SA out of recession


SA out of recession

Published Date: 2018-12-07 | Source: INCE|Community | Author: Petri Redelinghuys | Comments

SA out of recession

Well, I have to admit that I am surprised that the GDP number came in to strong yesterday. GDP growth came in at 2.2% versus expectations of 1.1%, which means that South Africa is now out of the technical recession. This is good news as we have now escaped two recessions in two years. It does show that things are still very difficult out there in the real economy, which is evidenced by the further contraction of the construction sector by some 2.7%.

At least there is some reprieve though. The Rand has firmed up considerably over the last few weeks and the price of Oil has been coming down, which should lead to around a R1.87 drop in the petrol price. Good timing as it's just in time for Christmas.

Is it enough though? Markets are still volatile and the overall picture of the global economy is not as rosy as it was a year ago. The reality of the US slowing down is starting to kick in as their government bonds yields are starting to invert. What that means is that short term bond yields (1, 3 and 5 year bonds) are offering higher interest rates than longer term bond yields (10 and 30 year). This leads to inflation pressures and usually to sharp hikes in interest rates. Also, it means that investors have no incentive to buy long term bonds and thus the government has a more difficult time financing its activities.

In a nutshell, the inversion of the yield curves is generally a precursor to a bear market and often times a recession in the US. Things have gone very well for the US for a long time now and it seems that the party might be over.

This is the same narrative I have been on about for the last few months, so it fits in with my thesis of expected negative market returns over the next 12 to 18 months. The question is, how does this affect South Africa? We are already battling with load shedding and an economy that has been in recession twice in two years... it the developed world markets come under fire, how bad does it get for South Africa?

Sadly, that is not a question I can answer now, but it is one that I will be asking myself for some time.

Here's hoping the Santa rally arrives and brings cheers to markets. Hope, however, does not mean things will happen. I am very worried about the next few months and think that the chances of a bear market is very high. As it stands, over half of the shares listed on the JSE are severely down this year.

Also, the cease-fire called by the US and China with regard to the trade war might have boosted markets in the short term, but we saw yesterday how the US market fell over 3% as markets started to rationalize that it might take a lot longer than just 90 days to sort out what is likely to be the most complex trade deal in history.

Investors should be very careful right now and remember, if this market crashes down over the next 12 to 18 months, it will be the biggest opportunity for those who have cash available to buy shares for the long term (if you are buying them once the market has finished crashing). So be patient and save up cash. If we enter a bear market, we are going to have the chance of a lifetime to make excellent investments soon.

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