Macro Pulse Episode 4

SA equities at 14%, but there was a lot of dispersion amongst the different sectors. In particular, those sectors and equities that’s linked to the South African equity market did very well. SA General Retail did well, close to 40% up for this year thus far. SA Property was up about 30% thus far this year. And then also South African banks and financials is up between 2025% thus far this year.

Resources, you know, lagged a little bit. They were flat. But even there, we we saw a little bit of dispersion with gold miners up, quite strongly 40%. But diversified miners, PGMs and energy, all down more than 20% this year. The big names like Naspers and Process, they were up about 30% this year.

So a lot of dispersion amongst the different equity names. The local currency also did well this year. The rank is up about 2% for the year, outperforming many of its emerging market peers, which is, in many cases, down more than 10% for this year when you look at the Mexican peso, Colombian peso, the Chilean peso, Turkish lira, and the like. So on an absolute and relative basis, South African equities and assets did well. South African equities outperformed its emerging market peers.

The bonds outperformed its emerging market peers. And so it has been a fairly defensive play within the emerging market space. It also has been a very bifurcated year in that the first five months to the year prior to the election, we had some sluggish performance amongst the different asset classes, but then saw a very sharp rerating and outperformance over the last few months after post election. Now the question is, did the market and then in particular the equity market rally too much? Did we see too much of a rerating taking place?

Are valuations high? Now to answer that, and in our view, we think that there’s still more scope to come, both in the absolute term as well as on a relative basis. That SAE assets can perform still well. But to answer that, let’s first look at the economy. What’s happening in the economy?

Because it’s ultimately economic growth that drives earnings growth, that drives equity performance. And if you focus on the economy, then we are seeing that interest rates are still coming down. The sample continue to cut rates as inflation remains low, and other central banks across the world, in particular, the core central banks continue to cut interest rates. So we think there’s more cuts to come than what the market is currently pricing in. We also see inflation remain low at now at below 3%, and we expect that to be low to remain below 4.5% until the middle of next year.

And so while inflation is low, rates are falling and the fuel price is coming down, we see more of an increase in disposable income. People are able to spend more. Disposable income is also supported by the fact that wages are rising faster than inflation. But also, we did see that jobs gains in the economy has risen to 300,000 in q three of this year. Further, the two pot system, what we know thus far is that the withdrawals out of the change in the two pot system is quite substantial and able to cushion some of the spending that’s taking shape in the economy.

It’s one thing to have the ability to spend. It’s another thing to have the willingness to spend. And their confidence is key and important. If we look at the economic indicators from the Bureau of Economic Research, they are showing us that consumer confidence and business confidence is steadily rising. We’re also seeing that playing through in the likes of private sector credit.

That’s rising now in real terms. Vehicle sales is also quite strong, in particular, passenger vehicle sales. And just more recently, Black Friday, we saw that according to eCentric, which represents 20% of the card spent, That year over year transaction values up almost 50% just on Black Friday alone. And thus far for Cyber Monday, we see a similar trend taking shape. So overall, we think that people are more able and willing to spend.

Confidence is rising among businesses, and fixed investment is also on the rise. We are seeing that people are feeling more optimistic. The network economy, in particular, electricity and transport and logistics is improving. And that is starting to have an impact on how people also perceive the new GNU and that the GNU will be able to drive reforms in the economy further. So as a result, we see that with the country’s risk premium is also coming down in the in the sense that S and P Credit Ratings Agency recently increased the outlook from stable to positive for the country.

And there’s real optimism that South Africa can be taken off the FATF gray list in 2025. The recent appointment of Ebrahim Rasul as the ambassador to The US for South Africa is also key in stabilizing the relationship between South Africa and The US. All in all, if we take all of these these factors into play, we see decent improvement in earnings playing out over the next six to eighteen months. We see that if economic growth is two to 3% and we look at the past, valuation is typically is about 20% higher in environments where we see higher growth. So there’s scope for valuations to to improve.

But it’s really earnings growth that’s that’s gonna come through in which we are focused on. And so from an absolute as well as on a relative basis, we think SA assets, both equities, bonds and the currency, has got scope to improve over 2025. So what about the risks to this view? Well, let’s focus on the global risks because we believe those are the key ones to watch in 2025. First of all, Trump’s policies are quite inflationary, which means that he may curb some of the cuts that the Fed on the market is pricing in for the Fed.

Ultimately, that may mean that the sample cut by less than what the market is expecting at this stage. The other risk is that due to Trump’s trade tariffs, we may see slower growth emanating from China as well as Europe, key trading partners to South Africa. And so those are things that we will watch. But Essay Inc, in particular, is quite insulated from the trade tariffs and from the global economy. And we believe in 2025, it may be a defensive play, while we see local dynamics still improving and while we see, the expectations of growth still rising.

At this stage, consensus only expect SA growth to be 1.7% for next year, and we think there’s a recent chance that it could be between 23% for next year. The second risk is China’s growth. We’ve seen the Chinese growth has disappointed this year, but we’ve seen a definite shift being taken during September. Authorities in China are really trying to focus to bring growth back into the economy. And if you look at the PMIs and some of the property sales numbers, we are starting to see a little bit of stabilization taking shape there.

And we believe that fiscal policies that will be released for next year will be constructive and conducive to support growth. So we think the Chinese growth, cycle should pick up over next year. That’s all for this week. See you in the next episode.