Online Retailing is profitable – very profitable. It has made Jeff Bezos the wealthiest man in the world. It is changing the way we buy. This week we look at the effect of online retailing on retail stores in SA. Read more in the Bottom Line.
Moody’s Ratings Agency: Moody’s lead analyst Lucie Villa, indicated last week at the Moody’s Sub-Sahara African Summit, that there is a low likelihood that Moody’s will change South Africa’s rating, either downwards or upwards, because of its stable outlook for the country. Moody’s is the only ratings agency that still has South Africa on an investment grade rating. The decreased risk of a downgrade bodes very well for the rand and strengthens the case even more for the Reserve Bank to cut the repo rate at its next MPC meeting on the 19th September. Nevertheless, Moody’s warned South Africa about the low economic growth outlook. Moody’s has decreased its 2019 growth forecast for the second time this year to 0.7% citing policy uncertainty, slow implementation of structural reforms and a worsening global economy. Villa warned that government’s economic reforms are slow and there isn’t a “realistic path” on implementing reforms, especially at Eskom. On the positive side, Moody’s is positive about rebuilding the credibility of institutions of accountability, including the SA Revenue Service and National Prosecuting Authority.
Manufacturing production contracted by 1.1% year-on-year in July. The biggest negative contributors to the year-on-year decline were the following sub-sectors: Petroleum, chemical products, rubber and plastic products (-8%), basic iron and steel, non-ferrous metal products, metal products and machinery (-4.4%), and wood and wood products, paper, publishing and printing (-5.1%). The largest positive contributions were made by the following divisions: food and beverages (7.0%); and motor vehicles, parts and accessories and other transport equipment (7.6%). Seasonally adjusted manufacturing production increased slightly in July by 0.4% compared with June. This followed month-on-month changes of -1.9 % in June 2019 and -2.3% in May 2019.
Mining Production increased by 2.4% year-on-year in July, the first year-on-year growth in the last nine months. The biggest positive contributors included; iron ore (up 23.7%) and coal (up 8.6%). The biggest negative contributors included: Diamonds (down 39.1%) and gold (down 13.1%). On a monthly basis mining production recorded another contraction suggesting the pace of recovery in the South-African economy will not be sustained. Production in the sector has been hit by high input costs, waning global demand and subdued commodity prices. Seasonally adjusted mining production decreased by 3.8% in July compared with June 2019. This followed month-on-month increases of 3.0 % in June 2019 and 3.1 % in May 2019.
Business confidence, measured by the RMB/BER Business Confidence Index (BCI), dropped to 21 points in the third quarter, down from 28 in the second quarter, a 20-year low and below levels reached during the 2009 global financial crisis. Current levels were last recorded in 1998-1999 during the Emerging Market debt crisis. During that time the rand weakened dramatically, and the repo interest rate shot up to an all-time high of 25.5%. The reading of 21 means that eight out of every 10 survey respondents are negative on the current business conditions in South-Africa. Of the 5 sectors making up the BCI, four recorded a quarter-on-quarter drop with only one recording an increase, namely, motor trade. Nevertheless, all the sectors are below the 30-point level, which reflects depressed business conditions. The low levels of business confidence are attributed to lower activity and, importantly, a downscaling of expectations for future operating conditions. The Bureau of Economic Research notes that most business people interviewed were pessimistic about future business conditions and that some are simply giving up hope. Business confidence in the various sub sectors of the BCI performed as follows (quarter-on-quarter): Retail dropped from 28 to 17; wholesale dropped to a 20-year low, from 42 to 29; new vehicle dealers increased from 17 to 22; manufacturing decreased from 22 to 16; and building decreased from 30 to 23.
SOUTH AFRICA: THE WEEK AHEAD
Contributed by Werner Erasmus
Consumer Price Inflation: Due Wednesday 18th September. Following a drop in Consumer Price Inflation (CPI) in July to 4%, consensus forecast is that there will be a slight increase to 4.2% year-on-year in August. This marginal uptick is expected to be on the back of an anticipated acceleration in food inflation in August. Core CPI however is expected to stay unchanged at 4.2%.
Retail sales: Due Wednesday 18th September. Retail sales are expected to continue their upward momentum with consensus growth forecast of 2.6% year-on-year in July. This will be the fastest year-on-year growth recorded since November 2018. This important data release will give an indication on whether the rebound in the second quarter’s Growth Domestic Product will be sustained into the third quarter.
Interest Rate Decision: Due Thursday 19th September. Consensus forecast is that the South African Reserve Bank (SARB) will keep its benchmark repo rate unchanged at 6.50% despite an improvement in the case for a rate cut, given low inflation, recent strengthening of the rand and accommodative monetary policy from various central banks globally.
Contributed by Nick Downing
Both China and the US moved to de-escalate the trade war between the two countries. The US pushed back the scheduled tariff increase on $250 billion in Chinese imports (from 25% to 30%) from the 1st October to the 15th October. China, meanwhile exempted 16 categories of US products from tariffs, for a period of one year. The goodwill gestures from both sides should pave the way for a more conciliatory environment when negotiations restart at the beginning of next month. Rather than aiming for the broad-based comprehensive outcome which had been close to agreement before negotiations failed in May, the two sides are targeting an easier interim solution. China, which has to date tied any progress in trade negotiations to relief for Huawei, has agreed that issues relating to trade and to security can be negotiated separately. The US also appears keen for short-term tangible progress, while leaving national security issues and Chinese concessions on deeper structural reforms to ongoing longer-term negotiations.
A report from Citigroup forecasts that the gold price, which this year has rallied over 17% in dollar terms and hit its highest level since 2013, could rally from its current price of $1500 per ounce to $2000 within the next two years. The report cited strong central bank buying as a means of diversifying reserves away form the dollar, and strong investor demand to hedge financial market risk. Negative interest rates add to gold’s allure. With $16 trillion worth of bonds worldwide in negative yield territory and therefore unable to fulfil their traditional risk diversification role, investors are increasingly looking for other safe havens, such as gold, to mitigate market risk.
Contributed by Nick Downing
The Treasury bond market suffered its worst week since November 2016, with the 10-year yield spiking higher by 35 basis points from 1.55% to 1.90%. The rise in bonds yields is attributed to growing confidence in an economic rebound in the latter part of the year stemming from concerted central bank easing. Other key indicators also confirm a recovering appetite for risk. The demand for high-yield or so-called “junk bonds’ surged higher in the past week, following several weeks of persistent outflows, pushing the average junk bond yield in the US to 5.77%, its lowest since January 2018. Falling junk bond yields indicate declining concerns over credit default risk. Meanwhile, US small-cap stocks, after falling in August to their weakest valuation versus large-cap stocks since 2003, surged higher in the past week marked by the highest inflows into the iShares Russell 2000 Exchange Traded Fund in 12 months. Small-cap stocks, perceived to be riskier than large cap stocks, tend to outperform in the first year of Fed monetary easing. Finally, the Citi Economic Surprise Index, which is negative when the majority of economic reports come-in below expectations and positive when the majority of reports beat expectations, has turned positive after being negative for a prolonged uninterrupted spell of 140 days.
According to the average forecast from a Wall Street Journal survey of 60 business, financial and academic economists, US GDP is expected to grow year-on-year in the fourth quarter by 2.2%, dropping to 1.7% in 2020 and rising slightly to 1.9% in 2021. The survey indicates a 34.8% probability of a recession in the next 12 months, higher than the 17.7% reading this time last year. The biggest culprit, identified by 61.5% of survey respondents, is the trade war with China. However, other factors include the economic slowdown in Europe, uncertainty surrounding the 2020 presidential election, an ageing population and unpredictable productivity gains. However, with US consumer spending, which contributes around 70% to US GDP growth, growing in the second quarter by 4.7% annualised, the fastest pace in four years, there appears to be little imminent threat of a recession. Meanwhile, there are few indications of structural imbalances which might spark a recession. The Federal Reserve forecasts US GDP growth of 2.1% in 2019, easing slightly to 2% in 2020 and 1.8% in 2021, while the White House remains steadfast in predicting 3.2% growth this year followed by 3.1% in 2020 and 3% in the following four years.
According to the Labour Department’s Job Openings and Labour Turnover Survey (JOLTS), the number of job openings fell in July by 3% month on month, down for the second straight month, to 7.22 million, its lowest level since February. Despite the recent decline, job openings continue to exceed the number of unemployed by a wide margin, currently by 1.2 million. Job openings have been in surplus since February 2018. A further indication of a strong labour market is the JOLTS quit rate, which increased to 2.4% after holding steady at 2.3% for 13 straight months. The quits rate, which measures the rate at which workers voluntarily leave their employment, tends to rise in a heathier jobs market as worker confidence in getting a replacement job, increases.
Core consumer price inflation (CPI), which strips out food and energy prices, due to their volatility, increased in August by 0.3% month on month for a third straight month, causing the year on year measure to accelerate from 2.2% to 2.4%, its fastest since July 2018. The acceleration is attributed to a surge in healthcare costs and increased rentals. Meanwhile, producer price inflation accelerated from 2.1% to 2.3% on the year. Despite rising inflation data, the Federal Reserve (Fed) is unlikely to be deterred from an expected 25 basis point interest rate cut at its policy meeting this week. The Fed’s preferred inflation measure, the personal consumption expenditures index (PCE), remains stuck at 1.4% at the headline level and 1.6% at the core level, both well below the central bank’s 2% inflation target. Capital Economics economist, Andrew Hunter observed that “The steady rate of unit labour costs growth suggests that a continued acceleration in core inflation is unlikely, and we expect it to level off over the rest of the year.”
Contributed by Nick Downing
China’s economic data indicate a continued decline in momentum in August. Industrial production growth slowed from 4.8% year on year in July to 4.4%, its slowest pace since February 2002, while retail sales growth slowed from 7.6% to 7.5%. Meanwhile, fixed-asset investment growth in the period from January to August fell to 5.5% on the year down from 5.7% in the period from January to July, while growth in private sector fixed asset investment, which accounts for around 60% of total investment, fell from 5.4% to 4.9%. However, there were some bight spots in the data including unemployment which fell from 5.3% to 5.2%. In addition, the residential property market remained resilient with year on year growth in home sales, by value, rising in the January to August period to 9.9% up from 9.2% the prior month. Although economic momentum is expected to rebound in the fourth quarter onwards in delayed response to monetary easing and fiscal stimulus, which has been implemented since December 2018, further policy easing measures are expected over coming months. Authorities will be keen to safeguard the targeted GDP growth rate of 6%-6.5%.
While consumer price inflation (CPI) remained elevated in August at 2.8% year on year, unchanged from July’s level and the highest since January 2018, the uptick in inflation is attributed to soaring pork prices, affected by the ongoing African swine fever outbreak. Core CPI, excluding food and energy prices due to their volatility, eased to a three-year low of 1.5%, well below the People’s Bank of China 3% inflation target, reflecting lacklustre domestic demand. Meanwhile, the producer price index (PPI) fell in August by 0.8% on the year following a 0.3% drop in July, marking the weakest reading since August 2016, when the PPI also fell 0.8%. Authorities tend to pay closer attention to PPI data than CPI data when deciding on monetary policy, which given its current deflationary state would suggest further monetary easing on the horizon.
Contributed by Carel la Cock
The European Central Bank (ECB) has cut its deposit rate to a new low from -0.4% to -0.5% and announced a fresh round of quantitative easing (QE) of €20bn a month starting in November. The QE program will run until inflation reaches the ECB target of under but close to 2%. The ECB revised its growth outlook in the eurozone to 1.1% for 2019 and 1.2 for 2020, down from previous forecasts of 1.2% and 1.4% for the respective years. The inflation forecast was also trimmed to 1.2% in 2019 and 1% in 2020, down from a previously forecasted 1.3% and 1.4% for respective years. European banks received some respite with the implementation of a tiered system that will see banks avoid negative rates on excess deposits held with the central bank. It will cut the cost of negative rates for the banks by a third. Furthermore, the ECB will launch its third targeted longer-term refinancing operation (TLTRO III) to extend cheap loans to banks in the hope that they will filter through to the broader economy via lower financing costs for businesses and consumers. Some economists have expressed reservations on whether the latest stimulus will achieve its goals. Mr Draghi, outgoing ECB president, stressed that “Now is the time for fiscal policy to take charge” in a parting shot aimed at Germany to increase its fiscal spending.
Contributed by Carel la Cock
Prime Minister, Boris Johnson, met with the European Commission president, Jean-Claude Junker and Luxembourg Prime Minister, Xavier Bettel, on Monday in the hope of advancing negotiations on a new Brexit deal. Although Mr Johnson reflected afterwards that the meeting made him more optimistic, he conceded that “clearly it's going to take some work.” His European counterparts however were frustrated by the lack of any new details on how to remove the contentious Irish border backstop with Mr Bettel lamenting “We need more than just words, we need a legally operational text to work on as soon as possible”. The Liberal Democrats under the leadership of Jo Swindon, have confirmed their stance on Brexit and promised to revoke Article 50 if they came to power. The party is now the only UK party with a clear alternative stance and distinguishes itself from the Labour party which has promised a second referendum should it win the elections. Mr Johnson has thus far kept his cards close to his chest, but with little evidence of any fresh proposals the most likely outcome seems to be an extension to Article 50 with a general election in November, which could prove to be the determining factor on the Brexit deadlock.
FAR EAST AND EMERGING MARKETS
Contributed by Carel la Cock
Turkey has cut its benchmark rate by 375 basis points (bps) to 16.5%. The country is still reeling from the effects of hyperinflation caused by the currency shock last year when Turkey experienced its first recession in a decade. The central bank was forced to hike interest rates to a staggering 24% to stabilise the currency, but the high interest rates have hampered economic growth. Inflation fell to 15% in August, down from 25% at the end of 2018, but economist have warned that the pace of rate cuts to stimulate the domestic economy should be weighed up against the need to attract foreign financing. If rates are cut too deep and too quickly, inflation could spike again leading to negative real interest rates and another currency crisis. Turkey and other emerging market countries have recently benefited from the higher risk appetite of bond traders looking for improved yields in a negative interest rate environment in Europe and Japan. It will be important for Turkey to find the correct balance between stabilising the currency versus stimulating economic growth.
KEY MARKET INDICATORS
JSE All Share
JSE Fini 15
JSE Indi 25
JSE Resi 20
Contributed by Gielie Fourie
Online Retailing is very profitable – it has made Jeff Bezos the wealthiest man in the world. It is changing the way we buy. To survive, it has forced retail shops to offer online retailing to the public. The electronic online shopping cart is replacing the traditional shop trolley. One of the great benefits of online shopping is the ability to read product reviews, written either by experts or fellow online shoppers. The Opportunities: Retailers can reach a wider range of customers. Online stores are open 24 hours a day, seven days a week. The technology is available to the smallest of retailers. Online retailing can drive down costs for the retailer, leading to bigger profits. For example, retailers don’t need bricks and mortar shops and can manage their businesses with fewer employees. On the other hand, there will be job creation in the delivery of parcels by couriers. With no shops, shoplifters will find less opportunities to ply their trade.
The Threats: E-commerce is regulated by a range of departments, including SARS, DTI and the Competition Commission. Where trade is cross-border there are implications for the collection of tax plus compliance with international trade regulations. Online shopping carries a higher risk of fraud than face-to-face transactions. One way in which consumers can protect themselves is by sticking with well-known stores. Privacy of personal information is a significant issue for some consumers – you must disclose your address, phone number and credit card information. This enables the store to build a profile of your buying habits. You don’t have to disclose this information when you buy instore and pay cash. The Growth: In SA the industry is still in its infancy. Internet retail sales in SA have grown from R1 billion in 2013 to R10 billion in 2017. This amounted to just 1% of our total retail sales of around R1 trillion in 2017 (Visa and Statistics SA, 2017), compared to 18% in the UK. Our online retailing has been growing at a rate that far surpasses the growth of traditional retail. Stakeholders interviewed by Euromonitor in 2018 estimated the growth of online retail in SA to be between 20-35% p.a. The Post Office noted that parcels coming into SA by air increased by 20% over one year (SAPO, 2017). The growth in e-commerce in SA has been restrained by high data costs, poor internet services and the unreliability of delivery, particularly the Post Office.
The Customers: Surveys show that e-commerce buyers in SA are predominantly higher income earners who work full time, with 35% earning above R 30 000 per month (Effective Measure, 2017). The survey noted that a large proportion of e-commerce consumers are people who have “higher income levels but are time-poor”. The Products: SA consumers use online channels for a range of digital and downloadable services (such as music or eBooks), travel and events tickets. Physical products bought online include fresh food, non-perishable food, household items, fashion items, computers and tech, electronics, toys, movies and music, alcohol, flowers, cars, etc.
The Players: The prominent online retailer in SA is Takealot. Large traditional retailers are now offering online sales as an alternate channel. Notable ones are Makro, Mr. Price, Foschini, Truworths, Pick n Pay, Woolworths, Incredible Connection, Clicks, Game and Netflorist. Amazon has a presence through shipping products form the USA to SA. The Channels: In SA online shopping occurs across both mobile devices and computers. A fairly high proportion of traffic originates on mobile devices - more than half of the traffic on certain websites originates on mobile devices. The bulk of delivery is concentrated in metro areas, particularly at present Johannesburg and Cape Town.
The Effect on Bricks and Mortar Shops: Online sales generally, create under 1% of total sales. Thus, bricks and mortar retail will continue to play a strong role in SA. Mr Price notes in its 2018 annual report that 50% of online customers collect their purchases in-store. 20% of these customers make an additional purchase while in the store. In addition, in another interplay between physical and online stores the company notes that 65% of its customers browse online before shopping in store.
Could e-commerce lead to the Fall of the Mall in SA? Andrew Smith, founder of Yuppiechef and e-commerce pioneer concluded “For a long time we believed that e-commerce was the future of retail, and that eventually this channel would “win” and the others would “die”. We were wrong.” He observed that “For many South Africans shopping is one of our favourite past-times — spending a Saturday at a mall, meeting friends and eating out. Or perhaps for certain products you prefer the physical shopping experience — browsing, getting advice and the immediacy of the purchase. Shops and malls are not going to disappear any time soon. We believe that the future of retail is ‘omnichannel’, which means a combination of physical stores and e-commerce.” (Yuppiechef, 2017).
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.