Macro Pulse Episode 21

Hello and welcome to Macro Pulse. In today’s episode, we will focus predominantly on South Africa. So African access has outperformed year to date with SA equities up 25%, South African bonds 13%, and the rand has appreciated about 9% against the US dollars. SA assets has been a defensive play in a very uncertain macro environment, and has outperformed many emerging markets and global markets.

We remain constructive on South African assets, but we recognize that the drivers of this performance that we had so far this year has been very thin. The market breadth has been thin, with the predominant performance coming from gold minus, platinum miners, Naspers and Prosus. So as we progress, we think over the next few quarters that leadership will change towards local sectors, retailers as well as banks and local industrials.

Why do we believe so? Well, first off, we think that the growth expectations, the consensus expectations for growth is still very low for 1% for 2025 and 1.5% for 2026. We think the growth momentum could surprise to the upside. Last week we had the second quarter GDP number come out at 0.8% quarter over quarter, surprising the market that was expecting a 0.6% quarter over quarter.

This was the best quater over nine quarters. And if you look at the split in where the growth has come from on the supply side, it has really been mining, manufacturing and trade that is contributed 0.2% towards growth. On the demand side, it has been household consumption that has been the key driver, with in particular discretionary spending, providing a lot of the support towards consumption.

Investment was weak. But even with investment where one has to distinguish between the public and the private sector. So while the public sector contracted, the private sector, investment actually rose over the quarter at close to about 6%. So looking forward, we think household consumption, consumption in general will continue to be robust, with investments starting to rise gradually over coming quarters.

If we look at some of the retail sales numbers and we had some earlier this week, real retail sales was up 5.8% year over year, again driven by discretionary spending, vehicle sales remained strong and even within net new vehicle sales, was up 22.5% year over year, with Chinese brands in particular making new record sales in the month of August.

And then on the credit front, we had still an acceleration in credit growth, and real credit growth is still positive. On the inflation front, we also got some positive news. We had the CPI numbers out this week and while core inflation remained at 3.1%, you know, in line with what the market was expecting, it was headline inflation that surprised to the downside.

The market was expecting a number to jump from 3.5 to 3.6%. And we got 3.3%. And if you look at the components, it was really fuel food in particular vegetables and meat. That surprise to the downside, inflation expectations are also moving down. So the BER released their second quarter inflation expectations also earlier this week. And we saw that people are now believing that inflation in two years time and the two year number is the one that the SARB is most interested in following, will come down from 4.5% to 4.2%.

So we see that the SARBs messaging around the 3% inflation target is starting to bare on fruit because of the credibility that’s ingrained within the SARB policy. And therefore we see inflation expectations falling. Now with inflation expectations falling, the oil price still low and the rand remain to trade at a robust or you know, appreciating base we think there is scope for the SARB to continue to cut interest rates to below 6% over the next year or two. We really think that the inflation target regime that’s changing is a significant economic reform that the country is undergoing, and that will bear benefits to consumers in the future? We believe that one of the reasons for the slow growth that we’ve had over the last few quarters has been because of a very tight policy setting, with the real policy rate at around 3.5%.

So while you had on the electricity front, a big improvement in terms of the electricity availability factor, which is now improved to about 70%, and that’s been driven by a sharp reduction in unplanned maintenance or brokerges it didn’t really have the effect on the economic growth just yet because of this tight policy setting, both from the policy side and fiscal policy side. But we believe it’s really the monopolies side that could move over the next few quarters. One more thing about inflation targeting is that we are still waiting for the National Treasury to officially make the announcement of the reduced target towards 3%. We believe that should come at the medium term budget because the new projections by National Treasury needs to include the 3% to make fiscal policy credible for the remainder of the year into next year.

We will have the medium term budget on the 12th of November, which is ten days before the G20 meeting that will be hosted in South Africa. We’ve heard that President Trump from the US won’t be attending the G20 meeting, that instead, Vice President Vance will be in attendance. However, for the medium term budget, we don’t expect any drama in the same scenes that we had earlier this year.

We think that there scope for a positive upward revision towards revenues. We see an improvement in SARBs efficiency tax compliance and also corporate income taxes can surprise to the upside as mining revenues are benefiting from the increased commodity prices.

We think that there is some scope for National Treasury to announce a reduction in bond issuance. However, National Treasury may might delay that announcement until February next year.

So we see that all these local dynamics is improving and that foreign bondholders are very much interested in our market. We had record inflows, daily inflows into our bond market, last week, to the magnitude of 25 billion of foreign inflows in one day. And early this week in the weekly bond auction, we saw that 90% of the auction was taken up by foreigners.

It’s not just the local dynamics that’s improving. We also see on the global front that there’s, increased appetite for emerging markets as the US is slowing, the job market is slowing, the dollar is weakening, there is appetite, for emerging market assets, including for South Africa. On that front, we had the Federal Reserve cutting interest rates by 25 basis points yesterday. Fed Chair Powell announced that they will be the new dot plots show that there will be another two cuts later this year. And that rates will fall to close to 3% by the end of next year. There was one dissenter and that was Stephen Marron, who is the new governor elected by the Senate this week, he had his first fed meeting and he voted for a 50 basis points cut. Remember, until recently, he was, an economic advisor to Trump. But Chair Powell didn’t push too much back against the markets pricing of rate cuts. Although he did say that this rate cut was one that could be seen as a risk management action. But we believe that the that the fed will continue to cut interest rates as the economy is slowing. We had a very weak non-farm payrolls, earlier in the month. And we believe there’s evidence that still shows that the labor market is, you know, on a continued weakening path.

One last word on China is that we’ve had very strong returns out of China. The equity markets continue to do very well despite some weaker economic growth. This expectations that, policymakers, makers will continue to ease policy. And with this strength in the equity market, one has to ask the question, are we seeing the reemergence of the Chinese animal spirits starting to rise again now with policy support more tilted towards consumption and with a real crackdown on excessive capacity and overcapacity and, you know, excessive competition. We do believe that the scope for consumer assets in China to continue to do well.

That’s all for this week. Thank you.