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Contributed by Kirk Swart
The strong performance of the mining and resource sectors continued into the second quarter ending June 2021. According to SARS, the trade surplus expanded to a record high of R57.68 billion (bn) in June of 2021. This is far above the market forecast of R52 bn. Exports were up 2% to R166.5 bn, boosted mainly by sales of precious metals and stones (which increased 7%), base metals (9%), chemicals (23%) and vegetable products (10%). Shipment of vehicles declined 31%. Most exports went to the US, China, Germany, the UK and Japan. Imports remained relatively unchanged at R108.8 bn. The strong export performance has led to a first half 2021 trade surplus of R255.6 bn, translating into a welcome boost to the revenue coffers, thanks to increased taxes from mining and resource companies. This is evident when looking at the taxes paid by Anglo American Platinum (Amplats) and Kumba Iron Ore for the first half of 2021. Kumba paid R9.2 bn in taxes and royalties in the first half of the year. This is more than double the R4.3 bn paid over the same period last year. On Monday, Amplats reported a tax and royalty payment of R16.6 bn during the first half of 2021, a significant increase from last year.
On Friday the monthly government and expenditure data was released by the Treasury. Gross government tax revenue amounted to R377 bn in the second quarter of 2021, an increase of 56.2% on the 2020 figure. Given the Covid-19 effect, it is more accurate to compare the figure to the second quarter 2019, which still shows an increase of almost 20%. The increased revenue collection has given the government headroom to introduce the fiscal relief package, announced by Cyril Ramaphosa last Sunday following the civil unrest in KZN and Gauteng. The package, which amounts to about R36.5 bn (0.7% of GDP), will be distributed mostly in the form of a R350 monthly social relief of distress grant until March 2022. The package will not be financed through government taking on more debt but through the above-mentioned tax revenue.
The manufacturing purchasing managers’ index (PMI) decreased to 43.50 points in July from 57.40 points in June. The outcome of the PMI was much worse than expected – it came out well below the critical reading of 50 points. A reading above 50 index points indicates an expansion in manufacturing activity, while a reading below that level shows contraction. This disappointing figure reflects a 14-month low for our PMI. It highlights the damaging effect of South Africa’s stricter lockdown measures and the fallout of the recent violent civil unrest. This is one of the first data points published to mark the impact of the adverse effect of the unrest on South Africa’s economy. This will not be the last bit of bad news. The full effects of the more severe level 4 lockdown, as well as the unrest that centred on Gauteng and KwaZulu-Natal, will only become evident in time. The riots disrupted supply chains, industrial output and the demand for manufactured goods. It has significantly put the brakes on the country’s economic recovery. In addition, the manufacturing sector may also have been negatively affected by the recent cyberattack on Transnet, which saw operations at South Africa’s major ports temporarily grind to a halt. July was a particularly challenging month for our economy.
South Africa’s private sector credit extension (PSCE) declined by 0.64% YoY in June 2021. This is the fourth straight month of negative reading since February. However, the broadly defined M3 measure of money supply increased by 0.12% YoY in June 2021, following a 1.82% increase in May. The decline in PSCE is worrying. It reflects just how South African businesses have remained reluctant to take on more credit as uncertainties over the economic outlook remain due to rising Covid-19 cases and lockdown restrictions. This could affect investors’ risk appetite and willingness to embark on a strong investment drive. The unfavourable and uncertain economic environment will first have to be addressed by government, in particular by cabinet’s economic cluster. In contrast, household credit extension continued an upward trend, growing by a robust 5.6% YoY as demand for all categories of credit increased.
According to Stats SA, the producer price index (PPI) accelerated to 7.7% YoY in June 2021, following a 7.4% rise in May. It is the highest producer inflation reading since February 2016. The biggest contributors were coke, petroleum, chemical, rubber and plastic products (15%); food products, beverages, and tobacco products (6.3%); and metals, machinery, equipment, and computing equipment (8.4%). Producer price pressure at the factory gate is important – it is a leading indicator of which way inflation is heading. The acceleration in PPI is indicating that consumer inflation could rise, although we do not expect inflation to reach 7% as producers will likely absorb the cost increases rather than pass them onto consumers amid subdued domestic demand.
SOUTH AFRICA: THE WEEK AHEAD
Contributed by Ingrid Breed
IHS Markit Purchasing Managers’ Index, due Wednesday 4 August. The IHS Markit Purchasing Managers’ Index (PMI), which is a composite single-figure indicator of private sector business performance, is expected to have dipped below the 50-threshold for the first time since September 2020. The consensus forecasts that it fell to 49 in July, down from 51 in June as a consequence of the lockdown and the outbreak of political unrest and looting.
Contributed by Nick Downing
The IMF kept its 2021 global economic growth forecast at 6% in its bi-annual World Economic Outlook. Although unchanged from its previous forecast, individual economies underwent significant upgrades and downgrades. The biggest winners were the US and UK, with forecasts raised from 6.4% to 7% and from 5.3% to 7%. The losers were China, shaved from 8.4% to 8.1% and most South Asian economies, including India, Indonesia, Thailand and the Philippines. According to the IMF, “Vaccine access has emerged as the principal fault line along which the global recovery splits into two blocs.” In aggregate the growth forecast for developed economies was upgraded from 5.1% to 5.6%, while downgraded for less developed economies from 6.7% to 6.3%. The IMF cited concerns over the spread of the Delta variant and the potential for inflationary pressures developing into a quicker than expected exit from accommodative central bank monetary policy. A tightening in monetary policy would create an added disadvantage for less developed economies due to the knock-on effect on emerging market currencies, especially those heavily exposed to US dollar denominated debt.
Contributed by Nick Downing
The economy, measured by GDP, returned to its pre-pandemic level in the second quarter (Q2), growing by 6.5% quarter-on-quarter annualised, up slightly from 6.3% in Q1 but well below the consensus forecast of 8.5%. The chief culprits were weaker than expected fixed investment spending and inventory drawdowns. Private domestic investment fell 3.5% in the quarter due to disruptions in residential construction caused by labour and raw material shortages. Supply chain constraints caused inventories to be depleted, shaving 1% from GDP growth in Q2, although an improvement on the 2.5% subtraction from growth in Q1. The clear winner was consumption expenditure, which grew in Q2 by an astonishing 11.8% annualised rate, up from the 11.4% pace recorded in Q1. Consumer expenditure growth may subside in the second half of the year, as federal stimulus payments expire but inventory re-stocking and investment spending will take up some of the slack with continued improvement in supply chains. Nonetheless, the US economy is probably past its peak rate of growth. The IMF expects growth will slow from 7% in 2021 to 4.9% in 2022, although still well above the average growth rate of the ten years prior to the Covid pandemic.
Despite the fading in Covid relief stimulus, personal consumption expenditure continued to gain in June, rising by 1% month-on-month, an improvement on May’s 0.1% contraction. Household expenditure is the bedrock of the US economy, contributing around three quarters of GDP. Personal income increased in June by 0.1% on the month, with rising jobs growth, wages and salaries making up for the decline in Federal stimulus cheques. The US consumer is showing no sign yet of diminishing appetite for expenditure. While the composition of expenditure is changing, from durable goods to services, as social interaction increases, aggregate expenditure is maintaining its uptrend. The Conference Board US consumer confidence index kept rising in July, to 129.1 from an upwardly revised 128.9 in June, indicating that the household sector will continue to underpin GDP growth in the third quarter. After years of deleveraging in the decade post the 2008/09 Global Financial Crisis, followed by Covid era relief programmes and heightened precautionary savings, household finances are now in their best shape in decades. Excess household savings are estimated to be a massive $2.4 trillion. The personal savings rate has dropped significantly from its Covid peak of close to 30% but at its current rate of 9.4% is still well above the long-term average of 5-7%.
In its official statement following the policy meeting on 27-28th July, the Federal Reserve said that “With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen.” The big talking point is the starting date for the Fed to begin tapering its asset purchase programme, which has comprised $120 billion per month since its was implemented in June 2020. The Fed gave its clearest signal yet that the Federal Open Market Committee has begun debating the key taper decision, but Fed chairman stated that “there’s a range of views on what timing will be appropriate.” The market consensus is that a decision will be taken at one of the two remaining policy meetings this year, either on 21-22nd September or 2-3rd November, comprising details on the timing, composition and pace of the taper. By then, social activity and supply chains should have normalised, helped by the successful vaccination rollout. The Fed’s threshold for the quantitative easing taper is “substantial further progress” towards the twin objectives of above 2% average inflation and full employment. While inflation, currently at 5.4% meets the criteria, there are still close to 7 million more people out of work than prior to the pandemic onset. The Fed’s taper decision will likely hinge on the non-farm payroll numbers over the next two to three months.
Contributed by Nick Downing
China’s purchasing managers’ surveys, which provide a reliable forward-looking insight into economic activity levels, showed a larger than expected deterioration in July. The official manufacturing purchasing managers’ index (PMI) fell from 50.9 to 50.4, which although above the neutral 50-level which separates expansion from contraction, is nonetheless its weakest since March 2020. Among the PMI sub-indices, the production index slipped from 51.9 to 51.0, affected by a resurgence in Covid cases, flooding in central China and the impact of surging raw material prices. The raw material cost index increased from an already elevated 61.2 to 62.9. The new orders index dropped from 51.5 to 50.9 with many manufacturers reluctant to take on new orders due to the impact on profit margins from rising input costs. The effect on new export orders was exacerbated by changing consumer spending patterns in key export markets, with spending turning from goods to services as vaccination programmes are rolled out and social restrictions are lifted. The new export order index dropped for a third straight month, falling further into contractionary territory from 48.1 to 47.7. The outlook was corroborated by the independent Caixin manufacturing PMI, which also dropped sharply in July, from 51.3 to 50.3, its lowest since May 2020. Fortunately, the official non-manufacturing PMI held up much better at 53.3, only a slight decline from 53.5 in June and well above the expansionary level. The PMI data supports the view that consumer and services sectors of the economy are gradually taking over from manufacturing and export sectors as the main drivers of economic growth.
Contributed by Carel La Cock
Japan’s Consumer Confidence Index declined in April, falling by 1.4 points to 34.7 and breaking the upward trend that started in February. Consumer optimism was down across all sentiment sectors – Overall Livelihood (-1.1), Income Growth (-0.6), Employment (-1.9) and Willingness to buy durable goods (-1.9). The percentage of respondents expecting prices to rise in the year ahead increased by 4.7% points to 76%, marking the highest level since February 2020. Only 6.3% of respondents expect prices to go down, falling by 2.7% from March. The latest survey results points to ongoing pessimism amongst Japanese consumers. However, high savings ratios recorded last year, and the expectation of higher prices could become the catalyst for a consumer led recovery as the global economy starts to build momentum.
Japanese private service sector activity continued to stabilise in April according to the latest Jibun Bank Flash Japan Services PMI. The headline Services Business Activity Index, tracking the change in the volume of business activity from the month before, came in at 49.5 compared to 48.3 in March and just below the key 50-level separating expansion from contraction. Demand for services has stabilised and is back at levels last recoded at the start of 2020, before the covid-19 pandemic became widespread. It marks the lowest contraction in business activity in 15 months and reflects the lower restrictions on firms during April, partly offset by the reintroduction of certain restrictions at the end of the month. Encouragingly, employment levels improved for a third straight month and job creation was the strongest in two years. Costs were also notably higher, driven by higher staff costs and raw materials but were passed on to customers, leading to services price inflation for the first time since February 2020. Overall firms in the private service sector expect activity to keep expanding in the year ahead and remain confident that a successful vaccination program would support a further recovery in demand.
Meanwhile, Japanese manufacturing expanded in April and showed the strongest improvement in operating conditions since 2018. The Jibun Bank Manufacturing PMI reading at 53.6 in April was 0.9 points higher than March and the highest since April 2018. Production volumes improved and output saw a third monthly improvement and at the fastest pace in three years. An uptick in demand has been singled out as the main driver and anecdotal evidence points to an increase in client confidence in both domestic and international markets as the global economic recovery gets underway. Employment levels also expanded as firms anticipates higher order volumes although the rate of new positions created was only marginally higher overall. Upward pressure on input prices continued in April leading to the rate of inflation rising to the highest since November 2018. Firms passed on the increased costs to clients marking the fifth consecutive month of higher output prices. Looking ahead, manufacturers reported increased confidence about business conditions in the next twelve months based on the belief that a broad economic recovery will be realised once the pandemic is over.
Contributed by Carel la Cock
European economic growth in the second quarter beat expectations and outperformed economic growth in the US and China according to flash estimates released last week. The euro area economy expanded by 2% quarter-on-quarter. This comfortably beat the 1.5% growth expected by economists in a Reuters poll and outpaced the 1.6% growth achieved by the US and 1.3% by China over the same period. Although both China and the US have already recovered to pre-pandemic output levels, Europe’s economy will only fully recover by the end of the year. Economists ascribe the successful vaccination programmes and the accompanying easing in lockdown measures to the rebound in economic fortunes and doubt that the more infectious Delta variant will significantly impact the momentum. Supply chain disruptions and delays in delivery times for inputs hampered growth in the second quarter, especially in Germany which felt the impact most acutely in the manufacturing sector, causing growth to be stifled at 1.5%, and well below the expected 2%. Spain and Italy both grew ahead of expectations, expanding by 2.8% and 2.7% respectively, boosted by higher household consumption. France saw a modest expansion of 0.9% in the second quarter following the first quarter of no growth when it narrowly missed a double dip recession. Meanwhile, inflation has risen above the European Central Bank’s inflation target of 2%, hitting 2.2% in July and up from 1.9% reported in June. However, core inflation, which excludes more volatile energy, food, tobacco and alcohol prices, was down from 0.9% to 0.7%. Unemployment continued to ease in June falling from 8% to 7.7%, representing 423,000 fewer unemployed. Economists expect the economic expansion to continue through the rest of the year. The ECB maintains that inflation will ease by next year, although economists are divided on when the central bank will start hiking rates.
Contributed by Carel la Cock
The UK government’s furlough scheme has been successful in protecting jobs. The latest report shows that more than half a million furlough workers returned to work in June. This comes as the hospitality sector reopened and economic activity rebounded following a successful vaccination programme. Employers will have to cover 20% of furloughed staff wages from this month and some economists fret that it could lead to job losses, especially in sectors such as manufacturing and construction which were not being impacted by the Delta variant and where furloughed workers could already have returned. Survey data also suggest that the number of furloughed workers did not decrease meaningfully in July raising some concern that June’s momentum is slowing. In a separate data release, the Office for National Statistics and Bank of England showed that the economic recovery has slowed, and consumers continued to save, adding £9.9bn to their liquid assets and eclipsing the contribution made in May. Although the vaccination programme has been successful until now, fears remain over whether the Delta variant and any future variant will trigger consumers to be more cautious, impacting household consumption which is a key driver of the economy. However, household savings are at elevated levels and there could be a significant boost to the economy once herd immunity is reached and consumers satisfy pent-up demand.
FAR EAST AND EMERGING MARKETS
Contributed by Carel la Cock
Purchasing Managers’ Indices released this week have highlighted the divergent fortunes of manufacturing sectors across the Far East. Amongst the ASEAN countries, five of the seven members experienced a decline in business conditions in July driven by a resurgence in covid-19 cases and a tightening in containment measures. The headline PMI for the region fell to a 13-month low from 49.0 in June to 44.5 in July and well below the key 50-level indicating an overall deterioration in business activity. Myanmar, Malaysia and Indonesia reported the most substantial contraction, while Vietnam and Thailand deteriorated at a slower pace but nonetheless substantial. Meanwhile the Philippines and Singapore showed promising recoveries. The Philippines’ growth extended for a second month while Singapore saw a noticeable acceleration in growth during July with a headline figure of 56.3, the fastest growth in more than eight years. Overall new orders and output fell in July and employers scaled back staff despite reporting a rise in backlogs. Inflationary pressures on input prices remained due to the persistent shortage of raw materials and lengthening supply times. Manufacturers passed extra costs on to consumers marking a ninth consecutive monthly increase in average charges. Optimism about output levels in the coming year remain upbeat, but less so than in June. ASEAN countries and other developing nations will remain vulnerable to any resurgence in future variants until vaccinations programmes are successfully implemented and herd immunity is achieved.
South Korea’s manufacturing sector continued to improve, driven by expanding output and new orders despite severe supply chain disruptions hampering demand and placing pressure on business costs. Higher output was attributed to a surge in demand in the semiconductor and electronics sectors from both domestic and international markets. Export orders from the US and China increased for a twelfth consecutive month and backlogs accumulated for a ninth month. The latest survey also showed input prices rising at a record pace driven by a sharp increase in the cost of raw materials and leading output prices to rise at a record pace for a third consecutive month. Confidence in the sector remains positive, underpinned by hopes that global demand and supply chains will recover in the year ahead. IHS Markit predicts that South Korea’s industrial production will grow by 5.8% in 2021.
Y to D %
JSE All Share
JSE Fini 15
JSE Indi 25
JSE Resi 20
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THE BOTTOM LINE
Contributed by Gielie Fourie
THE ANATOMY OF A MARKET CRASH: Markets crash more often than we might think – since 2000 we have experienced no less than 14 market crashes, in just 22 years. We look at four of these 14 market crashes. We do not have the luxury of unlimited space to cover the anatomy of market collapses in great detail. Yet every market collapse has at least one catalyst. If we could identify the catalysts of a crash in advance, it would allow us time to take corrective actions to mitigate its impact. Warren Buffett says nobody is going to ring a bell to announce the next market crash. Markets are not driven by fundamentals. They are driven by feelings, sentiments, and confidence levels. There is no clear answer as to what will actually trigger investors to start selling en masse at a specific point. We do know that investors do not want to miss out on profits. They suffer from FOMO (Fear of Missing OUT). One of the primary investor biases is the “herd mentality”. People will often drift towards the majority position because it feels more comfortable, even if it means doing the exact opposite of what logic tells them to do. The lesson is: Do not trade on your emotions.
THE 2000 DOT-COM BUBBLE: The dot-com bubble was created by excessive speculation in internet-related companies in the late 1990s, a period of massive growth in the use and adoption of the Internet. The catalyst was the extreme overvaluation of internet related companies. Between 1995 and its peak in March 2000, the Nasdaq Composite stock market index rose 400%, only to fall 78% from its peak by October 2002, giving up all its gains during the bubble.
2007–2008 – THE GLOBAL FINANCIAL CRISIS (GFC): The financial crisis of 2007–2008, also known as the GFC, was a severe worldwide economic crisis. It lasted for 18 months – the longest crisis after WWII. Unemployment peaked at 10.0%. Prior to the COVID-19 recession in 2020, it was considered by many economists to have been the most serious financial crisis since the Great Depression. Several catalysts fueled the GFC, especially lax financial regulations, excessive risk-taking by banks, and the bursting of the US housing bubble. It was a perfect storm, reaching its culmination with the bankruptcy of Lehman Brothers on 15 September 2008.
THE 2015–2016 STOCK MARKET SELLOFF: This selloff was the period of decline in the value of stock prices globally that occurred between June 2015 to June 2016, lasting for more than a year. The period included Chinese stock market turbulence, in which the Shanghai Stock Exchange (SSE) Composite Index fell 43% in just over two months between June 2015 and August 2015, which culminated in the devaluation of the yuan. Their bear market spread globally, with selling triggered by drops in commodity prices such as oil and copper, the Greek debt default in June 2015, the end of quantitative easing (taper tantrums) in the US, a sharp rise in bond yields in early 2016, and on top of it, in June 2016 the UK voted to exit the EU. The Dow Jones fell 1300 points (around 7%) from 18–21 August 2016. On Monday, 24 August, world stock markets were down substantially, wiping out all gains made in 2015.
THE 2020 STOCK MARKET CRASH: The catalyst for this crash and worldwide recession was the COVID-19 pandemic in 2020. It caused the steepest recession since the Great Depression of the 1920s. The 2020 stock market crash began on 20 February 2020 and ended on 7 April 2020. Unemployment peaked at 14.8%. The S&P 500 index dropped 34% from its peak of 3386 on 19 February to 2237 on 23 March. Today the markets have recovered. The S&P 500 and the JSE are at record highs. In fact markets are so high that commentators are expecting a downward market correction soon.
LESSON LEARNED – NEVER WASTE A GOOD CRISIS: We have identified the catalysts of four market crashes. We have also seen how markets have recovered from every crisis to set up new record highs. The herd mentality is to sell in a crisis. The contrarian investor will buy when the herd sells. The lesson? Never waste a good crisis. Don’t trade on your emotions. Smart investors use asset managers to manage their portfolios. While the developed world is returning to a new normal, the next crisis could be looming around the corner. A Black Swan could appear from nowhere. Be prepared – contact one of our friendly, experienced, and qualified consultants. With our consultants at your side, you will never walk alone.
*All writers’ opinions are their own and do not constitute investment recommendations or financial advice. Speaking to a qualified wealth and investment professional is crucial before making financial decisions.
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