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Cape Town - The decline in global risk appetite due to the Greek debt crisis means that the rand and SA financial asset prices have been hit more than most, says Overberg Asset Management in its weekly overview of the SA market landscape.
"The latest climax in the Greek debt crisis has reverberated throughout global financial markets," says OAM.
"The outcome over the next few days will be critical for the Greek people but will also have a pronounced indirect effect on SA investors."
"While traumatic for Greece the global fallout from a Grexit is unlikely to cause more than a temporary correction in global and SA financial markets," according to OAM.
Market overview
SA economic review
• The SA Reserve Bank’s Quarterly Bulletin showed an unexpected narrowing in the current account deficit from 5.1% of GDP in the fourth quarter (Q4) 2014 to 4.8% in Q1 better than the 5.1% consensus forecast. The improvement came in spite of a deterioration in the trade balance from –R35bn in Q4 to –R71bn in Q1 and is likely attributed to a sharp increase in dividend receipts which shored up the deficit on the services and net transfer payments account from –R163bn to –R117bn. The outlook for the current account deficit will benefit from lower oil prices, higher vehicle exports and a normalisation in platinum group metal exports. However, any improvement will likely be held back by continued electricity supply disruptions, and lower commodity resource export prices.
• The SA Reserve Bank’s Quarterly Bulletin showed growth in real gross domestic expenditure increased from 0.3% quarter-on-quarter annualised in the fourth quarter (Q4) 2014 to 3.4% in Q1. The gain is attributed to household consumption expenditure which increased 2.8% up from 1.6% the previous quarter. By contrast growth in gross fixed capital formation moderated from 2.6% to 1.8% led by a -0.6% contraction in public sector investment growth while private sector investment grew only moderately by 1.6%. Surprisingly government consumption expenditure shrank by -1.9% the first quarterly contraction since 2008 which the Reserve Bank attributes to slower growth in government employees. Although growth in household disposable income increased from 1.9% to 2.6% households remain heavily indebted with the household debt to disposable income rising from 78.0% to 78.4%. Overall the data points to a weak investment environment due to regulatory uncertainty, the threat of renewed industrial action, and energy supply disruptions. Meanwhile the consumer is constrained by high debt, rising inflation, and weak employment growth.
• Producer price inflation (PPI) accelerated from 3.0% year-on-year in April to 3.6% in May well ahead of the 3.3% consensus forecast. On a month-on-month basis PPI increased by 0.8%. The sharp increase in PPI is attributed to food price inflation which increased from 5.4% to 6.4%. Maize prices, which have risen around 30% since the end of January due to drought conditions, are starting to affect food price inflation and may soon filter through to the consumer price inflation (CPI) level. The data raises the likelihood that the SA Reserve Bank (Sarb) will hike the benchmark repo rate by 25 basis points at the next policy meeting on 23rd July. The Sarb Governor has made repeated references in recent weeks to the upside risk to CPI due to higher wage settlements, a weaker rand, higher fuel prices and the threat of rising electricity tariffs.
• Growth in private sector credit extension (PSCE) increased from 9.3% year-on-year in April to 9.5% in May slightly ahead of the 9.4% consensus forecast. Credit growth to households remained subdued, falling from 3.3% to 3.2% while credit growth to companies remained strong at 14.4% although slower than the previous month’s 15.1%. Annual growth in mortgages which accounts for 40.1% of total credit declined from 4.9% to 4.8% although the improving trend in place since last November remains intact. Credit growth is likely to remain relatively subdued over coming months due to a combination of poor growth prospects, weak consumer and business confidence, high household indebtedness and tight lending standards.
• The National Energy Regulator of SA (Nersa) declined the application by Eskom for a 9.58% tariff increase. Jacob Modise, the chairperson of Nersa, confirmed the regulator’s decision on Monday stating that Eskom had not provided reasons for the delays in commissioning the new power stations in Medupi, Kusile and ingula. Modise also cited Eskom’s alternative funding sources including a R23bn cash injection and the pending R60bn debt/equity swap.
• Foreign investors were net buyers of SA equities and bonds in the past week, buying a substantial R4.86bn of bonds and more modest R0.82bn of equities. For the month of June as a whole net buying of equities was more pronounced at R8.7bn taking year-to-date net purchases to R31.56bn. Bond purchases have been lower, in line with the global rout in bonds, with net purchases for June and year-to-date of R1.63bn and R10.11bn respectively. In the past week foreign purchases of SA equities were tilted in favour of the resource sector followed by the industrial sector. There was slight net selling of the financial sector while trading activity in the property sector was neutral.
SA political review
• President Zuma released the Farlam Commission of Inquiry’s report into the Marikana Massacre. The Marikana report recommends further investigation into the conduct of Police Commissioner Riah Phiyega. However, the commission found that Deputy President Cyril Ramaphosa should not be investigated further. The finding comes as a huge relief to the Deputy President keeping alive his chances to succeed Zuma as head of the ANC. Lawyers representing families of the miners who lost their lives during the massacre had demanded that Ramaphosa be prosecuted for his alleged complicity in the police’s actions.
• The High Court ordered the National Director of Public Prosecutions Shaun Abrahams to consider laying criminal charges against government officials responsible for the failure to follow a court order and detain Sudanese President Omar al-Bashir. The government officials are close allies of President Zuma including Police Minister Nathi Nhleko, State Security Minister David Mahlobo and Defence Minister Nosiviwe Mapisa-Nqakula. Judge President Dunstan Mlambo reported that: “A democratic state based on the rule of law cannot exist or function if the government ignores its constitutional obligations and fails to abide by court orders.”
• The government capitulated to union resistance against its proposed 6.4% public sector wage increase, reverting to the originally agreed 7% wage deal. The 2012 wage agreement which based wage increases on consumer price inflation (CPI) stipulated that if actual CPI is lower than the projected average, the difference would be deducted from wages in the following year. In 2014 public sector wages were calculated according to a projected CPI of 6.2% whereas actual CPI came in at 5.6%. The new agreement will put an additional burden on the State Budget which is already under considerable strain from a rapidly growing public sector wage bill.
The week ahead
• Quarterly Employment Survey: Due Tuesday 30th June. Little to no improvement in employment levels is expected for the first quarter. Public sector employment levels are expected to show a decline in line with resignations from the civil service prompted by proposed pension reforms. Meanwhile private sector employment growth is likely to be held back by poor business confidence.
• May trade data: The trade balance swung into a R4.99bn surplus in May from a revised R1.44bn shortfall in April, the South African Revenue Service (Sars) said on Tuesday.
• Kagiso manufacturing purchasing managers’ index (PMI): Due Wednesday 1st July. The manufacturing PMI is expected to show a slight decline from 50.8 in May to 50.3 in June.
• Naamsa vehicle sales figures: Due Wednesday 1st July. The year-on-year decline in annual vehicle sales growth is expected to improve from -3.2% in May to -5.0% in June.
• Sacci business confidence index: Due Wednesday 1st July. The business confidence index, which slumped to a 16-year low in May, is expected to show some recovery in June.
• BER consumer confidence index: Due Thursday 2nd July. The BER consumer confidence fell sharply in the first quarter (Q1) from 0 to -4. Little improvement in consumer confidence is expected in Q2 due to weak employment prospects, rising inflation, high household indebtedness, and continued electricity supply disruptions.
Technical analysis
• The rand remains below successive support levels suggesting a continuation in the rand’s depreciation. A break above the key “Fibonacci” level of R/$12.15 signals further depreciation in the rand to the R/$13.00 level.
• The US dollar index is testing a major 30-year resistance line, which if broken will pave the way for further strong gains in the currency.
• Despite the recent uptick in bond yields the long-term JPMorgan global bond index bull trend remains intact, with the yield targeting a new low during the fifth and final wave.
• The US 10-year Treasury yield has broken above key resistance levels of 2.0% and 2.2%. However, there is unlikely to be a major bear trend in US bonds as the deleveraging phase is still in its early stages.
• The benchmark R186 SA Gilt yield is testing support at 8.15% and needs to break below resistance at 7.90% in order to resume its bull trend.
• The MSCI World Equity index is in the 5th and final wave of a rising-wedge formation. A rising-wedge formation is a typical trend-ending signal. European equities are set to outperform US markets. The Nikkei exhibits the most bullish pattern.
• Since the 1950s the Dow Jones and S&P 500 have displayed 7-year up-cycles and the top of the current US equity cycle can be expected in the next year. The next major wave down will complete the 16-17 year secular bear market that started in 2000. The secular bottom should occur around June 2016.
• The S&P 500 is breaking down from a rising wedge pattern, which is traditionally a trend-changing pattern. A break below the previous low of 2067 will confirm a trend reversal. A further negative signal is that the Dow Jones Transport Index, traditionally a lead indicator for the broader market, has already broken down from its rising wedge.
• Although enjoying a temporary respite Brent crude’s previous break below key support levels at $60 and $50 suggesting a continuation of the weakening long-term trend. Copper is regarded a reliable lead indicator for industrial commodity prices and barometer of global economic growth. It has broken below the 2011 low of $6 500 suggesting a further downside move to $5 500.
• Despite recent advances Gold is in a protracted bear market signalled by rapid declines through successive support levels at $1 400, $1 300 and $1250. Gold’s next target is $1 100 and is likely to breach $1 000 before the bear market ends.
• The All Share index has lost most of its gains since the start of the year. The All Share Index is testing the key support line which has been in place since 2009. A break below 50 000 would signal a sharp move lower to the October low of 47 000.
Bottom line
• The latest climax in the Greek debt crisis has reverberated throughout global financial markets. A commensurate decline in global risk appetite means that the SA rand and SA financial asset prices have been hit more than most. The outcome over the next few days will be critical for the Greek people but will also have a pronounced indirect effect on SA investors.
• Over the past weekend the ECB effectively cut its emergency funding of Greek banks. The Greek government shut the country’s banking system for six days limiting ATM withdrawals to just €60 per day. The government announced a referendum to be held on 5th July on the creditors’ bailout proposals. The referendum may seal the fate of Greece’s membership of the euro currency bloc.
• Many economists believe that Greece’s days within the Eurozone are numbered, predicting a “Grexit.” Mohammed El-Erian, former chief executive at Pimco the world’s largest bond fund manager, believes there is an 85% probability of a Grexit in the next few weeks. According to El-Erian “Europe should have been much more forthcoming on debt reduction and Greece should have been much more forthcoming on implementing reforms.”
• Others are less pessimistic. It has been expected for some time that the impasse between Greece and its creditors would be taken to the limit resulting in a referendum and probably a snap general election. While creating volatility in financial markets we view this as a good opportunity to enter new investment positions. Opinion polls show that around 70% of Greeks want to remain in the Eurozone. Once the Greek electorate is given the chance via referendum and election to voice their opinion on the matter, the majority view is likely to prevail over the Syriza government’s bargaining position. The relief rally is likely to be substantial.
• What happens if Greece does exit the Eurozone? The possibility arose in 2011 when Greece received its first bailout. The authorities have since had four years to prepare for a Grexit and should therefore be able to contain the fallout. Fortunately unlike four years ago when there was a risk of contagion to other Eurozone countries such as Portugal, Ireland, Spain and Italy, contagion risks have since abated. These countries have successfully reduced their budget deficits and the ECB’s quantitative easing programme has supressed their sovereign bond yields. While traumatic for Greece the global fallout from a Grexit is unlikely to cause more than a temporary correction in global and SA financial markets.
* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.
Disclaimer: Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report.
