South African share and bond markets remained strong last week despite the increase in the repo rate by the Monetary Policy Committee (MPC) and the continuous load shedding, which has started to take a toll on the economy.
The rand exchange rate held its ground despite a more dovish outlook by the MPC as it increased the repo rate by only 0.25%. The rand lost only 12 cents against the dollar since the rate announcement and ended Friday at R17.21 against the dollar.
Commodity prices, especially precious metal prices, remain strong as the gold price trades higher than $1 920 an ounce. The increase in the oil price at $86.75 (R1 492) and the weaker rand over the past three weeks have contributed to a quick reversal in the prospects for diesel and petrol prices in February.
According to the Central Energy Fund, the price for diesel is now 52c a litre under-recovered and that for petrol 72c a litre. These increases may be implemented this coming Wednesday.
On the JSE, the All Share Index broke easily through the 80 000 point-level last week and at one stage on Friday moved towards the 81 000 point level. The index ended the week on 80 791 points. This is 1.9% higher for the week. The index is now 17.66% higher over the past six months (despite the higher levels of load shedding) and 10.60 up since the beginning of the year.
Various research, however, shows that, due to load shedding, the economy is expected to move into a recession during the year.
Both the International Monetary Fund and the panel of Bloomberg economists have downgraded South Africa’s expected economic growth for 2022 from 2.3% to 1.5%, and even lower for 2023 to less than 1.0%.
The MPC, delivering its rate decision on Thursday, also expressed concern over the effect that load shedding was having on the economy. SA Reserve Bank Governor Lesetja Kganyago has also said the bank expects the economy’s growth to shrink.
“For 2023, and as a result of extensive load shedding and other logistical constraints, the bank now forecasts GDP (gross domestic product) growth of only 0.3%. Given the scale of load shedding, the bank estimates that it deducts as much as 2 percentage points from growth in 2023, compared to the previous estimate of 0.6 percentage points.”
Given the dark clouds of economic recession for South Africa, more and more analysts are now expecting that shares on the JSE will move into a serious downward correction as price-earnings of most companies will increase considerably, as profit and earnings prospects for listed companies will dwindle in the months to come. The same is feared for bond rates.
Finance Minister Enoch Godongwana, in his Budget speech at the end of next month, is also likely to announce that the economy will grow at a much lower rate than the Treasury’s projections last year.
This will have a serious effect on state revenue prospects. It is therefore expected that taxes will have to increase, especially the fuel levy. The borrowing need for the government may also increase much more than anticipated. This will put pressure on bond rates. It is also feared that the rand exchange rate will give in and that will push bond rates even higher. Therefore, the fear exists that equities, bonds and listed property shares will come under serious strain in the months to come.
This coming week, domestic markets will await the decision by the Minister of Mineral Affairs on the announcement of the increase in the prices for fuel. Absa will release its Absa Manufacturing Purchasers Managers Index (PMI) for January on Wednesday.
The biggest effects on financial markets this week will come from the US Federal Reserve’s decision on interest rates on Wednesday. It is expected that the Fed will increase its bank rate by 25 basis points.
The release of the US non-farm payrolls on Friday will also drive markets this week. It is expected that the US economy added only 168 000 new jobs last months (223 000 in December) and that the US unemployment rate will have increased only marginally to 3.6% (The Fed is targeting 4.2% as the benchmark before easing interest rates.)
In Europe, the EU will announce its unemployment rate for December 2022, the inflation rate for January 2023 and the European Central Bank (ECB) will release its decision on interest rates on Thursday. The Bank of England (BoE) will make its latest interest rate decision on Thursday.
Chris Harmse is the consulting economist of Sequoia Capital Management.
BUSINESS REPORT