Economies: Blowing too hot or too cold?

An article in the New York Times this week asks whether the US economy is running too hot or too cold as it reboots in the wake of Covid-19. Although the economy is alive with possibilities, inflation is outstripping pay gains for many workers, with the number of those employed far below pre-pandemic levels.

Both the Biden administration and the Federal Reserve aim to achieve a smooth transition to an economy that enjoys prosperity without high inflation. But for that to happen, a huge mismatch – between economy-wide demand for goods and services, and their supply – will need to be resolved.  As we’ve argued before, how the Fed responds will be a key known factor in shaping equities’ performance over the next 12 to 18 months. (This assumes, of course, that successful vaccine rollouts will enable the resumption of a more normalised global economy).

On the domestic front and following the heat of the recent riots, South Africa faces cooling investor and consumer confidence, which is sure to take a huge toll on the economy. The unrest will be a major setback for government’s investment drive and its plans to address poverty, inequality and unemployment.

Most economists have now cut their full-year growth forecasts this week by less than one percentage point, which is a significant setback for our economy that can ill-afford waning business confidence and unacceptably high levels of unemployment. This means the 2021 growth consensus will probably fall back to around the mid-3% range, wiping out the previously higher estimates.

The story is the same when it comes to new fixed domestic and international investment. South Africa now has larger political risk attached to its profile, which will take years to recede even if structural economic reforms are accelerated. Skilled emigration will also sharply increase – another irreversible consequence of the violence and trauma.

Like the icy weather currently sweeping the country, our local news includes insight into the aftershock wreaked upon specific companies by last week’s looting and burning.

“Real growth isn’t weak, but it’s just not as strong as we thought it was going to be. There was a lot of optimism, and now things are coming back to earth a little bit.”

– Paul Ashworth, chief US economist at Capital Economics

“There is virtually no part of the economy that has not been affected by the violence, and there is probably no part of the country that will not feel the effects in some form or another because of the way our supply chains work.” 

​– South African President Cyril Ramaphosa

 

Global News

• Despite growing numbers of people having had the Covid vaccination across the world, global investor confidence dipped in June as a barometer of investors’ actual buying and selling behaviour shows that they cut back on risk in June. Confidence has also taken a knock from slightly increased prospects of US rate rises and some concerns about the Delta variant of Covid-19. The State Street Investor Confidence Index, produced by State Street, for June came in at 96.3, a drop of 2.1 points from May’s revised reading of 98.4.
• On the economic front, data showed US housing starts increased in June by more than forecast, which suggests residential construction is stabilising despite lingering supply chain constraints and labour shortages.
• This comes as investor confidence in the UK fell 5% so far in July, despite the island returning to what some may consider “normal” as Covid restrictions are lifted as part of what has been dubbed ‘Freedom Day’. There is growing concern that the rise in infection rates could derail the economic recovery and push up interest rates. Just under two-thirds (65%) of investors believe interest rates will be higher in a year’s time compared to 60% last month.
• Many British businesses are approaching England’s reopening cautiously. Most pandemic restrictions were lifted after 16 months, but the country hasn’t seen a stampede of workers returning to their offices. Many companies approached the reopening on so-called ‘Freedom Day’ cautiously, as the nation reported 40,000 new coronavirus cases in a population that is about two-thirds fully vaccinated.
• Gold has eased as the dollar emerged as the preferred haven bet amid the fear that the highly contagious Delta coronavirus variant may stall a global economic recovery, while a rebound in US bond yields further pressured bullion prices.
• Further afield, China’s gross domestic product gained 7.9% year-on-year in the second quarter of this year, which Stanlib says indicates some plateauing in recovery following the V-shaped rebound. Growth in the quarter under review declined from the first three months of the year, from 18.3% year-on-year.
• Meanwhile, in June 2021, China’s trade balance recorded a surplus of $51.53 billion, the highest surplus since January 2021. A Bloomberg poll had anticipated a $44.75 billion surplus, while May’s figure was a surplus of $45.54 billion. While both imports and exports increased in the month, the improvement in the trade surplus was the result of exports rising at a faster rate, gaining 6.6% month-on-month in June.
• China may have a tough time with exports to the US because ties between the two countries are fraying as Beijing pushes back against President Biden. From China’s perspective, the blows from the United States just keep coming: Sanctions and export controls over the crackdown in Xinjiang; a warning to international businesses about the deteriorating climate in Hong Kong; and the rejection of visas for students and researchers suspected of having links to the People’s Liberation Army. Now the United States has rallied a broad array of nations to accuse the Chinese Ministry of State Security not only of cyberespionage but also of hacking for profit and political intrigue.
• In addition, the Biden administration has warned investors about the risks of doing business in Hong Kong, issuing an advisory that said China’s push to exert more control over the financial hub threatens the rule of law and endangers employees and data. The advisory said Hong Kong’s “new legal landscape” posed risks for businesses, investors, individuals and academic institutions, among others, operating in the city.
• In terms of electrical products, shipments of which were delayed due to Covid (causing a global shortage of semi-conductor items), are starting to flow. Biden administration officials say they’re starting to see signs of relief for the global semiconductor supply shortage, including commitments from manufacturers to make more automotive-grade chips for car companies that have had to idle production.
• The world’s biggest miner, BHP Group, is considering getting out of oil and gas in a multibillion-dollar exit that would accelerate its retreat from fossil fuels. BHP’s energy assets make it an outlier among the world’s biggest miners – rival Anglo American has already exited thermal coal under investor pressure and BHP is trying to follow suit. Read more here. Read about the rise of responsible investing here.
• J&J and three drug distributors have reached a $26 billion agreement with states that would release them from all legal liability in the opioid epidemic. The offer will now go out to every state and municipality in the country for approval. If enough of them formally sign onto it, billions of dollars from the companies would be allocated to communities to pay for addiction and prevention services.
• New federal statistics released in the US this week show what a difficult year it has been for Black and Hispanic Americans who, thanks largely to the pandemic, have lost nearly two more years in life expectancy compared to their white counterparts.

Local News

• While investor confidence globally is under pressure due to rising infections caused by the Delta variant, South Africa’s confidence is being hampered by the recent failed insurrection. In fact, according to Claire Bisseker, investor confidence may never fully recover from South Africa’s week of anarchy. The hope is the unrest has so shaken the state that it unleashes powerful reforms that overwhelm the anguish lodged in the national psyche. (However, Dynasty remains sceptical that such large-scale reforms will take place. Our scepticism also extends to a lack of confidence in the capacity of the state to execute effectively on these reforms).
• From an investment management perspective, Ninety One has produced a webcast which we believe holds well-considered and balanced views on the post-riot prospects for our domestic asset classes. For clients who may be interested in this in-depth analysis, a 28 minute discussion between Nazmeera Moola (Economist and Head of SA investments); Clyde Rossouw (Co-Head of Quality); and Peter Kent (Co-Head of SA and Africa Fixed Income), may be accessed here.
• Some are concerned that the riots and the extension this month of the strictest coronavirus lockdown measures since May 2020 threaten to derail the upward momentum in South Africa’s composite leading business-cycle indicator. The gauge, which portends future economic output, rose to 128.8 in May from 125.8 the previous month, the South African Reserve Bank said. This is the highest since record-keeping began in 1960 and was largely driven by increases in the average hours worked by factory labourers and the volume of orders in manufacturing. While this is good news, South Africa is at risk of a sharp contraction next quarter thanks to the violent protests.
• This comes as economists and analysts are scrambling to model the hit on South Africa’s economic growth from the recent public violence, with estimates ranging from a 0.4% to a 1% reduction of total gross domestic product in 2021. Initial estimates suggest the recent looting and destruction triggered by former president Jacob Zuma’s arrest could cost the City of eThekwini R20 billion after trucks were torched, shopping malls gutted, and ports forced to close. And that’s just one of the hotspots.
• The week-long riots could also cost South Africa about R50 billion in lost output, while 150 000 jobs have been placed at risk, according to the Presidency, citing estimates from the South African Property Owners Association. About 200 malls were targeted and some 3 000 shops were looted during the protests, while 200 banks and post offices were vandalised.
• As a result, Citigroup and Deutsche Bank were among the lenders recommending investors short the South African rand. Chile’s peso is also seen as vulnerable relative to more stable units such as the Russian ruble. Elections are coming up in many major developing nations over the next three years and the pandemic is worsening socio-economic fault lines. The local currency took a knock following the riots last week and was trading at R14.78/$ at noon today.
• General Siphiwe Nyanda, former military commander and politician, writes that renewal in South Africa and the ANC will remain elusive as long as the ANC fails to come to terms with the fact that much of the recent violence in the country arises from its own doing. This, in fact, is an optimistic view. A strong possibility is that the ANC is unlikely to be saved from its self-inflicted wounds.
• The question is what the ratings agencies will do after Moody’s Investors Service downgraded five South African cities in the middle of the month. This placed the City of Ekurhuleni, the City of Cape Town, the Nelson Mandela Metropolitan Municipality, the City of Johannesburg, and the City of uMhlathuze deep into junk territory at a time when municipal finances are extremely stretched. The downgrade will affect their cost of borrowing in both bond and capital markets.
• Business leader Mark Barnes believes South Africa’s economic growth will be founded in a thriving small business sector. Writing for Business Day, he said: “But I do not subscribe to the notion that we should crush bigger entities into smaller bits. Instead of placing a limit on how big you can get, let’s make the appetite infinite for how small you can start.” He believes capital needs to be poured into small business in South Africa. If the state wishes to use any economic force or political power, it should be applied at the bottom of the economy, using the gains it harvests from the taxes paid by successful major corporations.
• The South African Reserve Bank’s Monetary Policy Committee on Thursday unanimously decided to hold the repo rate at 3.5% while the prime lending rate will remain at 7%. The central bank expects rates to increase by 25 basis points in the fourth quarter of 2021 and in each quarter of 2022.
• In company news, Toyota is set to resume production at its Durban plant, despite the uncertainty. The plant suspended operations last Monday as rioters brought chaos to the city and forced the harbour to close. That cost Toyota significant export losses and the company said the local unit risked losing business to other global affiliates because its European customers will not wait for their orders.
• Africa’s largest food retailer, Shoprite, said just over 200 of its stores in KwaZulu-Natal and Gauteng were affected by the looting and vandalism in the two provinces last week. Most of the stores affected were within its South African supermarket division; its liquor, furniture and distribution centres were also impacted, largely in KwaZulu-Natal which saw the brunt of the unrest and incidents of arson.
• Remgro, the investment company chaired and controlled by Johann Rupert, has poured another R3.7 billion into a telecommunications infrastructure company in a bid to take advantage of soaring demand for fibre. It has followed its rights to buy shares in Community Investment Ventures Holdings, which counts Vumatel and Dark Fibre Africa among its largest operating subsidiaries. Vumatel is South Africa’s largest fibre-to-the-home network operator with over 19,000km of fibre assets. Dark Fibre Africa is a premier open-access fibre infrastructure and connectivity provider in South Africa with more than 13,000km of fibre assets.
• South Africa’s Competition Tribunal has approved the sale of Yuppiechef to the Mr Price Group. Mr Price sees this as an opportunity to gain access to a higher LSM customer base in the homeware market, enabling growth of its share-of-wallet through aspirational value spending.
• In healthcare news, Pfizer has reached an agreement to start production of its Covid-19 vaccine at a facility in Cape Town to deliver more than 100 million doses annually to African nations. Pfizer and its German vaccine partner, BioNTech, have agreed with Biovac Institute, a company partially owned by the South African government, to manufacture the shots. Finished doses should start being produced in 2022.
• South Africa’s local government elections, slated for later this year, may be delayed as only about three percent of the country’s 60 million have been vaccinated. Former deputy chief justice Dikgang Moseneke, who led an inquiry established by the Electoral Commission, has found it was “not reasonably possible or likely” that the municipal vote would be free and fair in October. The nearest point of safety will be February 2022.
• President Cyril Ramaphosa has said that government is currently investigating the feasibility of introducing a basic income grant in South Africa. The Congress of South African Trade Unions has also called for the introduction of a basic income grant as part of a response to the massive socioeconomic fallout from the riots in KwaZulu-Natal and Gauteng. However, this has been criticised as an election ploy with many questioning where the money will come from. (The Ninety One webcast referred to above offers an explanation as to how the funds could be sourced).

 

 

Sources: Dynasty, Money Marketing, Wealth Briefing, New York Times, Stanlib, Bloomberg, BusinessLive, Moneyweb, BusinessTech, Daily Maverick, Ninety One,  etc.