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Mid-July economic review

SA’s extended lockdown, and ongoing looting and violence will have a large effect on recovery and growth going into the third quarter.

Globally, equity did not lose any steam throughout June. The MSCI All Country World index yielded 1.35% for the month, however, developed markets performed better than developing markets, with the MSCI World Index yielding 1.52% against 0.21% from the MSCI Emerging Markets Index.

US

Over in the US, CPI inflation increased yet again in May, hitting a 13-year high of 5% year-on-year compared with 4.2% in April. More importantly, the personal consumption expenditures index (the US Federal Reserve’s preferred inflation measure) hit its highest level since 1992, coming in at 3.4%, which is also far above the 2% target. Despite the rise in inflation, the Fed retains its view that it is temporary and thus kept its policy unchanged in the June meeting. It did however bring up the schedule for rate hikes, signalling that there could be two increases as soon as the end of 2023.

Tensions are yet again building between the two economic giants, China and the US, after the US blacklisted five Chinese firms over alleged human rights abuses. China retaliated by stating that it would take the necessary steps to protect the legitimate interest of Chinese companies.

UK

The United Kingdom’s economic recovery continues with the recent GDP figure printing 2.3% month-on-month as compared with the previous 2.1%. The Composite PMI reading for June came in at 62.2, slightly off the 62.9 printed in May, however it’s still a strong reading given that it is near the strongest levels seen in more than a decade.

As expected, this rebound in economic activity does come with an uptick in inflation, with the May CPI reading coming in at 2.1% (y/y), beating forecasts of 1.8%. The Bank of England’s view is in line with that of the US Fed and stated that the uptick will prove to be temporary, thus it also kept the bank rate unchanged.

SA

Locally, new vehicle sales staged a strong recovery with sales up 40.1% for the first half of this year as compared with the same period in 2020. This is encouraging considering new vehicle sales is regarded as a leading indicator of changes in economic activity. A strong recovery, however, cannot be confused with growth as we are still lagging pre-pandemic levels, which are expected to only be reached by 2023. The Absa PMI dipped to 54.7 in June as compared with 57.8 in May, however, it can still be seen as a positive reading by printing above the expansionary 50-mark.

Inflation also reached its highest level in 30 months, with the consumer price index printing 5.2% (y/y) in May from 4.4% the month before, officially crossing the midpoint of the South African Reserve Bank’s target of 3% to 6%. The biggest driver yet again was the price of fuel, which is 37% more expensive than it was a year ago. Although the sharp increase in inflation is predominantly due to base effects, it will put pressure on the Reserve Bank to possibly start normalising monetary policy at its next meeting.

Clouding the positive sentiment was the announcement that SA was to remain in an amended level 4 lockdown for two further weeks amid the continued spread of the Delta variant. The move will be felt across the board, however the hardest hit will be alcohol-related industries, hospitality, and tourism. This coupled with the current ongoing looting and violence in KwaZulu-Natal and Gauteng (which together account for over 50% of GDP) will have a large effect on the recovery and growth going into the third quarter.

The ongoing protests, introduction of a third wave, and slow progress in SA’s vaccination drive have put the rand under pressure, causing it to trade over the pivotal 14.50 mark against the US dollar and fall to its weakest level since April. With this being said, the rand is still one of the few emerging markets to come out on top against the majors for the quarter as a whole.

Read: Rand becomes currency to short amid turmoil

Local equities also came under pressure in June with the FTSE/JSE ALSI losing 2.43%. The biggest drag being resources delivering -6.55%, financials -2.62%, industrials 0.41%, and listed property 3.17%. South African bonds had another positive month returning 1.09%.

Source: Investing.com (data June 30, 2021)

In other news, the stock of Imperial Logistics jumped over 30% at market open on Thursday last week, as DP World – one of the world’s largest operators of marine ports and inland cargo terminals – put in a R12.8 billion bid to buy the South Africa-based logistics company. The deal, which may be a good offer for shareholders, will see Imperial delist from the JSE.

Read: Imperial to be delisted if DP World’s proposed R12.7bn acquisition is finalised

Mr Price is also a step closer with its plans to purchase 100% of Yuppiechef after the Competition Commission of South Africa gave it the green light. Yuppiechef is a South African business focused on home and kitchenware and Mr Price said the purchase will allow it to expand its customer base and make further inroads into the online retail space.

Read: Mr Price gets CompCom backing for R500m Yuppiechef deal

Shareholders of Prosus have approved the Naspers share purchase, which will see the majority of the economic value derived between the two companies move to Amsterdam. This move, which was met with much criticism by asset managers, is yet another attempt to reduce the discounts to net asset value in Naspers and Prosus. Naspers shareholders must now decide whether to swap their shares for Prosus shares, where the deal will only proceed if enough shareholders tender their shares to give Prosus a 49% stake in Naspers.

Read: Prosus shareholders approve share swap

Finally, billionaire Richard Branson and his company Virgin Galactic successfully pulled off a key test flight to space on Sunday. This is a big step for Branson and his team towards their goal of debuting tourism trips to space next year.

ADVISOR PROFILE

Mauro Forlin

Global & Local Asset Management

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