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Contributed by Werner Erasmus
Manufacturing production increased by 35.3% in May 2021 compared with May 2020. The latest reading was slightly below Bloomberg’s consensus forecast of 46.8% year-on-year growth. The largest contributions were made by the following divisions: motor vehicles, parts and accessories and other transport equipment (up 215.7%); basic iron and steel, non-ferrous metal products, metal products and machinery (up 42.0%); food and beverages (up 21.5%); and wood and wood products, paper, publishing, and printing (up 40%). Year-to-date (January to May) manufacturing output is up by 17.1% compared to the corresponding period in 2020 but still down by about 4.5% compared to the same period in 2019. Overall, manufacturing production is still not back to pre-pandemic levels and the latest reading, although positive, continues to be affected by base effects created by Covid-19 lockdowns in 2020. Looking ahead, severe power outages in June, the onset of the third wave of Covid infections and the ban on alcohol sales will hurt production over the next few months. On the positive side, the ongoing global economic recovery should support South Africa’s production sectors through export volumes during the rest of the year.
SOUTH AFRICA: THE WEEK AHEAD
Contributed by Ingrid Breed
Mining Production, due Tuesday 13 July. May’s mining production is expected to have been supported by rising commodity prices and high global demand, albeit partly disrupted by load shedding. The consensus forecast is that May recorded a 31.5% year-on-year and 0% month-on-month change compared with the 116.5% year-on-year and 0.3% month-on-month increases recorded in April. Year-on-year figures are, however, still skewed by the low base from 2020.
Retail Sales, due Wednesday 15 July. Less restrictive lockdown measures and increased consumer spending, which is anticipated to have remained firm on the back of low interest rates and rising income, are likely to have supported May’s retail sales. Retail sales are expected to have increased 12.5% year-on-year and 0.9% month-on-month in May compared with 95.8% year-on-year and -0.8% month-on-month in April. The year-on-year figures are, however, skewed by the low base from 2020.
Contributed by Nick Downing
Commodity prices are booming. The S&P GSCI composite commodity index has almost doubled over the past 12 months, powered by increases across oil, metals and agricultural commodities. The price gains are attributed to the reopening of economies and pent-up demand, fuelled further by massive fiscal stimulus. Investors are also drawn to commodities due to their natural hedge against rising inflation risks and to their hedge against the potential for US dollar weakness. Copper has captured the attention of the investment community over the past week after breaking above its previous all-time high recorded in 2011 during the commodity “super-cycle”, which was led by China’s rapid industrialisation. While copper and other metal prices are showing the characteristics of another super-cycle, most economists are sceptical as China is transforming from an investment-led to a consumer-led economy. However, other economies are taking up the baton helped by extravagant infrastructure spending plans and the race towards a net zero carbon footprint within the next 30 years. The mass adoption of renewable energy and electric vehicles will lead to a step change in demand for copper and other key “green” metals. Meanwhile, the hangover from the last super-cycle means mining companies have been reluctant to develop new capacity. Due to the extended period taken to develop new mines, the existing supply constraints may last several years and potentially squeeze commodity prices even higher. Ivan Glasenburg, CEO of Glencore said the copper price needs to rise another 50% from current levels to unleash the new capacity required to meet burgeoning demand forecasts.
Contributed by Nick Downing
Minutes from the Federal Reserve’s policy meeting on 15-16th June reveal a growing discussion of the Fed’s $120 billion per month asset purchase programme. It is likely that reduction of the programme will be formally set on the agenda at the next policy meeting on 27-28th July. According to the minutes, “Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings in light of recent data.” Some members of the Federal Open Market Committee expressed concern over rising inflation expectations and the likelihood that inflation would soon meet the Fed’s target of running moderately above 2% for a period of time. However, some economists feel that inflation will subside due to the transitory nature of current inflationary pressures, and that the Fed’s other target of maximum employment is likely to be met first. At the current monthly rate of job creation, which will likely rise as job seekers are pulled from the side-lines with the expiry of enhanced unemployment benefits and reduced Covid risks, full employment may be achieved as early as mid-2022. Job openings increased in May by 16,000 to a new record high of 9.2 million, just short of the 9.3 million people who are unemployed and actively seeking jobs.
The Institute for Supply Management (ISM) Services purchasing managers’ index (PMI), although in 50-plus expansion territory for a 13th straight month, dropped in June from its May peak of 64 to 60.1. The ISM manufacturing PMI also pulled back from 61.2 to 60.6. Anthony Nieves, Chair of the survey committee reported that, “The rate of expansion in the services sector remains strong, despite the slight pullback in the rate of growth from the previous month’s all-time high. Challenges with material shortages, inflation, logistics and employment resources continue to be an impediment to business conditions.” Among the services PMI sub-indices, the forward-looking new orders and new export orders indices dropped from 63.9 to 62.1 and from 60 to 50.7, indicating a potential loss in overall activity momentum over coming months. The prices index dipped from 80.6 to 79.5 indicating a potential peak in inflationary pressures. The data suggests that rather than surprising on the upside as has been the case since the start of the year, economic data may begin surprising on the downside. Nonetheless, at its current level the services PMI is still consistent with a robust annualised GDP growth rate of 3.8%.
Contributed by Nick Downing
For the first time since April 2020, the People’s Bank of China (PBOC) cut its Reserve Requirement Ratio, with a reduction of 0.5%. By cutting the reserves banks are required to hold, the PBOC is freeing up a potential 1 trillion yuan in new bank lending, equivalent to $154 billion. There are signs that the PBOC has been promoting liquidity expansion in recent weeks to combat slowing economic momentum. New bank loans increased from 1.5 trillion yuan in May to 2.1 trillion in June. Authorities are concerned that exports, the main engine of the post-pandemic recovery, may begin to slow with the reopening of key export market economies which will favour expenditure on services rather than on manufactured products. There is also concern that China’s pent up Covid demand may have been exhausted. Meanwhile, inflation data is moderating. Producer price inflation slowed in June from 9.0% year-on-year to 8.8%, its first decline since October with the month-on-month rate falling sharply from 1.6% to 0.3%. Consumer price inflation (CPI) remains well below the PBOC’s 3% target, registering 1.1% in June. Core CPI, which excludes food and energy prices, was even more subdued at 0.9%. As the first country to rebound from the pandemic induced recession, the slowdown in China’s economic momentum will be closely watched by economists in other countries as they assess their own post Covid economic trajectories.
Contributed by Carel la Cock
Japan’s prime minister, Yoshihide Suga, has made a U-Turn on the participation of spectators at this month’s Olympic games, calling for a total ban of spectators at all venues in and around Tokyo and extending the state of emergency throughout the course of the games. Japan’s vaccination drive has gathered momentum in recent weeks, but to date less than a third of the population has been vaccinated and as the number of infections of the new Delta variant rises, the government has had little choice but to prohibit spectators. Although the announcement comes as a blow to organisers who were hopeful to recoup some of the losses incurred with the postponement of the games, economists are doubtful that it will have an impact on the wider economy which has enjoyed a manufacturing and export driven recovery.
Contributed by Carel la Cock
The European Commission (EC) is forecasting economic growth will accelerate in the eurozone to levels not seen in over four decades. Figures published last week show the economy will expand by 4.8% this year followed by 4.5% next. Output will return to pre-pandemic levels by the last quarter of 2022, sooner than previously expected. The figures were revised upwards from previous predictions reflecting success in the region’s vaccination program. Thus far nearly two thirds of the adult population have been vaccinated with at least one dose and further vaccinations are progressing satisfactorily. This has also reduced restrictions, opening the services sector that has lagged manufacturing in the economic recovery. Tourism in the region is opening and helping to drive consumer spending. Amongst the larger European nations, France (+6%) and Italy (+5%) are expected to outperform Germany (+3.6%) in terms of 2021 GDP growth, although the latter was impacted less severely by the pandemic. Despite the pickup in the economy the EC does not expect inflation to be rampant in the coming year, forecasting prices to rise by 1.9% this year and easing to 1.4% by 2022.
The European Central Bank has unanimously agreed to change its monetary policy strategy that has been in force since 2003. The main change is the inflation target of 2% that will now be symmetrical in that both under and overshooting the target will be “equally undesirable”. Second, the cost of owner-occupied homes will be included in the headline inflation figure to bring it in line with other countries. Economists believe that the change in strategy paves the way to keep interest rates lower for longer, a fact that will be tested next week when the ECB meets for its July monetary policy review. Early indications are that there could be a split vote on when the ECB will start tapering quantitative easing and hiking rates.
Contributed by Carel la Cock
Retail sales in the United Kingdom have rebounded in the second quarter and grew at the fastest pace in more than 25 years. Contributing factors included an easing in lockdown measures coupled with the Euro football championships which led to consumers satisfying pent-up demand. Retail sales grew by a solid 10.4% in the second quarter compared to the same quarter in 2019, before the pandemic. Much of the growth came in June which recorded a 13% rise compared to the same month in 2019. Despite much stronger growth from pre-pandemic levels, retail growth has slowed from previous months according to the Office for National Statistics, showing a slight decline since the peak just after the reopening of shops in May. However, the British Retail Consortium has suggested that consumer appetite remains strong despite an uptick in cases of the Delta variant and added that it was important that shoppers feel safe to maintain the momentum. Data from Barclaycard, which tracks card payments on nearly half of the UK’s retail transactions, showed that consumer spending grew by 11% in June compared to 2019 and highlighted that balmy weather and sporting events such as Wimbledon and the Euro football championships boosted spending in the month. Other hospitality sectors also reported increased activity giving hope that economies across the globe could soon return to normality once successful vaccination programmes have been implemented.
FAR EAST AND EMERGING MARKETS
Contributed by Carel la Cock
Emerging economies across the Asia-Pacific region have implemented renewed lockdown measures as the Delta variant of the covid-19 virus is wreaking havoc in countries where vaccinations have been painfully slow. The Delta variant, thought to be much more contagious, has spread through Indonesia which recorded daily new infection numbers of up to 34,000, bringing the total number of active cases to over 2m. Countries in the region have relied on vaccinations from China, but been hit by supply shortages as countries around the globe race to vaccinate their populations. South Korea, which came through the first wave largely unscathed, has reported record new cases and implemented strict measures to curb the spread of infections. Any impact on the manufacturing of semiconductors in South Korea, one of the country’s main exports, could lead to further bottlenecks in supply chains and hamper the recovery efforts of developed markets. The renewed outbreak has highlighted the interconnectedness of the world economy and the importance of getting all nations vaccinated as quickly as possible.
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THE BOTTOM LINE
Contributed by Gielie Fourie
ENVIRONMENT, SOCIAL AND GOVERNANCE (ESG) INVESTING: – HOW DID IT START? Before ESG Investment there was Corporate Social Investment (CSI). This concept was too narrow – it concentrated only on the “S” of ESG. The concept was expanded to include the Environment and Governance. The environment issue came to the fore via the BP oil spill in the Caribbean. The focus on Governance was driven by the Enron disaster. The consensus now is that ESG is too difficult to define. Furthermore, it focusses on the causes of the problem, not on the results achieved. The latest trend is to rather concentrate on the impact of the actions taken. This has led to the term ESG being replaced with the term Impact Investing.
WHAT IS ESG? Defining ESG is not simple. Why? Because the principles are often subjective, rather than objective, leaving the door wide open for disagreement and debate. Therefore, it is not possible to apply a tick-box approach to ESG. It is near impossible to apply a grading system. The reasons for this are the subjectivity of ESG principles. Data are supplied voluntarily by companies; data could be unverified, or analysts will have access to different data sources. The result is that different people will tick different boxes, resulting in different ESG scores. A Canadian critic said, “It’s great marketing. It’s a lot of sizzle, but no steak.”
ESG – ENVIRONMENTAL CONCERNS: Concerns regarding climate change and the depletion of resources have grown. As with all areas of ESG, the breadth of possible concerns is vast, for example, greenhouse gas emissions, biodiversity, waste management, and water management. Research has led investors to begin to screen investments in terms of their impact on the perceived factors of climate change. Fossil fuel reliant industries are less attractive. In every area of the debate from the depletion of resources to the future of industries dependent upon diminishing raw materials the question of the obsolescence of a company’s product or service is becoming central to the value ascribed to that company. The long-term view is becoming prevalent amongst investors.
ESG – SOCIAL CONCERNS: Diversity: There is a growing belief that the broader the pool of talent available to an employer, the greater the chance of finding the optimum person for the job. Human rights: In 2006 the US Courts of Appeals ruled that there was a case for bringing the area of a company’s social responsibilities squarely into the financial arena. This area of concern is widening: to include such considerations as the impact on local communities, the health and welfare of employees and a more thorough examination of a company’s supply chain.
CONSUMER PROTECTION: Until recently, caveat emptor (“buyer beware”) was the governing principle of commerce and trading. In recent times there has been an increased assumption that the consumer has a right to a degree of protection and the vast growth in damages litigation has meant that consumer protection is a central consideration for those seeking to limit a company’s risk and those examining a company’s credentials with an eye to investing. The collapse of the US subprime mortgage market initiated a growing movement against predatory lending, which has also become an important area of concern. Animal welfare: From the testing of products on animals to the welfare of animals bred for the food market, concern about the welfare of animals is becoming an important consideration for some investors.
ESG – GOVERNANCE CONCERNS: Corporate Governance covers the area of investigation into the rights and responsibilities of the management of a company and the various stakeholders in that company. Corporate Governance includes measuring the business ethics, anti-competitive practices, corruption, tax and accounting transparency for stakeholders. Management structure: Attention has been focused in recent years on the balance of power between the CEO and the Board of Directors and specifically the differences between the European model and the US model. In the US, studies have found that 80% of companies have a CEO who is also the Chairman of the Board, while in the UK and the European model it was found that 90% of the largest companies split the roles of CEO and Chairman.
SUMMARY: Hendrik du Toit, CEO of Ninety-One, says that ESG, or Impact Investing, has become a major driving force driving capital flows. Du Toit says South Africa’s ESG record is not good. Capital will flow to companies and countries that are responsible investors. Although ESG investing and impact Investing are gaining momentum, there is still a long way to go. Impact investing is an added cost for companies. It is easier and cheaper to promote yourself as green, rather than doing the hard work in allocating budgets and resources to Impact Investing. If there are no penalties from government, companies can get away with doing nothing. But we cannot do nothing. Something must be done to save our planet. Boney M was right when they sang, 40 years ago, in 1981, “We kill the world ’cause we don’t know what we are doing!”
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