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October 2019 market overview

Tito Mboweni
| Market Forces

October was a month starved of positive economic news for South Africa. Early in the month the World Bank forecast that the SA economy will grow by 0.8% in 2019, the same rate as in 2018. This is 0.5 percentage point lower than the World Bank’s April forecast. The country’s unemployment rate hit an 11-year high with 29.1% of citizens of working age currently without a job – that translates to 6.7 million people without paid work. On a more positive note, annual headline consumer price inflation dropped to 4.1%, but those who spend a significant portion of their income on food and energy were harder hit: bread is 8.5% more expensive than a year ago, and electricity 11.8% more.

End of an era for Eskom
Eskom, together with the overall dysfunction in which South African state-owned enterprises find themselves, continue to cast an ominous cloud over the credit status of the SA government. A plan for Eskom was announced during the month and it’s been confirmed that Eskom’s transmission unit will be hived off while remaining under the control of a state holding company, making it easier for private generators to supply the national grid. It seems that the monopoly that Eskom has held over SA citizens for decades is truly facing its end.

Despite the bleak picture painted by economic data and talks of a downgrade, some signs of hope are visible in the business community. The Sacci monthly business confidence index (BCI) rose to 92.4 in September from a 34-year low of 89.1 in August.

Tito’s budget speech disappoints
Shortly before the delivery of the Medium Term Budget Policy Statement (MTBPS), yields on SA government bonds hit their highest level in three weeks, surpassed only by junk-rated Nigeria, Turkey and Lebanon among the major emerging markets. In his MTBPS, Minister Mboweni announced – among other things – that talks have begun to find equity partners for SAA (some good news), but for the current fiscal year the main budget deficit is expected to widen to 5.9% of GDP. National Treasury is also prepared to implement wage freezes at certain levels of government. Economists and market analysts were not impressed by the Minister’s lack of detail around debt reduction, and the Rand subsequently weakened. Two days later Moody’s adjusted the outlook for its credit rating of the SA government from ‘stable’ to ‘negative’.

Equity markets show some recovery
Despite poor economic signals during October, the FTSE/JSE All Share Index (ALSI) gained 3.14% on a total return basis, while the SA Listed Property Index (SAPY) gained 1.89%. Unsurprisingly, with a credit downgrade looming, bonds had a negative month with a return of -0.35%, and cash returned 0.59%. During October the Rand strengthened by 0.65% against the greenback but weakened 1.67% against the Euro.
For the year to date, the ALSI and ALBI returned 10.45% and 8.06% respectively. Listed property returned 3.25% and cash returned 6.07%. The Rand weakened 4.72% against the greenback and 2.2% against the Euro.

Over the 12 months to end October 2019, the ALSI returned a strong 11.49%, but the ALBI is still leading with a return of 12.96%. Listed property eked out 0.84% over the 12 months and cash returned 7.33%.

Over the long run (10 years to October 2019), equities were the top performing local asset class with an annualised return of 11.18%. Property yielded a 9.98% total return, bonds delivered 8.77% and cash 6.53%, against consumer price inflation of 5.12%. Internationally, the MSCI World Index returned 16.89% in Rand terms, boosted by the weakening of the local currency over the past decade. International bonds delivered 9.31% in Rand terms.

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