The Week Ahead of 4 September 2018


The Week Ahead of 4 September 2018


Published Date: 2018-09-04 | Source: INCE|Community | Author: Chris Gilmour

The Week Ahead of 4 September 2018

Emerging Markets (EMs) remained under pressure last week and the ZAR fell again in line with EM weakness generally. We should remember that the EM economies currently taking strain typically all exhibit external weaknesses or fiscal imbalances, combined with a lack of foreign exchange reserves and credible internal policies. Remember the so-called "Fragile Five of a few years ago? Those countries were SA, Brazil, Turkey, India and Indonesia and they all displayed the aforementioned characteristics. Turkey has relied too heavily on an externally funded, credit-driven growth model, while Brazil has large fiscal deficits and rapidly rising public debt. Last week, Argentina asked the IMF for an urgent loan. And while the IMF granted it, and the Argentine reserve bank raised the policy rate from 45% to 60%, it wasn't enough to stem the tide of massive currency depreciation. South Africa's lack of any form of growth on the near horizon coupled with stubborn resistance to anything that remotely resembles genuine structural reform of the economy doesn't send out the right signals. Expect EM economies like SA to remain under pressure for the foreseeable future.

In the US, the S&P 500 and the Nasdaq both hit record highs last week and the Dow Jones Industrial Index isn't far behind. Starting in Mar 2009, this is the longest US bull market in history. The market is shrugging off trade wars and just going higher. But one should remember the old maxim that "nobody rings a bell at the top of the bull market". However, there is plenty of positive sentiment keeping markets high, notably strong US corporate earnings growth. But both Sep and Oct are historically volatile months so don't be surprised if we encounter a correction or two in the next few weeks.

MTN got hit with a potential bill of $8bn by the Nigerian government for alleged contraventions of Nigerian exchange control law. This comes in the wake of a similarly-sized fine by the Nigerian government a few years ago for not closing down dormant subscribers in time. This is thinly-disguised extortion by the Nigerian authorities and if they persist with this type of behaviour, Nigeria will eventually become un-investable, regardless of the potential long-term attraction of being Africa's most populous and arguably largest economy. Meanwhile MTN's share price slumped to its lowest level since 2009 and many potential investors will be very wary of touching this stock until the uncertainty has been resolved.

British Prime Minister Theresa May visited South Africa last week and reassured President Ramaphosa on the Expropriation Without Compensation (EWC) issue. She told the President that if a rules-based system remains in place and it doesn't degenerate into a land-grab free-for-all, the British government would have no qualms about implementing EWC.

The ZAR is one of the world's worst performing currencies year to date. Having dropped by 15.8% so far this year, it is in line with the Russian Ruble at 15.3% and the Iranian Rial at 14.6%. The Brazilian Real (-20.7%), Angolan Kwanza ((-38.8%), Turkish Lira (-44.0%), Argentine Peso (-50.5%), Sudanese Pound (-61.1%) and the Venezuelan Bolivar (-99.99%) have all performed worse than the ZAR so far this year.

South African second quarter GDP will be released by the SA Reserve Bank on Tuesday 4 Sep. For a recession to occur, this figure will require to be negative, as it was in Q1, to the tune of -2.2%. It is probably unlikely that SA will enter recession a) because of the extent of the drop in Q1 and b) because the mining production figures in Q2 have been significantly better than expected. In other words, the low base of Q1 means that Q2's growth would have to be incredibly weak to register negative growth. However, if by some statistical quirk Q2 is indeed negative and SA enters recession, it probably won't be long before Moody's ratings agency downgrades SA's local debt to junk. That in turn would trigger massive outflows of foreign funds.

JSE listed company results out this week;

  • 3 September 2018
    • Stadio - Interim
    • Bidvest Final
    • Sun International - Interim
  • 7 September 2018
    • Echo Polska Properties - Interim

Economic data releases this week;

  • 3 September 2018
    • Absa Manufacturing PMI Aug, nAAMSA new Vehicl sales Aug
  • 4 September 2018
    • SA GDP Q2
  • 5 September 2018
    • Markit PMI Aug
  • 6 September 2018
    • SA Electricity Consumption Jul

An image of Chris Gilmour


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