If implemented correctly this could boost tourism and also make it easier for business travelers trying to operate in the country.
Another potential green shoot is the proposal by the ANC to launch a Sovereign Wealth Fund (SWF) for SA. If well executed, it will silence the nay-sayers but if implemented poorly, it will not only do damage locally but will also be a signal to offshore investors to stay away for longer. There is still very little detail as to how the ANC intends to proceed, and given that it was part of the parties’ election manifesto it could potentially die a natural death. Those who are against the idea highlight issues such as the twin deficits (fiscal and current account deficits); a massively constrained budget; lack of excess cash; lack of resources and funds to make the fund viable; questionable governance and dependence on foreign portfolio flows, just to name a few. SWFs are usually linked to resource-rich countries, particularly oil generating sovereigns, but France, Italy, and India have managed to use their strategic funds to attract offshore investors into key economic areas.
Source: Bloomberg, Absa WIMI (July 2019)
The markets ended Q2 on a positive note, the ZAR appreciated against the USD, bond yields were lower and the stock market was up. Looking forward, all eyes will be on Medium Term Budget Speech (MTBPS) in October. There is much to be done, but all is not lost.
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