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Summary of core macroeconomic and market views
Currency
Our neutral range for the USDZAR is between 14.50 and 15.25. In the short term, we continue to prefer a strengthening bias.
Inflation
We believe inflation will likely remain muted for some time. However, we expect inflation to rise gradually in the coming months, as a result of the low base effects from 2020. We forecast CPI (average) at 4.2% in 2021 and 4.4% in 2022.
SARB
As base case, we expect the SARB to hike in November. We forecast a 75bps hike to the repo rate by the end of 2022. Although this remains our baseline forecast, a hiking cycle starting sooner rather than later would not surprise us.
Bond yields
We adjusted our fair value range for the R2030 to 8.50-9.00% (previously 9.00-9.50%). In the same vein, our fair value range for the R2048 is now 50bps lower at 10.50-11.00%. We see our fair value range as a three- to six-month view. We believe there is potential for further flattening of the yield curve over this period, as the market anticipates an improvement in SA’s fiscal metrics by the October 2021 MTBPS, due to a tax revenue overshoot and higher nominal GDP growth. Our long-term/structural view remains neutral long-duration bonds, as we believe the fiscal trajectory will likely deteriorate in the absence of structural reform implementation.
Rating action
In 2020, both Fitch and Moody’s took negative rating actions on the SA sovereign, lowering their respective ratings by two notches over the calendar year to “BB-” and “Ba2”, respectively. Both agencies have maintained a “Negative” outlook. S&P affirmed its “B/Stable” rating on SA after downgrading it in April 2020. We believe S&P does not yet see SA as a “B” credit (hence the “Stable” outlook), unlike Fitch. We believe the National Treasury may have done enough to stave off a downgrade in 1H21, but this could still happen towards 1H22 if the implementation of the 2021 National Budget progresses too slowly or proceeds worse than anticipated (with regard to growth and fiscal stability trends).
Source: Nedbank CIB Markets Research
Equity-market indices marginally better after Fed reassurances
Equity markets continued its cautious stance, albeit posting a better performance in July relative to its declines in June. The S&P 500 index however, continued to post its sixth consecutive month of gains, rising 2.3% in July, after its 2.2% rally in June. Investors were quite concerned that the US Fed would turn more hawkish and announce plans for reducing the size of its QE programme in July. Ultra-loose monetary policy, as well as unprecedented fiscal support have buoyed equity markets since the start of the year, and any sign of this ending has caused market jitters.
At its meeting in July, the Fed dismissed concerns of an early end to its QE programme, warning that it needs to see a more sustainable recovery before reducing its stimulus measures. This announcement saw most major equity indices recover slightly in the second-half of July, after recording declines since the start of the month. The JSE All Share Index gained 2.1% in USD terms in July, while the FTSE 100 rose 1.1% in USD terms over the same period. The Eurostoxx600 gained a marginal 0.7%. These equity indices all posted large declines in June, so the positive performance in July was a welcome development.
The Nikkei 225 was down 4.2% (USD terms) in July, its worst performance since March 2020. Rising Covid-19 cases, particularly of the Delta variant, necessitating stricter lockdown measures in Japan have led to a decline in confidence and uncertainty over the economic outlook. Asian equities were hard hit by the negative sentiment brought about by a regulatory crackdown by Chinese regulators on Chinese companies listed in the US. Chinese regulators managed to appease tensions towards the end of the month, indicating better communication with US authorities going forward.
The Brent crude price was up 1.6% in July, despite a 400 000-bpd increase in supplies from OPEC that is effective from August 2021. The market is expecting a strong pace of global growth to support demand for oil, given the recent upward revisions to global growth estimates for 2021 and 2022. As at July 2021, the Brent crude price has rallied almost 50%, and is currently 73% higher relative to a year ago.
REEZWANA SUMAD & WALTER DE WET, CFA - Nedbank CIB Markets Research
Disclaimer – The views and observations in this report represent the analyst’s own and not the Multivest house view
Asset Class Returns in ZAR
3-Year Cumulative Returns in ZAR
Annualised rolling 3 year returns over the last 20 years
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ALSI Contributors / Detractors
ALSI Metric & ALSI Historic PE Ratio
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Style Based Returns
Currencies vs ZAR
ZAR on Parity
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Economic Overview – July 2021
Although the International Monetary Fund in its July outlook still expects global growth of 6% in 2021, the composition of the growth changed in favour of advanced economies. Vaccine access emerged as the new fault line between advanced and emerging economies as the latter don’t have sufficient access. Consequently, several countries in South and East Asia experienced a surge in new COVID-19 cases, affecting the outlook for emerging markets economic growth. In fact, a new wave of infections are occurring all over the world, reducing the pace at which commodity prices increased.
The first estimate of economic growth in the United States for the second quarter disappointed at 6.5% (annualised) – compared to an expected 8.4% – due to among others rising COVID-19 cases and declining vaccination rates. The Federal Reserve still maintains that sharp rising consumer price inflation (CPI) can be attributed to transitory factors, while full employment is viewed as far from the target. The Fed therefore did not discuss tapering of its bond purchasing programme, meaning interest rate increases are something far in the future.
In the Eurozone and UK daily COVID-19 cases increased at a fast pace. In the European Union (EU) it increased from around 12 000 cases a month ago to almost 70 000 by end July. In the UK labour shortages and surging COVID-19 infections contributed to Services PMI decreasing from 62.4 in June to a four-month low of 57.8 in July, while manufacturing PMI fell from 63.9 in June to 60.4 in July. In contrast, the Eurozone’s Services PMI increased from 58.3 in June to 60.4 in July due to a sharp rise in vaccinations. The European Central Bank (ECB) is not concerned about rising CPI and adopted a symmetric 2% inflation target in the medium-term. However, the Bank of England acknowledged that CPI would probably breach 4% (the CPI target is 2%), but still views the increase as passing, Japan’s economic growth will be affected by surging coronavirus cases in Southeast Asia (a prominent trading partner region) as it will affect supply chains of Japanese companies. On the inflation front, core CPI increased by a lower than expected 0.2% y/y in June, still driven by higher fuel costs. Japan is also working towards fiscal health as the government is aiming to achieve a primary budget surplus by 2027.
China’s National Bureau of Statistics announced gross domestic product expanded by 7.9% y/y in the second quarter, down from 18.3% in the previous quarter. The People’s Bank of China (PBOC) cut the reserve requirement ratio (RRR) for all banks by 50 basis points, which may release long-term liquidity of around US$155 billion to support the economic recovery, which appear to be losing steam. In this respect manufacturing PMI decreased from 52.0 in May to 51.3 in June as China was adversely affected by increasing COVID-19 cases, shortages of labour and constraints on electricity supply. The Political Bureau of the China Communist Party discussed plans for the second half of 2021, working towards pro-active fiscal policy, keeping the exchange rate stable and steadying commodity prices.
South Africa’s economic growth for the third quarter will be negatively affected by the institution of a stringent adjusted level 4 lockdown (since downgraded to adjusted level 3) and property damaging riots. The government subsequently announced several measures to assist in the ‘rebuilding’ of the affected areas in KwaZulu-Natal and Gauteng, alleviate poverty via the reintroduction of the R350 per month social relief grant and TERS-payments to workers affected by the lockdown. These measures are estimated to cost R38.9 billion, but the National Treasury confirmed this will not increase the fiscal deficit as it will be financed from a “revenue overrun”. Thanks mainly to high commodity prices, first quarter tax collections were about R60 billion more than in 2019 (before Covid-19). The government also reached an agreement with labour unions on salary increases, estimated to cost around R27 billion. The South African Reserve Bank kept the repo rate unchanged and lowered its CPI forecast for 2022.
Multivest Economic Division
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