When analysing the JSE one should pay especially close attention to Naspers. The share makes up 25% of the JSE Top 40 Index and 21% of the All Share Index. Any movement in the Naspers share price has a significant effect on the JSE.
Total new vehicle sales grew in November by 7.2% year-on-year marking the sixth consecutive month of expansion. On a year-on-year basis, export numbers faltered for a second straight month due to weather disruptions at Durban port and production changes by major manufacturers, causing a 13.7% decline on the year. Commercial vehicle sales declined 9.0% on the year although on a month-on-month basis increased by an encouraging 7.8%. The outlook for vehicle sales is improving, helped by strong export demand and a gradual recovery in domestic business and consumer confidence.
The trade balance registered a surplus in October for the eighth consecutive month. The surplus widened slightly to R4.56 billion from R4.48 billion in September lifting the cumulative surplus for the year-to-date to R51.6 billion. This compares with a deficit of R9.9 billion in the same period last year. On a year-on-year basis imports gained in October by 8.4% while exports grew by 18.3%, boosted by a 50.8% increase in the value of mineral exports. A buoyant global economy is lifting export demand across the board. The World Trade Organisation lifted its growth forecast for world merchandise trade volumes in 2017 to 3.6% from a previous 2.4%. This compares with 1.3% growth in 2016. The positive trend in South Africa’s trade balance signals a narrowing in the country’s current account deficit thereby reducing its reliance on capital inflows.
Producer price inflation (PPI) eased to 5.0% year-on-year in October from 5.2% in September. The key drivers were electricity and water PPI, which fell sharply from 6.0% to 3.6% on the year due to a steep 7.1% month-on-month decline. By contrast, the PPI for “coke, petroleum, chemical, rubber and plastic products” and “transport equipment” increased by an elevated 1.3% and 2.0% on the month. PPI is expected to remain below 6% for the foreseeable future although any shocks to the rand or oil prices could cause an upward spike, which in turn would prompt the Reserve Bank to hike interest rates.
Growth in private sector credit extension (PSCE) unexpectedly slowed to 5.4% year-on-year in October from 5.5% in September below the consensus forecast of 5.7%. Credit extension to companies improved on a year-on-year basis from 7.1% to 7.2% but fell 0.5% on the month. “Other loans and advances”, which includes unsecured loans to both companies and households, also improved on the year from 6.4% to 6.5% but fell 0.7% on the month. Mortgage advances eased from 4.4% to 4.3% on the year but increased 0.4% on the month. The standout was instalment sales and leasing finance, which grew 0.8% on the month boosting growth on the year from 4.0% to 4.8%, driven by the recovery in new vehicle sales. While credit growth is subdued there are early signs of recovery in the credit cycle in the installment sales and leasing category.
Net foreign investor outflows registered a massive R15.32 billion in the week to 1st December, marking the biggest weekly outflow since May 2016 and the fourth largest on record. The catalyst was undoubtedly the credit rating downgrade by Standard & Poor’s. On the week, foreign investors sold a net R8.73 billion worth of bonds and R6.58 billion of equities. However, for the month of November, net bond and equity flows were more muted at -R3.77 billion and +R4 billion, respectively. Net equity inflows have been gaining momentum, registering a positive R15.3 billion in the combined months of October and November. For the year-to-date, net equity inflows are still negative at -R57.93 billion while net bond inflows remain positive at +R53.77 billion.
The ABSA manufacturing purchasing managers’ index (PMI) increased from 47.8 in October to 48.6 in November. Although still below the key 50-level, which signals contraction, the PMI is at its best level since May and well above the recent low of 42.9 in July. Among the PMI sub-indices, business activity increased sharply from 45.9 to 48.0. However, the forward-looking new orders index slipped from 49.9 to 49.1 and the future conditions index eased from 51.2 to 50.0. Meanwhile the prices index surged from 73.2 to 80.7 indicating a build-up in inflationary pressure. Despite mixed sub-index readings, the overall improvement suggests the manufacturing sector is gradually recovering from its recent slump.
The RMB/BER business confidence index eased to 34 in the fourth quarter (Q4) from 35 in Q3, which although an improvement on the seven and a half-year low of 29 reached in Q2, is still at depressed levels. While sentiment deteriorated further in the retail, manufacturing and construction sectors, it improved slightly in the vehicle sector and wholesale trade sector. According to the BER survey businesses are adopting a wait and see approach ahead of the ANC elective conference, which concludes on the 20th December. A positive outcome to the conference would impact sentiment positively over the short-term while a longer-lasting impact would depend on market-friendly structural reforms. RMB chief economist Ettienne le Roux notes that: “The government has a narrow window of opportunity to put in place an action plan to change the country’s longer-term growth path for good. We need bold and unpopular solutions for the jam South Africa is in.”
SOUTH AFRICA: THE WEEK AHEAD
Third quarter GDP: Due Tuesday 5th December. Better than expected consumer spending and robust agricultural production should keep third quarter (Q3) GDP growth in line with the 2.5% quarter-on-quarter annualised growth achieved in Q2.
South African Chamber of Commerce and Industry (SACCI) business confidence index: Due Wednesday 6th December. The SACCI business confidence index (BCI) has been on a downward trend since November 2011 but has shown signs of bottoming out after hitting a more than 30 year low of 89.6 in August. Business and industry sentiment is starting to look past the current period of acute political and policy uncertainty.
As expected OPEC’s ministerial meeting concluded with an extension of the joint OPEC/non-OPEC production cut agreement until the end of 2018. The new agreement is joined by Libya and Nigeria. At the same time, global demand growth remains strong, providing an added squeeze to the supply-demand balance. However, non-OPEC supply continues to surge, especially in the US, which means that despite rising global demand and the OPEC-led production curbs, there is unlikely to be a meaningful rise in the oil price from current levels.
The JPMorgan global manufacturing purchasing managers’ index (PMI) increased in November to 54.0 a six and a half year high from 53.5 in October. The reading is well above the expansionary 50-level. Regional PMI’s improved almost across the board. While the US PMI slowed slightly from recent peaks, China’s increased from 51.6 to 51.8, Japan’s rose sharply from 52.8 to 53.6 and even the UK’s surged higher from 56.6 to 58.2, its highest since August 2013. The Eurozone was the standout, rising from 58.5 to 60.1. The IMF recently raised its forecast for global growth due to the stronger than expected Eurozone recovery, describing the Eurozone the “engine of global trade.” The global PMI survey, which is forward looking, suggests the world’s current buoyant growth rate may accelerate even further in the months ahead.
The Senate approved its own version of the “Tax Cuts and Jobs Act”, making it increasingly likely that the tax reform proposals will be passed. While the precise details are still to be agreed to reconcile the two versions of the bill passed by the Senate and House of Representatives, the outcome will likely include a steep drop in the corporate tax rate from 35% to 20% and a substantial decline in the top income tax rates. The tax proposals will inevitably stimulate economic growth via increased spending and investment. As a result, however, interest rates are likely to rise by more than previously expected. Fed funds futures ascribe a probability of a Fed rate hike at next week’s policy meeting at almost 100% up from a low of 20% in September. Market expectations for rate hikes in 2018 have also risen.
In what is likely to be Fed chair Janet Yellen’s last testimony to Congress she struck an upbeat tone on the economy, stating that “economic expansion is increasingly broad based across sectors as well as across much of the global economy.” Meanwhile, President Trump’s nominee for the next Fed Chair, Jay Powell, stated in his confirmation hearing a continuation of the Fed’s current path towards monetary tightening. He expects the Fed’s balance sheet to reduce by around 40% in the next three to four years. Powell also struck a deregulatory tone, stating that existing rules on the financial sector are already sufficiently strict.
On the Bitcoin topic, New York Fed President William Dudley cautioned prospective investors to be cautious as its value is highly unstable and it is not legal tender. When asked whether the Fed would adopt a digital currency, he argued that “it’s not a store of value and it doesn’t really have the characteristics that you’d like to have in a currency.” Meanwhile, Dudley played down the risk posed to financial markets by current high leverage rates on the basis that the expansion “has a lot more room to go.” He added that regulations adopted since the 2008/09 global financial crisis meant the US financial system “can bear that stress much, much better.”
Third quarter (Q3) GDP growth was revised upwards to 3.3% quarter-on-quarter annualised up from the initial estimate of 3.0% and 3.1% in Q2. This marks the fastest growth in three years and comes despite a series of hurricanes, which impeded growth during August and September. The upward revision is attributed to increased estimates in public sector spending and investment spending. Equipment investment growth was revised higher from 8.6% quarter-on-quarter annualised to a substantial 10.4%, which bodes well for productivity growth and the sustainability of the current economic expansion.
Following October’s strong increase, the Conference Board consumer confidence index unexpectedly gained further in November, rising from 126.2 to 129.5, well above the consensus forecast of 124. This marks its highest level in 17 years. Gains were broad based among the sub-indices. While inflation expectations eased, sentiment over job prospects, business conditions and durable goods purchases, all improved. Expectations of conditions in six months’ time also improved, indicating that household confidence remains on a solid upward trajectory.
New home sales surprised to the upside in October for a second straight month, rising by 6.2% month-on-month well above the consensus forecast for a 6.2% decline. The annualised number of new home sales increased to 685,000 the highest level since 2007. Meanwhile, pending home sales continued to rebound in October, rising by 3.5% on the month well above the consensus forecast of 1.0%. Pending home sales usually lead existing home sales by around six weeks, which suggests home sales are likely to maintain the current upward trend over the remainder of the year. US construction spending increased in October by a solid 1.4% on the month as developers continue to replenish depleted inventories of homes on the market. At the same time, non-residential construction is rising amid increased public spending and investment spending.
The official manufacturing purchasing managers’ index (PMI) increased slightly to 51.8 in November from 51.6 in October although not enough to regain September’s level of 52.4. The increase is attributed to a broad-based improvement across the sub-indices including imports, export orders and overall new orders. Despite the latest PMI increase, the manufacturing outlook remains uncertain amid a cooling property market, reduced fiscal expenditure, rising interest rates and slowing credit growth. In addition, the clampdown on pollution is putting added strain on the manufacturing sector.
The Caixin manufacturing PMI, which has a greater focus than the official PMI on small and medium-sized firms, fell slightly in November to 50.8 from 51.0 in October, marking a five-month low. Among the sub-indices the biggest culprit was the forward looking new orders index, which fell from 52.4 to 51.8. This suggests the manufacturing sector may come under further pressure in the months ahead. The Caixin PMI tends to be a more accurate barometer of China’s cyclical trends than the official PMI.
The consumer confidence index increased in November to 44.9 from 44.5 in October, marking the third straight monthly increase and the highest level since September 2013. Among the sub-indices, the employment index gained from 48.7 to 49.3 a four year high. Income growth increased from 42.5 to 43.0 its highest since 2007, signaling growing confidence in wage growth. The willingness to buy durable goods increased from 43.6 to 44.0 a four year high and asset values jumped from 45.5 to 46.8 helped by resurgent equity markets. The upbeat consumer confidence data signal a solid turnaround in household expenditure and a broadening in economic expansion away from Japan’s traditional reliance on export growth.
Industrial production grew in October by just 0.5% month-on-month well below the consensus forecast of 1.8%. The disappointing figure is attributed to routine shutdowns at chemical production facilities and refineries and numerous typhoons in the Asian region. The Ministry of Economy, Trade and Industry (METI) forecasts a solid pick-up in industrial production in November of 2.8% month-on-month revised upwards from a previous -0.9%, and 3.5% growth in December. This would result in industrial production growth in the fourth quarter (Q4) of 3.6% quarter-on-quarter, up strongly from 0.4% in Q3 and 2.1% in Q2.
Eurozone consumer price inflation (CPI) increased in November to 1.5% year-on-year from 1.4% in October, attributed to a rise in energy prices. Core CPI, excluding energy, food, alcohol and tobacco prices, remained unchanged at 0.9% unable to recoup the decline from 1.1% in October. Persistently low core CPI readings support the ECB’s recent decision to extend a tapered version of its asset purchase programme until the end of September 2018.
The Eurozone unemployment rate fell to 8.8% in October from 8.9% in September, its lowest level since January 2009, beating expectations for no change. Declines in unemployment were recorded in Ireland, France, Malta and Belgium. Youth unemployment also declined but increased sharply in Spain and Portugal. There continues to be wide divergence between member countries, ranging from 16.7% in Spain to 3.6% in Germany. The divergence in unemployment figures largely explains the rise in core consumer price inflation in Germany and its contrasting absence in other Eurozone countries.
The European Commission business and consumer survey Economic Sentiment Index (ESI) increased from 114.1 in September to 114.6 in October its highest since October 2000. The ESI reading suggests a further acceleration in Eurozone GDP. The rise in the ESI was underpinned by solid gains in the industrial index and services index, more than making up for a slight decline in the retail confidence index. Despite the upbeat economic survey inflation expectations remained weak. Consumers’ inflation expectations a year from now remain consistent with core consumer price inflation of 1.5%, below the ECB’s target of below but close to 2%. Among individual countries, the ESI index increased in France and Italy to their highest levels since the 2008/09 global financial crisis. Spain’s ESI increased to its highest since November 2015 indicating little effect from the Catalonian crisis.
The manufacturing purchasing managers’ index (PMI) increased from 56.6 in October to 58.2 in November its highest since mid-2013. The improvement was broad based across all sub-indices amid strengthening domestic and external demand. Encouragingly the forward-looking new orders indices showed strong gains strengthening the outlook for continued expansion in the manufacturing sector in the months ahead. The export orders index increased from 54.3 to 56.4 and the overall new orders index from 58.1 to 60.9.
Following the results of its 2017 Financial Stability Report the Bank of England (BOE) reported that the UK’s major banks are strong enough to keep lending even in the event of a “disorderly” Brexit. This marks the first time since the bank stress tests were introduced in 2014 that the UK banks have not been required to strengthen their balance sheets. Furthermore, the scenario conditions in this year’s stress test were far more demanding than last year. These include a 2.4% decline in world GDP, 4.7% decline in UK GDP, 33% drop in UK property prices and 350 basis point increase in the BOE’s benchmark interest rate.
FAR EAST AND EMERGING MARKETS
India’s GDP growth accelerated in the third quarter (Q3) to 6.3% year-on-year up strongly from 5.7% in Q2. This marks the end of the weakening in GDP numbers that has been in place since Q4 2016 when GDP growth registered 7.0%. The upbeat GDP data suggests the economy has adapted to the disruptive effects of last year’s removal of high denomination bank notes from circculation and this year’s implementation of the Goods and Services Tax. Investment spending was especially strong, rebounding from 1.6% year-on-year growth in Q2 to 4.7% in Q3. GDP growth is likely to maintain its recovery path in the quarters ahead helped by strong growth in rural wages, increased fiscal spending and the bank recapitalization programme.
India’s manufacturing purchasing managers’ index (PMI) increased from 50.3 in October to 52.6 in November its highest level since October 2016. This marks the fourth straight month that the index has been above the key 50-threshold separating expansion from contraction. The improvement was broad based across sub-indices but especially pronounced in the output and forward-looking new orders index, which gained from 50.3 to 54.3 and from 49.9 to 54.2, respectively. The upbeat new orders reading bodes well for continued expansion in manufacturing output in the months ahead. Meanwhile, the output price index decreased from 51.1 to 50.6 indicating a welcome decline in wholesale price inflation.
KEY MARKET INDICATORS (YEAR TO DATE %)
JSE All Share
JSE Fini 15
JSE Indi 25
JSE Resi 20
To return to its medium-term appreciating trend of the past 18 months the rand needs to break through key resistance at R/$14.00 and R/$13.50, which if broken would target further gains to R/$12.50.
The US dollar index has tried but failed to break through a major 30-year resistance line suggesting the three-year bull run in the dollar may be over.
The British pound has broken above key resistance at £/$1.30 promoting further near-term currency gains to a target range of £/$1.35-1.40.
The JPMorgan global bond index is testing the support line from the bull market stemming back to 1989, which if broken will project further sharp increases in bond yields.
The US 10-year Treasury yield has failed to break below key resistance at 2.0% raising the probability that the multi-year bull trend in US bonds is over.
The benchmark R186 2025 SA Gilt yield has broken above key support at 9.0% indicating the potential for a rapid upward move to the 10.5% target level. A break back below the new resistance level of 9.0% is required to remove the danger of a further upward spike in bond yields.
Key US equity indices, including the S&P 500, Dow Jones Industrial, Dow Jones Transport, Nasdaq and Russell 2000, have simultaneously set new record highs, confirming a bullish outlook for US equity markets.
The Brent oil price has broken above key resistance at $50 and likely to remain in a trading range of $50-60 over the foreseeable future. Base metal prices are in a bull trend confirmed by copper’s increase above key resistance at $6000 per ton.
Gold has developed an inverse “head and shoulders” pattern, which indicates further upward momentum and a test of the $1400 target level.
The break in the JSE All Share index above key resistance levels at 56,000 and 60,000 signal the early stages of a new bull market.
When analysing the JSE one should pay especially close attention to Naspers. The share makes up 25% of the JSE Top 40 Index and 21% of the All Share Index. Any movement in the Naspers share price has a significant effect on the JSE.
Since the start of the year the JSE All Share Index has gained by 18%. However, if Naspers is excluded the gain would have been just 9%. Part of the reason is the sheer size of Naspers with a market capitalisation of just under R1.7 trillion.
The Naspers share price has rocketed by over 90% since the start of the year. Price gains have been 24% over the past three months, boosted by strong financial results from Naspers and from Tencent, which alone makes up over 100% of Naspers’ market capitalisation.
Analysts have upgraded Tencent’s earnings forecasts yet again based on significant revenue growth across all divisions. Analysts have also upgraded their valuations of Naspers’ remaining e-commerce assets. The capital expenditure in these e-commerce assets of the past few years is starting to bear fruit. An increasing number of these businesses have begun to monetise their business models.
The outlook for Tencent remains positive. It has grown to such a point that its sheer size and dominance have become a reinforcing competitive advantage. Scottish Mortgage, the largest investment trust listed on the London Stock Exchange with a market capitalisation of over £6 billion, has Tencent as its third largest holding, comprising 6.8% of the portfolio. The managers of Scottish Mortgage highlight that the digital arena is dominated by just six companies, including Alibaba, Baidu and Tencent in China and Alphabet, Amazon and Facebook in the US. The investment managers of Scottish Mortgage: “Continue to believe that the competitive positions of these digital network businesses will be further cemented by the power of their massive data sets and new advances in computing.”
Although the share price has surged 90% since the start of the year, Naspers has never been so cheap in terms of its discount to net asset value (NAV). Its listed holdings add up to over R5,400 per share, which means the share price is trading at a massive 32% discount to NAV.
Despite the glowing outlook for Naspers and the compelling value offered by the shares prudential investment guidelines advise against allocating the JSE’s full 25% weighting in lower risk portfolios.
While a lower than market weighting to Naspers raises the risk of underperforming the JSE All Share Index, the priority in lower risk portfolios is to avoid losses which result from excessive portfolio concentration. Like all shares, even Naspers has risks attached.
Overberg Asset Management specialises in the management of private share portfolios. Our philosophy ensures a secure long-term relationship with our valued clients, built on trust, service, value and performance. At the cutting edge of investing, Overberg has a proven track record in Global and Domestic South African markets.