Sector views steady despite more growth
Although our growth expectations for South Africa are above consensus for this year and next, this outlook is already reflected in many asset prices, in our view. At the same time, external risks to local assets are likely to remain elevated. 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. This recovery continued into August and gained further momentum after the Fed reiterated its stance on ultra-low policy rates for an extended period of time.
Summary of core macroeconomic and market views
Growth: SA’s real GDP growth rose to 1,2% q/q in 2Q21, after a 1% q/q rise in 1Q, slightly ahead of consensus of 0.9%. For the ytd, SA’s GDP is up 7,5% yoy. The performance of the SA economy in 1H was significantly better than expected, leading to an upward revision to our 2021 GDP growth forecast to 5,3% (from 4,7% previously).
Inflation: SA CPI rose to 4,9% yoy in August, from 4,6% in July, in line with consensus but worse than our estimate of 4,7%. With this upside surprise in CPI relative to our own estimate, our CPI average for 2021 rises to 4,4%, from 4,3% previously, while 2022 remains unchanged at 4,2%. We continue to see inflation rising close to 5% by year-end, before easing towards 4,5% in 1H22. The main upside risks to our inflation estimate are isolated to food and transport costs, and any second-round impact that these may introduce over the medium term.
Monetary policy: In line with our expectations, the SARB MPC kept the repo rate unchanged at 3,50% in September. This decision, like the last one, was unanimous. However, the tone of the statement was significantly more hawkish than the last one, in line with our and market expectations, with SARB’s QPM adding 25 bps worth of rate hikes to the repo rate by the end of 2023. Given that this decision was unanimous but growth, inflation and repo rate estimates are all higher, and specific upside inflation risks remain a concern, we believe a hike at its next meeting in November is still on the cards. While our baseline forecast remains unchanged for the start of this hiking cycle to occur in November 2021, we are acutely aware of risks that may delay this into 2022.
Fixed income: We adjust our fair-value range for the R2048 50 bps lower to 10,00-10,50%. The key change comes from the lower US 30y bond yield embedded in our fair value – we have reduced this estimate to 2,00%, relative to 2,50% previously, as imminent reduction in the Fed’s QE and tapering episodes tend to precede sharp declines in US long-end bond yields. We maintain a fair-value range of 8,50%-9,00% for the R2030, with a point target of 8,70%. We believe there is potential for further flattening of the yield curve over this period, due to an improvement in SA’s fiscal metrics to be announced in the November 2021 MTBPS, as well as expectations for a hike by SARB at its November MPC meeting. 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.
Currency: Although the USDZAR is only marginally above our existing fair-value estimate and in the middle of our current fair-value or neutral range, we adjust our expectations marginally weaker to better reflect the weakening bias we expect for the currency in the next few months. For the first time since April, we adjust our neutral range for the USDZAR from 14,50-15,25 to 14,80-15,50. We also adjust our fair-value point estimate that was in place since June higher – from 14,90 to 15,10.
Global inflation rates remain elevated, but have probably turned a corner
US CPI eased to 5,3% yoy in August, down from 5,4% yoy previously, in line with consensus. Inflation eased marginally, as a result of lower food, medical care, usedcar, tobacco and services inflation in August. However, the US core PCE deflator, the Fed’s preferred inflation gauge, remained unchanged at 3,6% yoy in August, driven by high price inflation of durable goods and energy products.
In the UK, inflation accelerated to 3,2% yoy in August, from 2,1% yoy previously, worse than consensus expectations of 2,9% yoy. Inflation was driven largely by restaurant and hotel prices (+8,6% yoy from 2,2% previously). Core inflation rose by 3,1% yoy, from 1,8% previously, worse than consensus of 2,9% yoy.
Consumer price inflation in the Eurozone rose by 3% in August, up from 2,2% yoy in July. The higher inflation rate in August was driven by higher prices of clothing, footwear, electricity, gas and other fuels. Inflation was also driven by higher transport costs, which increased by 7,4% yoy, from 6,8% yoy previously. Core inflation rose by 1,6% yoy, from 0,7% previously.
China’s CPI eased to 0,8% yoy in August, from 1,0% yoy previously. During the month, the key disinflationary driver was food, which contracted by -2,0% yoy, from - 1,8% previously. Low food prices are as a result of lower pork prices. On the other hand, producer price inflation accelerated by 9,5% yoy in August, up from 9,0% yoy previously.
In Japan, consumer price inflation contracted by -0,4% yoy in August, down from -0,3% previously. During the month, food prices contracted by -1,1% yoy, from -0,6% yoy previously.
Source: Nedbank CIB Markets Research
Disclaimer – The views and observations in this report represent the analyst’s own and not the Multivest nor Nedbank Group house view.
Multivest Chartbook - September 2021
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Multivest Economic Overview – September 2021
Economies and financial markets were battered in September on account of several events. Some of these incidents – which already caused declines in share markets, increases in bond yields and changes in exchange rates – are to continue in coming months, when its current effects will show up in slowing economic growth, employment and inflation numbers. Although almost all economies were negatively affected, but emerging markets felt the contagion pain disproportionately more than other countries.
These events mostly arose from China and the United States (US). It includes rising geopolitical tensions between China and the US; increasing infections from the COVID-19 Delta variant in China and the US; supply chain disruptions contributing to stubbornly high inflation in many regions including Europe, the US and China; shortages of labour in consumer-facing industries in especially the US; indications of bond purchase tapering by the European and US central banks; debt defaults by Evergrande, a large property developer in China; and a shortage of electricity in China. Some context is appropriate.
Geopolitical tensions arose from the US and the UK providing Australia with “nuclear-powered stealth technology” which will allow their submarines “unnoticed” entrance in “South Sea China” and challenge China’s military expansion. However, immediately after the “deal”, China applied to join a Asia-Pacific trade agreement from which the US withdrew in 2017. China’s application is an attempt to compete with US trade in the region. However, China doesn’t seem to comply with several membership rules such as protection of intellectual property rights, and if membership is denied, it may cause a fall-out between China and these countries, affecting future bilateral trade and economic growth.
Staying with China, the “Evergrande loan default” contributed to a massive rise in its four-year bond yields from about 12% to almost 60%, contributing to capital flight from emerging markets and currency depreciation. Evergrande’s problems arose when the Chinese authorities announced rules (debt to assets cannot exceed 70%; debt to equity cannot exceed 100%; and cash holdings must be equal to short-term borrowing). Evergrande could not meet two of the three and was disqualified access to funds from banks, causing the company to default on loan repayments. As the impact on the financial sector is unknown, it contributed to contagion risks throughout international financial markets.
Furthermore, electricity shortages are now spreading to more provinces in China. A surge in demand for Chinese products and efforts to reduce carbon emissions contributed to power outages, negatively affecting production. Consequently, China’s economic growth forecasts were adjusted downward, while it will contribute to additional supply chain disruptions as the country may not be able to meet import orders. On top of this, Chinese authorities implemented strict rules to deal with the outbreak of the COVID-19 Delta variant, further affecting Chinese production.
In the US, the Fed signalled its intentions to start bond purchase tapering. Fed chair Jerome Powell also expressed frustration with sticky inflation, driven by supply chain disruptions caused by COVID-19 disruptions. Nevertheless, markets now expect tapering to occur in December. A growing choir is emerging for rate increases in the US to start in the second half of 2022, but this is too early to call.
The South African economy’s challenges seem to pale compared to that of China. Although the exchange rate plummeted, share prices declined and bond yields increased on the back of the above events, the good news is the SARB kept interest rates unchanged, inflation seems to be “soft” albeit rising, the trade surplus continued to increase, tax collections are overshooting, while the country was moved to COVID-19 level 1. Still, the economy continue to lose jobs, signaling a policy fault line.
Multivest Economic Division