Global markets started the month off on a tear but ran out of steam as the month progressed, despite generally better-than-expected results out of both United States (US) and European companies for the third quarter. Risk events including the US election, a second wave of Coronavirus (COVID-19) infections in Europe and the finalisation of a Brexit deal between the United Kingdom (UK) and Europe resulted in markets losing their appeal as the month progressed.
* 30 September to 28 October 2020
The local market followed a similar trajectory as interest in South Africa (SA) Inc. propped up the All Share Index for much of the month before global risk off sentiment impacted the Johannesburg Stock Exchange (JSE) as well.
Global capital market volatility on 28 October made it difficult to glean whether the Medium Term Budget Policy Statement (MTBPS) had a major impact on local equities, bonds or the rand – but it did little to mitigate downward pressure on the day.
Economic data overview
United States economic data continued to improve in the month. Retail sales climbed 1.9% month-on-month in September compared to a 0.6% increase in the previous month as higher levels of disposable income amid frontloaded stimulus cheques likely propped up overall expenditure. The ISM Manufacturing Purchasing Managers’ Index (PMI) eased to 55.4 index points in September, slightly softer than the 56 recorded in the previous month, although still well within the expansionary territory. Non-farm payrolls added 661 000 jobs in September from an increase of 1 489 000 the previous month and registers as the fifth consecutive monthly gain in employment. Similarly, the unemployment rate eased to 7.9% from 8.4% in the corresponding period. The trade balance deficit widened to $67.1 billion in August from a deficit of $63.4 billion in the previous month as imports (+3.2% month-on-month) increased at a faster pace than exports (+2.2% month-on-month). Reflation continued as Consumer Price Index (CPI) climbed to 1.4% year-on-year in September from 1.3% in the previous month – the highest rate since March. Construction spending remained strong, rising 1.4% month-on-month in August from an increase of 0.7% the previous month led by the private sector. In fact, this was the strongest increase since January.
Euro area economic activity was mixed over the month, but still better than market expectations. The flash Markit Manufacturing PMI climbed to 54.4 in October from 53.7 the previous month amid strong growth in new orders and output growth. Conversely, the flash Markit Services PMI slipped further into contractionary territory, coming in at 46.2 index points from 48 previously. In fact, the index has been edging lower since August. Real sales rebounded strongly, rising 4.4% month-on-month in August after falling 1.8% the previous month predominately supported by solid growth in non-food product purchases. The inflation print declined even further in September, falling 0.3% year-on-year after contracting 0.2% in the previous month as energy prices fell deeper into deflationary territory. A stronger euro may also be a concern for the European Central Bank (ECB) as this may prevent inflation trending toward their 2% target and may even lay the foundation for further monetary policy accommodation. In fact, the core inflation rate (excluding volatile items such as food, alcohol and tobacco, as well as energy) rose a mere 0.2% year-on-year from a rise of 0.4% in August. This registers as the lowest print on record, which will certainly be a concern to the ECB.
Data out of the UK continued to improve, although on balance printed below market expectations. The trade balance came in at a softer surplus of £1.4 billion in August from £1.7 billion the previous month and registers as the lowest surplus since March. Exports climbed 1.5% month-on-month while imports rose at a faster 2.2%. The flash IHS Markit/CIPS Manufacturing PMI edged lower to 53.5 in October from 54.1 in September amid softer increases in new orders and output. Similarly, the flash IHS Markit/CIPS Services PMI dipped to 52.3 in October from 56.1 the previous month as business activity eased. Housing inflation was rampant as the Halifax house price index surged 7.3% year-on-year in September compared to a 5.2% increase in August and registers as the highest increase in roughly four years. The stamp duty holiday and low interest rates are likely incentivising buyers to enter the market. Conversely, the unemployment rate climbed to a higher 4.5% for the three months to August compared to 4.1% in the previous period. Average earnings including bonuses were flat in the three months to August after falling 1% previously largely supported by higher public sector wages.
Chinese data remained firm over the month. Gross domestic product (GDP) growth printed at a higher 4.9% year-on-year in the third quarter after rising 3.2% in the previous quarter led by a strong recovery in industrial production. Retail sales were relatively upbeat, climbing 3.3% year-on-year in September from 0.5% the previous month. Newly built housing prices softened slightly, moderating to 4.6% year-on-year in September from 4.8% the previous month. While the trade balance came in below market expectations, registering $37 billion in September from $39.1 billion in the previous month, exports and imports registered all-time high readings signalling that global demand conditions continued recovering. Both CPI and Producer Price Index (PPI) edged lower, coming in at 1.7% year-on-year and -2.1% in September from 2.4% and -2% respectively.
Data out of Japan continued improving, although they are still relatively downbeat. The flash Jibun Bank manufacturing PMI edged up to 48 in October from 47.7 the previous month but remained below the 50-point neutral mark. The flash Jibun Bank services PMI slipped to 46.6 in October from 46.9 in September. The last time services were in expansionary territory was January. The unemployment rate continued its upward trend, printing at 3% in August from 2.9% the previous month and registers as the highest unemployment rate since May 2017. Similarly, the jobs-to-applicants ratio slipped to 1.04 from 1.08 in July. Inflation was flat in September after rising 0.2% the previous month and registers as the lowest increase since last 2016. We believe that muted demand and ageing demographics remain strong disinflationary forces.
In South Africa, the data have mostly been better in third quarter of 2020 versus the record 51% quarter-on-quarter seasonally adjusted and annualised contraction in second quarter of 2020. The composite leading business cycle indicator rose 3.7% from a month earlier in August of 2020, following a 2.6% increase in July. It was the strongest reading since January 2010, with all 10 component time series increasing as activity levels in the economy continued to rebound amid the further easing in lockdown restrictions. Retail trade went down 4.2% from a year earlier in August 2020, following a downwardly revised 8.6% slump in July. It was the fifth consecutive month of decreases in retail activity but at the softest pace in the current sequence, amid the further easing in restrictions. Sales fell less for food, beverages and tobacco, general dealers, textiles and clothing. On a seasonally adjusted monthly basis, retail sales grew 4%. Mining production followed a similar trend to retail sales. It fell 3.3% year-on-year in August but was up 6.8% on a seasonally adjusted monthly basis. Manufacturing production rose 3.6% on a seasonally adjusted monthly basis, following a downwardly revised 5.9% growth in the previous month. The IHS Markit PMI went up to 49.4 in September from 45.3 in the previous month. Output and new orders declined at a softer rate amid a pickup in demand as several businesses reopened. Also, export sales fell to the least extent since before the pandemic on the back of an improvement in global activity. The inflation rate slowed to 3% in September from 3.1% in August, the seventh consecutive month below the midpoint of the target range. Main upward pressure came from the cost of food, as well as housing and utilities. The lowest contribution came from the cost of household contents and services, health and recreation and culture. Meanwhile, core inflation remained unchanged at 3.3%.
The MTBPS was released during the month. Government reiterated its commitment to reduce spending and stabilise the debt-GDP ratio over the medium term. Most of the spending cuts are focussed around the wage bill, which brings in some execution risk as the current wage dispute is still in the Courts. Debt is now forecast to reach 95.3% in 2025/26, slightly higher and later than what was announced in June. Their growth and inflation forecasts are in line with consensus estimates.
There was no South African Reserve Bank (SARB) meeting during the month.
Market outlook in a nutshell
- Market attention has shifted to the outcome of the US Presidential Elections – the polls seem to suggest a Democratic sweep. We caution that this should not be taken as a given as various scenarios can play out. The possibility of a Republican win, a contested election and ambiguity surrounding the outcome of the Senate – a major influence on foreign policy – are all factors that we believe can influence the market.
- Global growth is rebounding. A more material recovery is expected next year, particularly if US fiscal stimulus is greater than what we currently anticipate.
- Monetary and fiscal policy has become more supportive. Countries are likely to continue offsetting the economic impact with extraordinary and unprecedented support. Developed markets (DM) monetary policy will be eased significantly and is expected to remain accommodative through 2020 and 2021. Central banks will add significant liquidity and balance sheet support to their economies.
- Inflation is expected to rebound in 2021, although will likely struggle to remain near target levels on a sustainable basis.
- The US trade-weighted dollar to weaken modestly from over-valued levels in the medium term.
- Commodities will broadly benefit from a pickup in global demand. Gold prices will remain supported by low real rates in DMs as well as safe-haven demand. Platinum group metals (PGM) prices continuing to benefit from strong supply disruptions, particularly in South Africa. Oil prices should remain under pressure as a recovery in global demand fails to neutralise the impact of the Organisation of Petroleum Exporting Countries (OPEC) supply management and continued elevated inventories.
- The primary risk to global growth remains to the downside. Issues such as COVID-19, rising global indebtedness, oil market volatility, trade wars, nationalistic politics and policies and anti-globalisation sentiment will all play a role in adding to the risk of economic activity.
- Bond yields will remain low, but drift slightly higher as fears subside in the medium term.
- Global equities have more investment merit than global bonds based on an elevated earnings yield versus bond yields.
South African economic growth is expected to contract significantly in first half of 2020 and remain low by historical standards throughout the forecast horizon.
- Falling growth in disposable income is placing downward pressure on economic activity. We expect a notable increase in private sector layoffs in the short term.
- Concrete implementation of structural economic reforms will pose upside risk to our forecasts.
- A better sense of unity and patriotism post the COVID-19 disaster might lead to a greater level of consensus on the need to frontload growth-boosting reforms.
- Fiscal pressures continue to be exacerbated by a weak nominal growth experience.
- Inflation is expected to remain benign. The SARB has cut rates by 300 basis points so far this year, taking the base rate to 3.5%. We expect the SARB to cut rates by a further 25 basis points in 2020.
- Credit growth will remain under pressure.
- We anticipate better than money market returns from growth assets over the next 12 months, although muted business confidence remains a significant impediment. An improvement in confidence would be required to generate returns in the double-digit range.
- The government’s worsening debt burden and nominal GDP growth underpin our view of further credit rating downgrades.