Monthly Equity Strategy- May
Monthly
StrategyMay
Monthly
EquityEquity
Strategy
- April 2014
Part 2: Macro and investment theme Analysis
Overall themes and forecasts
Mike Haworth
Sasfin Securities
4-April-2014
Summary
Macro and investment themes
Secular themes
Earth is running a fever
Increasing levels of greenhouse gases are worsening pollution which is warming the atmosphere. The higher
temperatures are causing sea acidification, altering currents and lifting sea levels. Increased frequency of extreme
weather events is already evident. Policy changes can be expected to limit the amount of greenhouse gases
produced by human activity, especially carbon dioxide. Directly in regulators’ cross-hairs are carbon-intensive
industries such as electrical power generation, some areas of the chemical industry and vehicle emissions. This is
a threat to the coal-fired power generation industry and an opportunity for renewable energy solutions and lowcarbon alternatives. Increased volatility in agricultural commodities can be expected due to the growing frequency
of weather extremes. Governments will face increasing infrastructural funding pressure along their coastal regions
due to the rising sea level.
Technology advances are creating increased concentrations and dependencies
Business and household functions are increasingly dependent on electricity as a source of energy, which places a
growing imperative for risk management in this area. The digital convergence of information technology
communications and media is giving rise to new systems of delivery, processing and interaction with information.
These advances are becoming increasing disruptive in many media and telecom based industries and
increasingly in entertainment, financial services and the transport industry. The ‘internet of things’ describes the
growing interaction, over the internet, between machines giving rising to expanding automation in the home,
business and public sectors. Major advances in battery efficiency are facilitating increasing use of mobile
information, telecom and renewable energy equipment. Huge development in material science is giving rise to
nanotechnology and increasing product development in glass, genetics, apparel and construction materials.
Increasing incidence of lifestyle diseases
Commendably global health initiatives are gaining increasing control on the incidence of communicable diseases
but there is a growing trend of increasing non-communicable diseases (NCDs) globally. NCDs are known as
lifestyle diseases and include obesity, cancer, diabetes, hypertension, heart and lung diseases. In a general
sense, NCD’s are caused by poor diet, rising alcohol consumption and smoking, especially among the youth, and
more sedentary lifestyles in urbanised areas. This trend is giving rise to unmanageably high public sector health
demand and increasing individual health costs. This trend is evident in advanced and emerging markets. There is
a growing reaction to the rising incidence of NCDs which is aimed at tobacco and alcohol production companies.
It is also increasingly being aimed at convenience food companies and carbonated beverage companies because
of their high usage of sugar and salt. Sugar is coming under increased scrutiny from the healthcare industry which
is likely to negatively impact demand in the longer term. The threat of increasing communicable and noncommunicable diseases in urban area is an opportunity for healthier lifestyle incentive based products in the food,
insurance and personal services industries. This trend will also force governments to increasingly cross-subsidise
the cost of public health services on the middle and upper income groups.
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4 April 2014
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Structural themes
Public debt over hangs
Advanced economy gross public debt levels are over 90% of GDP and rising, which dictates fiscal consolidation
in those economies resulting in a fiscal drag on GDP growth. The US is the first advanced economy to show a
major decline in its budget deficit since 2011. There are signs of improving government primary budget deficits in
European economies. The extremely high public debt levels dictate that bond yields must be kept low in order to
sustain funding. The reduction in asset purchases by the Federal Reserve is reducing global liquidity and
increasing US real yields resulting in a progressive reversal of the global USD-short carry trade. The reversal of
portfolio capital flow out of emerging market economies is causing significant disruption in those markets.
Feeding the dragon
China’s credit growth cycle is in a downswing. This slowdown is induced by their financial authorities increasing
regulation and higher money market rates. Both have been in response to the rapid expansion in the shadow
banking system, shift in savings from State banks to wealth products in the shadow banking system and
unsustainably high debt levels in local government. The credit slowdown is expected to slow the rate of
investment growth which together with slower net trade and significant planned policy reform is expected to slow
GDP growth over the next few years.
Low interest rate trap
Zero or near zero short-term interest rates in advanced economies will persist in 2014 but are causing a
misallocation of assets. The artificially low short term interest rates are distorting the financial system globally,
especially in advanced economies, and holding back economic activity. Bank intermediation is undermined by the
low interest rates which is restraining the credit growth cycle in advanced economies. Excessively loose liquidity
and negative real interest rates obscure credit risk in the financial system. This is a risk in China, Europe and
Japan. The expectation for the first Fedfund rate rise has been brought forward to Q2:2015.
Growth model in advanced economies is under question
Advanced economies have used a combination of foreign savings and technology-driven productivity gains to
drive their economic growth. Globalisation and technology changes gains have boosted emerging market
economies at the expense of advanced economies due to significant wage and tax competition resulting in
growing income and wealth inequality in advanced economies. Low domestic investment spending in advanced
economies over the last decade has eroded their competitiveness. Rebalancing of the drivers of growth is
required focusing on domestic development strategies in order to avert secular stagnation.
Vulnerability of emerging markets
Many emerging markets have made significant gains in the past decade, reducing poverty and increasing income
per capita. Strong foreign capital inflows seeking higher yields over the past five years boosted emerging markets’
money supply and strengthened their currencies. This externally induced strength gave some emerging market
economies the room to begin domestic policy reforms while other emerging markets used the increased financial
strength to lift higher import growth and expand in their credit systems, fuelling rapid consumption growth. Now
that the Federal Reserve has started reducing its asset purchases, the foreign portfolio capital has begun to flow
back into advanced economy capital markets. This has sharply weakened many emerging market currencies,
forcing their Central Banks to raise interest rates to slow the capital outflow, and head off a major economic
slowdown and much higher inflation. The differentiation in emerging market economic performance will become
more apparent in 2014.
Africa rising
Sub-Saharan Africa’s GDP is forecast to grow between 5% and 6% in 2014. The growth is partly driven by
domestic transformation facilitating increased private sector activity but much of it is driven by foreign savings
assisting strong infrastructural, mining and manufacturing growth. Strong portfolio inflows have boosted money
supply growth in key economies such as South Africa, Nigeria and Ghana allowing increased imports and strong
domestic credit growth both of which boosted consumption. While consumer credit growth is expected to slow in
these three economies, the key drivers of continued growth remain foreign direct investment aimed at improved
infrastructural efficiencies, higher mining and manufacturing production, all of which are strengthening their net
trade balance. The economic balance between external and domestic expansion will be critical for greater social
inclusion and the sustainability of growth.
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Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Cyclical themes
Commodity cycle downswing still underway
International commodity indices continue to soften in special drawing right (SDR) terms. While global commodity
demand is slowly increasing there is not a rapid cyclical upswing driven by combined consumption and
investment demand. Advanced economy consumption growth is in slow recovery, constrained by weak aggregate
demand in the low and middle income groups. Strong supply growth, especially in the bulk and base metal
sectors, continues to come into the market at a rate greater than demand growth which is suppressing prices. Any
price spike is likely to be due to a supply-side production disruptions such as are being seen in the platinum
mining sector. There is growing disruption in the energy market affecting oil, gas and coal prices due to significant
new supply from shale gas and shale oil sources. The supply-side risk associated with the international stand-off
over Ukraine is supporting the Brent oil price. Agricultural commodity prices are softening due to weather
conditions enabling strong supply growth in 2014.
Not business as usual
SA’s GDP growth is expected to accelerate modestly from a low base in 2013 to 2.6% in 2014 due mainly to a
partial reduction in the net trade deficit. Consumer confidence has continued to weaken, short term interest rates
are now rising, inflation is expected to rise and the ZAR is significantly weaker which is expected to slow the rate
of imports in an increasingly import-dependent economy. The credit growth cycle is in a downswing induced by
high debt levels and income loss due to persistent labour strikes. Employment growth remains minimal in the
private sector and is boosted by basic skill job growth in the public works programme. Investment levels are low
and growth remains weak due to sufficient capacity in the existing domestic manufacturing base and weak
business confidence. Revenue growth in domestic companies is expected to slow in 2014 placing greater
emphasis on company business portfolio restructuring and cost cutting.
SA consumer under pressure
Household consumption expenditure is expected to slow in 2014 due to lower real disposable income growth,
income erosion associated with work stoppages and rising household debt levels constraining the access to credit
by households. The sharply weaker ZAR will increase the cost of imported and import-parity priced consumer
goods which should slow demand growth. Lower income groups are worst affected by the strikes, reduced access
to credit and higher inflation. Continued expansion of social grants, the public works programme and rotation
away from discretionary spending should support the non-discretionary consumer goods sector. Higher cost of
imported consumer goods, rising interest rates and tighter credit conditions are expected to undermine semidurables, and particularly durable, consumer good demand in 2104.
ZAR vulnerability
The ZAR weakened over 25% against the main advanced economy currencies in the past year. Advanced
economy portfolio capital is reversing out of SA now that the Federal Reserve is reducing its asset purchase
programme and has signalled that US short term rates are likely to start rising from Q2:2015. SA has been
dependent on foreign capital inflows to fund its wide, plus 6% of GDP, savings shortfall. No material improvement
in the national savings rate is expected in 2014 and could decline further due to weaker private sector business
cash flows and continued expansion outside SA. SA’s trade deficit is expected to narrow in 2014 due to a partial
recovery in mining production and reduced consumer imports. In addition, the weaker ZAR is expected to reduce
the services account deficit due to increased international and regional tourism. Foreign investor perception of risk
will remain critical in H1:2014 with close attention paid by the international credit rating agencies to SA’s political
stability around the National Election in early May 2014 given the growing social unrest around service delivery
and continuing labour strikes in the precious metal mining industry. The slower than initially expected trajectory of
the reduction in the budget deficit remains a key concern for the credit rating agencies. The wide inflation
differentiation between SA and its main trading partners dictates a longer trend depreciation trend in the ZAR but
short term the ZAR could strengthen somewhat due to a reduced trade account and more attractive bond yields
and lower perceived country risk post the elections.
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Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Table of Contents
Summary ................................................................................................................... 2
Macro and investment themes ............................................................................... 2
Secular themes .................................................................................................. 2
Structural themes ............................................................................................... 3
Cyclical themes .................................................................................................. 4
Asset class benchmark performance ........................................................................ 6
Commodity market performance ............................................................................... 7
Macro and investment themes ................................................................................ 11
Secular themes .................................................................................................... 11
Earth is running a fever .................................................................................... 11
Technology advances creating concentrations and dependencies ................. 12
Increasing incidence of lifestyle diseases ........................................................ 13
Structural themes ................................................................................................. 14
Public debt overhangs ...................................................................................... 14
Feeding the dragon .......................................................................................... 15
Low interest rate trap ....................................................................................... 16
Growth model in advanced economies under question ................................... 17
Vulnerability of emerging markets .................................................................... 19
Africa rising....................................................................................................... 20
Cyclical themes .................................................................................................... 22
Commodity cycle downswing still underway .................................................... 22
Not business as usual ...................................................................................... 23
SA consumer under pressure .......................................................................... 24
ZAR vulnerability .............................................................................................. 26
Forecasts ................................................................................................................. 27
This structure of this report has been changed in a continued quest to simplify and clarify the funnelling of macro
concepts to investment themes and in turn to portfolio themes. The macro themes are a mix of political,
economic, social and technological trends. Threads from combinations of macro trends are woven into investment
themes.
The macro themes have three fundamental underlying drivers.

The secular themes are long term (plus ten years) and are driven primarily by market adaption.

Structural themes are medium term (typically 3 to 10 years in duration) and are primarily driven by changes
imposed by regulation, political and fiscal policies.

The cyclical themes are short term (up to three years in duration) and are primarily driven by
macroeconomic cycles associated with commodity prices, credit demand and monetary policy changes.
The themes are reviewed and updated as the key assumptions behind each theme start to change. Themes by
their nature tend to grow and decay over their own life cycles. The secular themes are long cycle and the cyclical
trends are short cycle in nature.
This report now incorporates Part 3 of the original multi-part Equity Strategy set of reports.
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4 April 2014
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Asset class benchmark performance
115
110
105
100
95
90
World
Emerging Markets
Mar-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
85
Apr-13
MSCI SA index is back to Sep13 levels while the World
index continues its rising
momentum.
120
Mar-13
All three USD indices rose in
March. The SA index
recovered quicker than the
Emerging and World Index.
MSCI USD indices based to 100 as at 31Jan-14
Figure 1 : MSCI $-based indices based to 100 at 31-Jan-14
South Africa (USD)
Source: MSCI, INet
50.0
40.0
30.0
20.0
10.0
-
Jan-14
Mar-14
Mar-14
Nov-13
Jan-14
Equity
Cash
Preference shares
Sep-13
Jul-13
May-13
Mar-13
Dec-12
Oct-12
Aug-12
-10.0
Jun-12
The equity annual return
rebounded further in Mar-14 to
23.8% from 22.8% in Feb-14.
Bonds returned a positive
0.6% over the past year and
Preference Shares generated
a 3.2% return. Cash returned
5.2% and Real Estate 1.1%
YoY to Mar-14.
Annual nominal total return %
Figure 2 : Nominal annual ZAR domestic asset class returns %
Bonds
Real estate
Source: INet, BESSA, JSE
50.0
40.0
30.0
20.0
10.0
-
Equity
Cash
Preference shares
Bonds
Real estate
Source: INet, BESSA, JSE
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4 April 2014
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Dec-12
Oct-12
Aug-12
-10.0
Jun-12
The asset indices are based to
100 in Oct-13 and show the
continued strength of the
Equity Index. All other asset
class YoY returns are below
that of cash.
Annual nominal total return %
Figure 3 : Asset class indices based to 100 as at 31-Oct-13
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Commodity market performance
The following commodity indices are denominated in SDRs (IMF Special Drawing
Rights) as a proxy for a weighted global currency. The use of SDRs helps to strip
out the USD movement in commodity prices.
90.0
85.0
80.0
75.0
70.0
65.0
60.0
55.0
Metals
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
Industrial
May-13
Food
May-12
All
Mar-12
Nov-11
Jan-12
50.0
Sep-11
Metal and Industrial
commodity indices drifted
lower during February and
March 2014 but the Food
commodity index picked up.
The Economist indices in SDRs based to
66 at 31-Jul-12
Figure 4 : The Economist indices denominated in SDRs and based to 66 at 31-Jul-12
Non-Food Agricultural
24.0
1,100.0
22.0
1,000.0
20.0
900.0
800.0
18.0
700.0
16.0
600.0
14.0
500.0
Gold
PGM
Mar-14
Dec-13
Sep-13
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
Mar-12
12.0
Dec-11
400.0
Spot silver price SDR/oz
1,200.0
Sep-11
Precious metals (gold and
PGM) have been trading in a
sideways SDR100/oz band
since mid-2013. Silver
continues to collapse.
Precious metal spot prices SDR/oz
Figure 5 : Precious metal spot prices based in SDRs/oz
Silver
Aluminium
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4 April 2014
Copper
Lead
Nickel
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Tin
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
100.0
95.0
90.0
85.0
80.0
75.0
70.0
65.0
60.0
55.0
50.0
Mar-12
The benchmark base metals
copper and aluminium
continue to drift lower while
zinc and tin picked up in
February and held onto their
gains in March 2014.
Spot base metal price SDR/lb
based to 100 at 31-jul-12
Figure 6 : The base metal spot prices denominated in SDRs/lb and based to 66 at 31-Jul-12
Zinc
Figure 7 : Energy spot prices based in SDRs
Brent crude oil
Coal price FOB Ex Ara Nar 6000 ($/tonne)
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Jan-10
Coal continues to diverge
from oil.
Apr-10
Oil prices firmed in March in
response to the international
stand-off over Ukraine.
90
85
80
75
70
65
60
55
50
45
40
Spot energy prices SDR/oil bbl and
SDR/coal tonne
The Brent - WTI crude oil price
spread narrowed in January,
February and March due to
the severe winter weather in
the US.
West Texas Intermediate crude oil
Coal price Global Rb Index
Figure 8 : Iron ore spot prices based in SDRs
Iron ore lump is drifting
sideways but fines prices
continue to weaken.
Spot carbon steel input prices
SDR/tonne
150
140
130
120
110
100
90
80
70
60
Iron ore fines ex China - 63.5%
Mar-14
Nov-13
Jul-13
Mar-13
Nov-12
Jul-12
Mar-12
Nov-11
Jul-11
Mar-11
Nov-10
Jul-10
Mar-10
Nov-09
Jul-09
50
Iron ore pellets ex China- 63-5%
Figure 9 : Main ZAR cross rates
ZAR YoY depreciation was
15.1% against the USD, 25.8%
against the GBP and 23.2%
against the Euro.
ZAR/cross currency
18.0
The longer term trend of ZAR
weakness looks intact. The
modest strengthening
persisted in March.
16.0
14.0
12.0
10.0
8.0
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
6.0
ZAR/USD
ZAR/GBP
ZAR/EUR
Source: PMPal, Inet, Bloombergs, IHS Global Insight
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4 April 2014
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Figure 10 : ALSI’s size sector performance
Mid Cap
The Midcap sector generated
the strongest performance
gain in March. The Top40 was
the weakest generating a gain
of 1.49% last month.
Small Cap
Size indices
ALSI gained 1.83% in Mar-14
building on the 4.88% gain in
Feb-14.
Fledgling
All Share
Top 40
-
1.0
2.0
3.0
4.0
5.0
% Monthly total return - Mar-14
Source: JSE
Figure 11 : ALSI’s economic group performance
Telecommunications
Telecom, Oil & Gas and
Financials indices were the
top performing economic
groups last month.
Technology, Consumer
Services and Basic Materials
were the worst performing
economic groups in Mar-14.
Economic group indices
Oil & Gas
Financials
Industrials
Health Care
All Share
Resources
Consumer Goods
Basic Materials
Consumer Services
Technology
(10)
(5)
-
5
10
% Monthly total return - Mar-14
Source: JSE
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4 April 2014
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
15
Figure 12 : ALSI’s economic group performance
Food & Drug Retailers
General Retailers
Non-life Insurance
Food and Drug Retailers, Nonlife Insurance and Mobile
Telecom were the main
outperforming sectors in
March.
Mobile Telecoms
Banks
General Financials
Food Producers
Computer Hardware,
Industrial Metals and Media
were the worst performing
sectors last month.
Oil & Gas
Fixed Line Telecoms
Thirteen of the 35 sectors
generated losses last month
with 19 sectors generating
gains signalling a loss of
momentum.
General Industrials
Industrial Transportation
Health Care
Life Insurance
Real estate investment trusts
Sector indices
Pharmaceuticals
Equity Investments
All Share
Beverages
Construction
Electronics
Software & Computers
Travel & Leisure
Real estate developments
Household Goods
Mining
Support Services
Chemicals
Coal Mining
Industrial Engineering
Forestry & Paper
Personal Goods
Automobiles
Media
Industrial Metals
Computer hardware
(50) (40) (30) (20) (10)
-
10
% Monthly total return - Mar-14
Source: JSE
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Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
20
Macro and investment themes
Secular themes
Earth is running a fever
Macro theme components
Increasing greenhouse gases are boosting pollution levels and
atmospheric temperatures
Warmer atmospheric temperatures are causing thermal expansion of
the oceans which is raising sea levels.
Warmer atmospheric temperatures are reducing ice and snow cover.
While this does little to global sea levels it does expose large areas of
land which no longer reflect the heat but increasingly absorb it.
Increasing carbon dioxide levels in the atmosphere are raising the
oceans’ acidity as they soak up atmospheric carbon dioxide. When
carbon dioxide is absorbed by seawater, chemical reactions occur
that reduce seawater pH, carbonate ion concentration, and saturation
states of biologically important calcium carbonate minerals. This is
and will increasingly interfere with marine skeletal formation in oyster
to coral, photosynthetic functioning in algae and seagrasses and
plankton activity.
There is a growing climate risk associated with the increased
frequency of weather extremes - flooding and drought.
Investment theme
Expanding low carbon and renewable
energy technology innovation; increased
carbon-based regulation with negative
impact on high-carbon emission industries
such as coal-based power and chemical
production.
Increasingly frequency in weather
extremes impacting insurers and are likely
to create increased volatility in agricultural
commodity prices. Increased robustness
of urban infrastructure is required
especially regarding infrastructural
services such as water, sewage and
stormwater.
Pollution growth and urbanisation together with increasing weather
disruption is growing global demand for water.
Increasing pollution in urban areas is causing a growing incidence of
lung related health problems.
Changes in land use are altering the weather and water demand.
The European Commission unveiled new energy and climate targets
for 2030, calling for a 400% reduction in the bloc's greenhouse gas
emissions from 1990 levels with a 27% of energy coming from
renewable sources.
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4 April 2014
Increasing vehicle and industry emission
regulation to reduce and in some case
eliminate emissions and water pollution.
Water supply and treatment system
design, equipment and services are
coming to the forefront of government
imperatives.
Industry impact
Sector position
Expanded demand for solar and
wind power generation
equipment
Overweight imported solar and
wind power equipment supply
Increasing taxes on thermal coal
usage
Underweight thermal coal
Growing demand for natural gas
Overweight natural gas supply
Increasing city productivity
disruption impacting GDP growth
Negative impact on construction
and auto purchases
Increasing claims on short term
insurers
Underweight short term insurers
Growing cost for coastal
municipalities
Expanded coastal emergency
services
Increasing need for utilities
security
Overweight utilities
Growing demand for water
supply and purification
Focus on civil mechanical
engineering contractors
Increasing demand on
healthcare systems
Overweight private hospitals and
pharmaceuticals
Increasing threat to food security
Overweight fertiliser producers
Increasing emission regulation
Expanded PGM demand, reduce
thermal coal exposure
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Technology advances creating concentrations and dependencies
Industry impact
Sector position
Increasing technological dependence on electricity.
Increasing capital investment in
power generation
Overweight power management
system
Increasing information technology dependence on the internet.
Expanded broadband capacity
and speed
Overweight broadband services
Expanded solar power
equipment demand
Overweight solar and wind
equipment supply
Increasing demand for
smartphones
Overweight smartphone
producers and mobile telecom
services
Increasing demand for
equipment control devices
Overweight electronic equipment
control systems supply
Expanding demand for niche
software apps
Overweight app store providers
Expanded demand for ‘cloudrelated’ services
Overweight cloud services
providers
Smart phones are forecast to connect an additional 2 to 3 billion
people by 2020.
High growth in internet data
usage
Overweight high speed internet
service providers (ISPs)
New disruptive technologies include advanced robotics, genomics,
energy storage, renewable energy and 3D printing.
3D printer demand expected to
grow dramatically
Overweight 3d printer and
consumables suppliers
Growing variety of battery
applications
Overweight battery suppliers
Expanding demand for smart
glass
Overweight international high
tech glass manufacturers
Components
Investment theme
Major reduction in solar energy cost per watt to less than $1 per watt
today but the slow adoption is due to the massive sunk cost of the
insitu power production capacity.
Major shift in technology growth toward
renewable electrical energy generation
and energy storage.
The energy storage innovation is racing ahead and reducing the
frequency of interrupted supply of renewable energy sources such as
wind and solar.
Expanding digital technology is facilitating convergence of IT, telecom
and media. This is changing user experience (touch screen, mobile,
graphical user interface), delivery (document and content
management systems, data centre, cloud storage, browser and
search engines), information and communication (email, app stores,
social media) and data (databases, data integration and big data).
Increasing automation in industrial systems and processes due
electronic advances and expanded facilitation using the internet.
Growth in internet usage expanding the library of information on the
internet.
According to McKinsey some 90% of data was produced in the last
two years. By 2020, the quantity of data storage is forecast to
increase 50 times that of 2010.
Rapidly expanding internet data use,
driving big data technologies, diagnostics
and applications development resulting in
increasing machine to machine
communication driving automation.
Major innovations in material science in response to new energy
requirements, increased strength to weight composite materials,
more effective chemical reactions using catalysts, new intelligent
materials with greater informational value.
Advances in batteries, photovoltaic
conversion, reduced carbon production,
smart plastics, major advances in glass
technology, innovations in bio-materials in
medicine, nanomaterials.
Internet of things describes the increasing automation of routine
physical and clerical tasks but increased processing power and
artificial intelligence which is beginning to erode higher skilled jobs.
Growing internet connection facilitating
automation
Expanding broadband demand
Overweight ISPs
The ability to capture, organise and analyse to extract insights and
transact from the data has become core competency for companies.
Growing demand for data analysis
Expanded demand for data
analysis demand and services
Overweight data analysis
software providers
The motor vehicle industry is at a cross-road from a safety, pollution
and urban congestion perspective.
Likely acceleration in motor vehicle
automation and power systems
Increasing number and connect
ability of electronic systems in
vehicles
Overweight OEM electronic
equipment suppliers
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4 April 2014
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Increasing incidence of lifestyle diseases
Components
Investment theme
Increasing signs of expansion of communicable disease coming
under control in emerging market economies.
Growing incidence of lifestyle or non-communicable diseases (NCDs)
in advanced and emerging economies.
Rising alcohol consumption and smoking among an increasingly
urbanised youth combined with more sedentary lifestyles are causing
the higher incidence of lifestyle disease.
Expanding demand for medical and
pharmaceutical interventions to slow the
increasing incidence of lifestyle diseases
especially in urban areas in both
developed and emerging market
economies
Industry impact
Sector position
Increasing hospital and
pharmaceutical demand in EMs
Overweight private hospitals and
generic-rich pharmaceutical
companies
Increasing loss of employee
productivity creates opportunities
for wellness incentives
Overweight medical aids with
health insurers with wellness
incentives
Fiscal authorities continue to
raise sin taxes above inflation
Increased premiumisation in
advanced economy beverage
markets
Sugar is coming under increasing medical pressure as over use is
considered a major cause of non- communicable diseases.
Sugar demand in advanced economies is
weakening.
Reduced advanced economy
sugar demand
Overweight sugar producers
focused on EMs
Strong demand for convenience
food both fast food and prepared
food from food retailers.
Overweight fast food companies
Rising incidence of chronic diseases pose a growing threat to the
health and longevity in developing nations.
Growing pressure on food and fast food
companies to reduce the amount of sugar
and salt used. Increasing pressure from
medical science on artificially sweetened
carbonated beverage companies.
Growing pressure on tobacco and
alcoholic beverage companies to limit
advertising.
Continued strong growth for
sweetened carbonated soft
drinks in EMs
Overweight grocery retailers with
prepared food offerings
NCDs are rising in emerging market economies (including South
Africa) with low income people in urban environment being the worst
affected.
Low income growth progressively worst
affected by NCD health problems
Growing public sector health
requirement hence the
inevitability of the National health
Insurance
Overweight private hospital’s and
generic and OTC pharmacare
products
The world's health needs are changing rapidly. By 2050 the number
of over 60s will exceed the number of children under 15. In addition,
over 3 billion people will join the global middle class over the next two
decades and most of them in urban areas.
Increasing demand for health insurance
and government support in healthcare
Greater demand for medical aids
and health insurance but the
critical; element will be managing
claim rates
Overweight medical aid and
health insurance
Lifestyles and urban pollution is expanding the incidence of chronic
lung disease which is forecast to the world's third largest killer by
2030.
Increasing air pollution –related lung
diseases in large urban areas
Expect tighter emission
regulations on vehicles and
manufacturers
Page 13
4 April 2014
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
PGM catalyst demand
strengthens, questions remain
around SA suppliers
Structural themes
Public debt overhangs
Industry impact
Sector position
Reduced fiscal space in
advanced economies
Advanced economy yield curve
relatively well anchored in 2014
Higher public debt levels
increase the need for fiscal
budgetary restraint slowing GDP
growth in advanced economies
Slow GDP growth recovery in
advanced economies restrained
by government spending growth
High twin deficit EMs at greater
risk from foreign portfolio
outflows
Stay ZAR hedged but be more
selective about EM exposure as
in some case the ZAR hedge
feature is fading
Risk of contagion pushing up
emerging market bond index
spreads
Low probability of crises in Asian
and Africa EM sovereign debt
markets
High debt levels in advanced
economies dictate low bond
yields to hold down state debt
costs
US benchmark yield likely to
remain relatively anchored at
current low levels through 2014
Rising state debt cost is progressively
crowding out non-interest public sector
budgetary expenditure which is reducing
government’s allocation effectiveness.
Increasing pressure on social
wage growth in low growth
advanced economies
Continued GDP growth
constraint in advanced
economies due to public sector
budgetary constraints
IMF continues to play a bridging finance role in trouble European
economies. The emergency loans invariable come with onerous
‘reform’ conditions attached.
IMF loans force public sector austerity and
investigations into corruption,
administration of troubled public sectors..
The smaller Central European
economies appear to be the
most troubled now with Ukraine
being latest example due to
persistent political protest over
the past four months.
Ukrainian woes likely to support
higher oil and natural gas prices.
Japan’s three arrow economic strategy has boosted growth and
stopped inflation.
Japan need to implement structural
reforms to begin long term fiscal
consolidation which could lead to debt
stabilization.
Japan has increased its
consumption taxes to help
reduce its deficit. This has the
potential to undermine the
nascent recovery.
Japanese Yen has weakened
against the USD reducing the
imported cost of Japanese goods
into the SA market.
Components
Investment theme
Advanced economy public debt is high and continues to rise.
Fiscal deficits used to offset deficient demand have resulted in
considerably high public debt levels in advanced economies without
significant economic reform to improve sustainability.
High government debt levels impeding
balanced fiscal spending and policy
flexibility and crowding out private sector
credit demand.
Growing differentiation in gross government debt levels in Emerging
Market economies where African and Latin America economy debt is
rising and Asian debt is declining.
Emerging Market economies more prone to debt crises due to
savings shortfalls and dependence on foreign savings.
Advanced economy total public and private debt to GDP levels are
30% higher than before the crisis and many of the competitiveness
enhancing reforms are not being instituted.
High debt levels increase country risk which increases the state debt
cost and yields.
Page 14
4 April 2014
Higher debt levels should lead to higher
interest rates. Continued monetary policy
accommodation is required to hold
interest rates down to support economic
growth.
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Feeding the dragon
Components
Industry impact
Sector position
Local government credit growth
to slow impacting fixed
investment growth
Slower investment growth
leading to reduced growth in
commodity demand
Regulators will rein in credit
growth, especially for local
government and housing
Avoid the Chinese banking
system
Relaxation of money market
controls should result in higher
interest rates reducing demand
in shadow banking area
Focus on Chinese consumer
segments not directly affected by
higher interest rate such as
mobile telecom and internet
Prolonged artificially low Chinese Central
Bank interest rates arecausing growing
investment imbalances with expansion
into higher yielding investment products in
the shadow banking system and reduced
deposits in the State banking system.
Growing overcapacity in some
manufacturing sectors impacting
returns offered by the shadow
banking system investment
products causing a contraction
Prices of carbon steel commodity
inputs likely to come under some
pressure in 2014
Increasing financial authority regulation to
control credit growth
Expect higher money market
rates and higher capital
adequacy requirements
Slower growth in commodity
demand from China
Increased bank regulation and growing
bad debts in the shadow banking system
are causing tighter financial market
liquidity.
Tighter liquidity likely to push up
interest rates
Increasing risk in real estate due
to higher interest rates
China's balance-sheet recession has
started but is in its early work-out phase.
Reduction in risk appetite is increasing
savings, reducing currency in circulation
and lower nominal interest rates but
inflation is shrinking, pushing up real rates
aggravating the debt burden.
Chinese banks to undergo multiyear balance sheet repair
constraining credit growth
Lower and middle income
consumer under more pressure
Investment theme
Rapid expansion of government debt especially local government
debt.
Growing investment imbalances due to easy credit policies.
China's credit cycle in a downswing after
a period of excessive growth. Reduced
credit growth should slow investment
rates.
Massive expansion of shadow banking system in China.
Growing non-performing loan ratios in the Chinese banking system.
Chinese banking authorities increasing regulatory requirements to
control the rapid expansion of credit.
Savings are migrating from bank deposits in the State-Owned
banking system to higher yielding non-bank credit and wealth
instruments.
China is also facing the low interest trap where official interest rates
have been held down for many years. This has resulted in wealthy
households and corporations looking beyond the banking system for
positive real returns on their savings. This trend has resulted in an
increasing portion of these savings flowing into wealth trust products
offered in the shadow banking system.
China's foreign exchange reserves continue to expand due to current
and capital account surpluses but liquidity continues to tighten with
money market rate spikes in 2013 and the 10-year bond yield
reaching 10-year highs. This is the consequence of attempts to clean
up toxic assets and promote bank deleveraging.
China's rapid buildup of debt has resulted in capital structure and
maturing mismatches and misallocation of resources on the demand
side creating excessive dependence on credit for risk assets.
Page 15
4 April 2014
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Low interest rate trap
Components
Investment theme
Industry impact
Sector position
Risk of reversal of foreign
portfolio flows out of EMs
Overweight ZAR hedges
Stark differentiation between
large and small banks in
advanced economies
Focus on large diversified
banks internationally and
domestically
Restrained credit growth to
business and household in
advanced economies
More productivity than credit
driven growth
Low interest rate environment encourages corporations to sell their
short term commercial paper to other corporations, pension funds
and money market funds.
Increasing issuance of corporate
listed debt taking advantage of
low yields
Relatively low corporate credit
growth in advanced economies
The longer quantitative easing persists the greater the collateral
damage to the real economy. As the Fed begins to taper and dollar
liquidity drains from global markets so structural problems and
imbalances resurface.
Slow withdrawal of US dollar
liquidity from global markets
Increased risk of EM currency
weakness and foreign portfolio
capital withdrawal
Increased Central Bank asset
purchases in advanced
economies if inflation keeps
declining
Central Bank accommodation
dependent data improvement
while ST interest rates remain
near zero in 2014 and 2015
Forward guidance by the Fed is
changing. The Fedfund rate is
now expected to start rising in
April/May 2015
Near zero ST interest rates in
2014 and Q1:2015 in the US,
longer in the EU and Japan
Growing credit risk in Chinese
banking system
Expect higher ST interest rates
in China and increased credit
regulation
Start of a protracted process of
capital withdrawal from EMs as
advanced economy returns begin
to look more attractive
Less support in money supply
from foreign portfolio flows likely
to negatively impact credit
growth
Start of reversal of foreign
portfolio flows causing EM
currency weakness
EMs face weaker currencies,
higher inflation and ST interest
rates which should slow
economic growth
Little economic reform seen in
advanced economies during
massive accommodation phase
Low advanced economy fixed
investment growth
Extended period of near zero interest rates is causing a misallocation
of assets.
In a low interest environment, the narrower margin encourages
lending to large corporations and not small businesses.
Banks are not inclined to lend their excess reserves for a tiny yield
even where there is moderate counterparty risk.
Near zero interest reduce rate flexibility if inflation keeps falling.
Longer the Central Banks hold interest rates near zero the more they
have to use forward guidance to anchor rate expectations.
Artificially low interest rates are distorting
the financial system in advanced
economies holding back economic
activity.
Reduction in the Fed's asset purchase
programmes is step one in the monetary
normalisation process, step two is to raise
short term interest rates and this now
expected to start in Q2:2015 and step
three is to allow fixed interest securities
on the Fed's balance sheet to run-off
rather than being sold-off.
Excessively loose liquidity and negative real interest rates obscure
the credit risk in the system. China, Europe and Japan now face the
dilemma of how to reconcile the economies' liquidity needs with the
solvency of the system as a whole.
The Fed signalled in May-13 it would start tapering in the months
ahead resulting in a sharp bond yield rate rise. US tapering is
expected to end in November 2014.
Rising US real yields have triggered a reversal of portfolio capital
flows from high yielding markets toward developed economy markets.
Asset purchase programmes seem more like ‘addictive painkillers
than effective antibiotics’.
Page 16
4 April 2014
Reduced Central bank asset purchases
lower excess liquidity flowing into high
yielding markets.
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Growth model in advanced economies under question
Components
Investment theme
Former US Treasury Secretary, Larry Summers warned of sustained
economic stagnation in advanced economies, as despite some
recovery, advanced economies are still performing 10-15% below
pre-crisis growth trends.
Globalisation and technological change is altering advanced
economy competitiveness.
Unprecedented pressure on developed economy companies to drive
innovation and cost savings.
The pace of infrastructural investment has been low in developed
economies for the past three decades.
Developed economies have used a
combination of external savings and
technology driven productivity
improvement to drive their economic
growth.
Smaller banks find it increasingly difficult
to borrow funds when interest rates are
near zero. Persistent distortions in bank
intermediation in developed economy
markets. Increasing regulation and
balance sheet problems constrain lending.
Aging demographic and off-shoring has created a major distortion in
national household income.
Page 17
4 April 2014
Sector position
FOMC members and NABE see
continued slow cyclical recovery
in US economic growth from
Q2:2014
Overweight US equities focus on
technology and energy
infrastructure development
Continued strong price
competitiveness in global
markets
Strong differentiation in
economies undergoing
technological changes
Little sign of infrastructural
development outside shale oil
and broadband/internet
Low confidence continues to
inhibit private sector fixed
investment growth despite low
interest rates
Low real and nominal interest rates not materially stimulating
significant additional investment.
Most of the easy structural changes in the macroeconomic and
political mix in advanced economies after the cold war era have
already been achieved.
Industry impact
Low capital spending and technology
innovation are generating a long term
decline in the relative price of capital
goods.
The tough structural reforms in
advanced economies lie ahead
especially in Europe and Japan
Secular slowdown in consumer
growth in advanced economies
due to aging populations
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
No clear major cyclical pickup in
commodity prices outside
selection food prices
Overweight US economic
growth, focus on shale oil
energy, technology, select
manufacturing
Overweight US equities focus on
technology and energy
infrastructure development
Focus on residential building
recovery rather than slower
corporate building improvement
Reduction of entitlements to slow
recovery in household
consumption
US healthcare and
pharmaceuticals to benefit,
increased tourism, slower
durable spending growth
Growth model in advanced economies under question – cont.
Components
Investment theme
Industry impact
Sector position
Growth strategies which rely primarily on exports reach their limits
when many countries pursue them simultaneously. Competition
among economies based on low unit labour costs and taxes leads to
a race to the bottom, with few development gains, but potentially
disastrous social consequences. Growth of demand from developed
countries is expected to remain weak for a protracted period of time
and the limitations of an export centric growth strategy are becoming
increasingly obvious.
A rebalancing of the drivers of growth.
Greater weight given to domestic demand
is becoming indispensable. Distinct from
export-led growth, development strategies
which give a greater role to domestic
demand for growth can be pursued by all
countries simultaneously without ‘beggarthy-neighbour’ effects, and without
counterproductive wage and tax
competition.
Exports led growth strategies
unlikely to be winners in the
current environment, a more
inward focus is needed through
structural reform and reinvestment in infrastructure to
boost productivity
Slow improvement in global trade
but not the main driver of
economic growth in Asia.
Rising level of income inequality is reducing economic and social
mobility. As the rich get richer and poor get poorer, consumption
growth is likely to decline.
Factor productivity improvements from mid-1990s to mid-2000s came
from digital convergence, 'peace dividend' from the end of the Cold
War. The big gains in global trade have come from the Uruguay
Round of free-trade negotiations since 1994 and have already been
achieved, as have liberalisation of capital flows. Most of these big
productivity boosters are historic effects.
Much of the banking funding is for existing assets, especially
commercial and residential real estate but does not directly stimulate
new capacity investment or consumption - it just drives up asset
prices and unsustainable wealth effects.
Page 18
4 April 2014
Persistent income and wealth equality
affecting the cyclical recovery in
aggregate household demand in the
advanced economies.
Growing social and political ramifications
from the expanding social inequality
steering political debate toward greater
social sensitivity.
US net trade balance improving
because of reduced imports
Aggregate consumer demand
restrained by lagging low and
middle income remuneration and
wealth growth
Global luxury goods continues to
outperform groceries
Medium term productivity
improvements to boost GDP
growth will come from freeing
infrastructural blockages and
boost technology innovation
High income group continues to
show strength relative to low
income groups in advanced
economies
Most property transactions have
a wealth effect but do little to
boost GDP growth in the medium
term
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Overweight SA’s exposure to UK
and European commercial
property, persistent low bond
yields are supportive of
valuations
Vulnerability of emerging markets
Industry impact
Sector position
China’s GDP growth slowing to
6% per annum over the medium
term
Steel, coal and select
manufacturing sectors
experiencing overcapacity
Rate of growth in imported
commodity demand in China is
expected to slow in the next few
years
Carbon steel commodity prices
likely to soften through 2014 and
little new support for major base
metals
China's export sector is facing rising labour costs, a strengthening
Renimbi against the USD, weakened export demand, and buyers are
increasingly demanding financing at a time when domestic monetary
conditions were tightening resulting in weaker export performance.
China’s manufacturing sector
starting to become uncompetitive
in certain areas due to rising
wage costs
Overcapacity in intermediate
commodity production, steel and
cement
Rising US real yields are undermining the carry-trade and are
attracting portfolio capital away from emerging market and
commodity investments.
The slow reversal of the global
US carry trade eroding
investment demand in
commodities
Increased currency volatility in
EMs, with a depreciation bias
Components
Investment theme
China is undergoing a structural transformation compounded by a
tightening phase in its credit cycle.
China's credit has grown from 125% of GDP in 2008 to 215% in
2012. Local government debt has increased 70% since 2009 to
almost $3trillion by mid-2013. Monetary authorities have begun to
tighten monetary conditions in 2013 which have caused two money
market rate spikes in 2013.
Credit growth is far outpacing nominal GDP growth and leverage is
increasing. This suggests that the credit intensity of GDP is
increasing to ensure economic growth remains in line with potential.
The risk in resource-centric emerging
market economies which are concentrated
on Chinese commodity demand is rising
and their currencies are coming under
pressure.
Rising real US yields are undermining the
USD short carry-trade and so starting a
process of reversal of foreign portfolio
capital flows returning to developed
economies.
High consumption and credit rates have characterised many
emerging markets over the past few years resulting in poverty
reduction but sustainability is being questioned.
Increasing concern about economic and political vulnerabilities in
emerging markets but there is recognition of significant
macroeconomic and political differences.
Little structural reform evident in emerging markets for last five years
raising questions about sustainability without rising commodity prices
and foreign savings inflows.
Many of the emerging markets face national elections in 2014 adding
a further sensitivity to the immediate growth outlook in these
economies.
China is leading the way regarding reforms but shifting its growth
model from reliance on exports and public investment to
strengthening the private components of domestic demand.
High and rising consumer debt, slowing population growth, rising
income inequality have weakened consumer demand and stimulated
savings while slowing growth has discouraged productivity and
investment.
Page 19
4 April 2014
Emergence of the 'fragile five' emerging
market economies due to their large twin
deficits making them overly dependent on
foreign savings to stabilise their
currencies. Most of these economies did
not use the period of strong foreign capital
inflows to undertake reforms to improve
sustainability. Instead their boost to
money supply and currency strength
resulted in strong imports for consumption
and high credit growth. These pro-growth
conditions are now reversing.
Emerging market economies’ domestic
reforms needed to foster business friendly
pro-competition environment, an attractive
foreign trade regime and a healthy
financial sector.
Rising risk in growth credit
intensity in China
The slowdown of foreign portfolio
capital inflows into EMs is
curtailing their money supply
growth and their credit growth
Credit growth in larger EMs likely
to slow as foreign capital inflows
slow
Growing differentiation in risk
and performance in EMs – no
longer a generic positive view
Credit growth slowdown in
China, Brazil, India, Argentina,
SA, Nigeria and Ghana
EMs will have to undertake tough
structural reform to unlock the
internal potential of EMs with
less reliance on exports
Establishment of robust private
sector needed in Africa
expanding non-government
related employment
Increased risk of political unrest
undermining GDP growth in EMs
due to elections this year
Economic activity likely to slow in
two quarters before national
elections
China’s reform process is
underway but will slow growth in
the medium term
Reduced manufacturing for
export, increased development of
private sector
EMs need increased private
sector and less public sector
involvement in their economies
Expanding middle class
consumption due to stronger
private sector growth
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Africa rising
Components
Investment theme
Sub-Saharan growth of 5.5% to 6% pa expected by the IMF in 2014
High sub-Saharan growth extends beyond the resource-rich countries
driven by the expansion of the private sector, strengthened
institutions, increased access to global capital markets and higher
investment in infrastructure and human resources.
Africa is undergoing social and demographic changes led by a
growing emerging market middle class, rising disposable income and
far reaching communication channels.
There is significant direct investment by China for the development of
infrastructure to facilitate access to natural resources.
Sub-Saharan trade has been increasingly directed away from
developed to emerging market economies over the past decade. This
is leading to a rising exposure to China.
Domestic risk is related to supply-side shocks from either the weather
or political disruption from civil unrest.
Widening current account deficits in most sub-Saharan economies
reflect increase investment in infrastructure (energy and mineral
extraction) and export-oriented businesses. The current account
deficits have been largely financed by foreign direct investment so
external indebtedness is rising and domestic savings are declining.
Significant debt forgiveness has helped some low-income
economies.
Page 20
4 April 2014
Africa's high growth forecast of around 5%
to 6% in 2014 is being driven by internal
reforms boosting private sector activity,
foreign direct investment in resources and
infrastructure and expanding production
driven commodity export revenues.
External factors such as tighter credit
conditions (reduced global liquidity and
higher interest rates), weaker commodity
prices and less investor confidence in
emerging markets reversing portfolio
capital flows (South Africa, Nigeria,
Ghana) are restraining sub-Saharan
growth.
Resource-centric economies could feel
increased pressure from weaker
commodity prices and slower export
volume growth.
Expansion of investment in energy, urban
centres and export-related infrastructure.
Industry impact
Sector position
SA companies looking to
participate in higher growth
elsewhere in Africa
Growing consumer,
infrastructural and logistics
demand
Africa growth opportunities
extend beyond resources into an
expanding private sector
Expanding middle class driving
strong consumption growth rates
Expanding middle class and
rising consumption rates in
African economies
Strong grocery apparel and
durable market growth; strong
mobile telecom demand;
expanding credit demand
Strong foreign direct investment
growth by China in mining,
infrastructure and government
facilities
Expanding infrastructure
facilitating private sector growth
Growing import and export trade
with China increasing
concentration and dependence
Increased resource base
development by the Chinese
Political disruptions create risk of
supply side shocks
Political risk elevated in SA,
DRC, Nigeria and South Sudan
Expanding infrastructural
investment in African economies
is boosting growth potential and
potential for middle class
expansion
Secular growth in middle class
due to expanding private sector
economic participation driving
employment and wage growth;
leapfrog technology adopting
reinforcing this trend
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Africa rising - cont
Components
Investment theme
Industry impact
Sector position
Growth strategies which rely primarily on exports must sooner or later
reach their limits when many countries pursue them simultaneously.
Competition among economies based on low unit labour costs and
taxes leads to a race to the bottom, with few development gains but
potentially disastrous social consequences.
Economic balance between external and
domestic expansion is critical for greater
social inclusion. Africa’s growth has
partially achieved this but skilled
employment growth has materially lagged
GDP growth.
Export-related developments are
not the only opportunities for SA
companies to participate in the
high sub-Saharan African growth
trend
Expanding goods and services
trade between SA and subSaharan Africa
Growing urbanization in Africa
increases the food security risk
and has the potential to impact
wildlife tourism potential
Increasing grocery and transport
demand in expanding cities;
urban infrastructural expansion
lagging so high convenience
imperative
High growth economies are
mostly small so significant limited
economies of scale
SA’s initial penetration into larger
sub-Saharan markets to achieve
economies of scale; construction
is the one area where SA
companies can enter smaller
high growth economies
The slowdown in SA growth is likely to
affect the SADC neighbouring countries
the most. Central, West and East African
economies are likely to be relatively
immune from the slowdown in SubSahara's largest economy. The latter
factor is important for SA's regional export
potential.
Significant potential for
expansion of middle class
consumer dependent on growth
in private not public sector
expansion
Expansion of credit and
communication critical to
facilitate private sector growth
Major technology leapfrog potential for
African economies using mobile telecom
Growing usage of mobile
telecom and internet driving
much strong
Massive demand for voice and
data communication to leapfrog
infrastructural difficulties
Likely strong growth in demand
for generic pharmaceuticals
throughout Africa
High rates of communicable and
non-communicable disease
incidence in expanding Africa
cities driving pharmaceutical
demand, especially less
expensive generics
While the risk of weather related supply disruptions is ever present,
global food prices have been declining in 2013 and look to continue
lower in 2014. This together with minimal inflation in the international
oil price should help contain inflation in Sub-Saharan Africa in 2014.
One third of Africa's 55 countries have annual growth above 6% and
sub-Saharan Africa grew at an estimated 5.1% pace in 2013.
The working age population in Africa is expected to be 1.1 billion by
2040.
The expansion of Africa's telecoms infrastructure is probably one of
the most remarkable technological leaps seen in the world over the
last ten years.
The expansion of non-communicable disease is expected to become
the leading cause of death in Africa by2030.
Page 21
4 April 2014
High growth with relatively low inflation
bodes well for per capita income gains
which should continue the expansion of
the middle class in Africa.
Urbanisation without infrastructural
expansion results in increasing congestion
boosting the convenience imperative. This
is a key reason for poor eating and
drinking habits resulting in the expanding
incidence of NCDs especially among the
lower income groups
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Cyclical themes
Commodity cycle downswing still underway
Components
Investment theme
US equity and developed economy equity indices outperforming
commodity indices.
International investor flows out of commodity exchange traded funds
into developed economy equities and bonds.
The tail end of the last surge in expansion of capacity in commodity
supply is still coming into the metals commodity markets at a rate
above slowly recovering global metals commodity demand.
Developed economy equity indices
outperforming emerging market and
commodity indices.
America's shale gas and light oil are changing the global energy
markets and boosting US global competitiveness.
Geo-political risks in the Middle East and over the EU-Ukraine-Russia
confrontation are influencing the Brent crude oil and European
natural gas prices.
Page 22
4 April 2014
Investment shift away from
commodity to equity indices
Be specific in commodity
exposure, weak base metals but
strong food price increases
Lower trading volumes in
commodity ETFs
Spot bulk commodity prices are expected
to be under pressure due to supply growth
faster than demand growth in 2014
especially in the carbon steel inputs and
base metal markets.
Unique supply side disruptions are likely to be the key price drivers in
2014.
There is growing disruption in the energy market due to developed
economies' accelerating adoption of shale gas and ‘fracking’
technologies.
Sector position
US equity markets outperforming
USD-based commodity indices
causing an investment shift
Reduced commodity trading exposure among investment banks.
Growth in import demand for commodities from China is slowing as
investment and credit growth slows and the economy undergoes a
degree of policy induced rebalancing toward consumption.
Industry impact
Any strong price rises in precious metals
are likely to be supply side driven, as
could be the case in platinum group
metals.
Iron ore price trading sideways,
premium in lump; coal prices
softening
Be highly selective in iron ore
exposure – based on volume not
price growth
Major base metal prices drifting
sideways to slightly down
Focus on diversified metal and
mineral miners
PGM labour strikes disrupting
mining production.
Underweight PGM until we see
some positive operating leverage
Shale oil revolution should soften
the WTI crude oil price while
Ukraine-Russian concern
support Brent oil price
Thermal coal markets under
threat in longer term
There is significant technology driven
market disruption in the energy market
undermining oil and coal markets.
The shale oil revolution is
expected to spread globally.
Currently the main thrust is in
North America
Heightened supply side risk associated
with the Ukrainian annexation is
supporting higher energy prices.
EU and Russia, oil, natural gas
and electricity markets affected
by the international stand-off
over the Ukraine.
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Oil sector expected to come
under pressure with softening oil
price and little further ZAR kick in
2014
Oil sector is being supported by
supply side risks without further
ZAR kick in 2014
Not business as usual
Components
Industry impact
Sector position
SA consumption growth is slowing, led by household spending.
Investment theme
Slowing consumer spending
growth
Underweight consumer stocks
and unsecured lenders
Government consumption growth constrained by persistent high
budget deficits.
Restrained government
consumption growth at rates
below GDE; slower public sector
employment growth
Slower public sector
remuneration growth slowing
credit demand growth
Gross employee remuneration growth slowing to 2.0% in real terms
due to reduced unit wage growth, shift in job mix and higher inflation
Continued weakening GDE growth in SA
in 2014 restrained by softer household
consumption growth and low investment
growth combined with a modest drag from
government consumption expenditure.
Positive but slower employee
remuneration growth eroding
discretionary consumer income
Lower income group worst
affected by income loss due to
strikes and company
restructuring
Persistent strikes in mining industry undermining employment,
investment, production and cash flows.
Lower income group earnings
erosion and affecting
consumption growth
Investment growth remains muted with low real growth in the private
sector due to low business confidence and sufficient domestic
manufacturing spare capacity. Public sector investment growth has
plateaued. General government investment is being crowded out by
social wages and remuneration costs, so future investment will need
to be debt funded.
Few major capital projects
outside existing parastatal rail
and electricity power generation;
continued opposition to ‘user
pays’ e-tolls in Gauteng and no
major PPPs in the pipeline
Underweight domestic focused
construction companies
SA business successfully
expanding into higher growth
markets outside SA
Focus on foreign subsidiary
earnings improvements
Likely slowdown in rate of
consumer goods imports which
will reduce long haul road
demand between the coast and
Gauteng
Underweight consumer durable
spending
There is continued expansion by SA private sector businesses
outside SA which is structurally lowering domestic private sector
capital investment, job growth and taxes paid inside SA.
Fixed investment growth weak, private
sector manufacturing spare capacity, low
business confidence and private sector
businesses expanding outside SA.
The ZAR fall, along with many other emerging markets, sharply
increases the cost of imports in an increasingly import-dependent
economy which is expected to dampen domestic demand and push
up inflation.
Growth in the SA economy is forecast at 2.6% in 2014 and is
expected from a reduction in the trade deficit. Some recovery in the
mining net trade surplus and lower imports should narrow the trade
deficit.
Key driver of higher forecast GDP growth
in SA in 2014 is reduced drag from the
trade deficit due partly to some recovery
in mining production lifting export
revenues and a contraction of imports due
to sharply higher ZAR prices.
Improved trade account balance
dependent on some respite from
PGM mining strikes and reduced
consumer goods imports
Underweight consumer
spending, especially at the low
income end and durables
The political pressure has been turned up on the ruling party ahead
of the National Election in May 2014. There is a growing risk that
government policy will try to accelerate transformation in the
economy post the election to regain support.
Likely increased push on racial income
and wealth transformation leading to
increased regulation compliance and
greater private-public role confusion.
Unlikely to see private sector
domestic fixed investment growth
accelerating in 2014
Underweight domestic focused
construction
Monetary conditions began tightening in 2013 and are expected to
continue to do so in 2014. Short term interest rates are rising with
another 100 basis point rise forecast in 2014. Higher inflation is
eroding discretionary income. Tighter credit conditions are also being
imposed due to high household debt levels.
Money conditions are tightening in SA in
2014 due to rising short term interest rates
and high debt levels constraining lending
and minimal job growth.
Domestic credit cycle downswing
in 2014, where unsecured
lending slows more than assetbacked credit
Underweight retail banking and
unsecured lenders
Page 23
4 April 2014
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
SA consumer under pressure
Components
Investment theme
Industry impact
Sector position
Domestic credit growth slowing;
unsecured lending slowing the
most. Lower income groups the
worst affected
Underweight retail banks and
unsecured lenders
Rising inflation in 2014 likely to
negatively impact the lower
income groups the most
Focus on high income group
consumer spending
There is likely to be a marked forced rotation in consumer spending
from discretionary to non-discretionary in 2014.
Domestic credit retailers and
unsecured lending likely to feel
the slowdown the most
Underweight unsecured lenders
Inflation in semi-durables and durables reversed from deflation to low
but rising inflation in 2013. Further acceleration of inflation in semidurables and durables is expected in 2014 as forward cover and
stocks are reduced.
Rising inflation in semi-durables
and durables erodes affordability
and likely to slow retail sales
growth
Low income group worst affected
by rising income
Cost-pushed price increases in
the durable goods market and
rising interest rates expected to
drive negative growth rates in
2014
Underweight consumer durable
exposure to appliances and
passenger car sales
Household credit growth
constrained by already high debt
levels and low savings.
Underweight retail banks
Support in non-discretionary consumer goods market is expected due
to the expansion of social grants and increasing goods inflation.
No collapse expected in grocery
market even at the lower income
end due to social grant support
Underweight grocery retailers
Increasing erosion of the middle income consumers’ disposable
income due to expanding indirect taxes mainly property, license fees
and road tolls and now higher interest costs in mortgages, credit
cards and usury rate-related unsecured loans.
Growing pressure on middle
income discretionary spending
due to wider indirect taxation,
high administered price
increases and high and rising
fuel prices
Growing pressure on semidurable discretionary spending,
especially the credit driven
portion
Low income group remuneration
negatively affected by earnings
loss due to strikes and minimal
private sector employment
growth
Underweight low income
consumer exposure
Shift in job mix eroding overall
remuneration growth and
affecting the consumer spending
mix
Focus on high income consumer
spending
Consumer credit cycle is expected to be in a downswing phase again
in 2014. The slowdown is driven by declining consumer confidence,
high debt levels, loss of income due to strikes, shift in jobs mix and
rising short term interest rates.
The sharp depreciation in the ZAR is expected to push up inflation
rates in 2014 which will negatively impact the lower income groups
the most.
Some demand destruction is expected in the durables market due to
accelerating price inflation reducing affordability.
Household debt to disposable income levels bottomed at 75% and
are rising again which is crimping demand especially in the lower
income groups.
Job growth in the private sector is minimal given the low economic
growth and production disruptions from strike activity. Income is
being lost by striking trade union members.
There is a shift in job growth away from higher paid private sector
production jobs to lower paid community-based jobs as part of the
public works programme, so there is no apparent boost to aggregate
gross remuneration but there is a shift in the distribution of income to
the lower income groups.
Page 24
4 April 2014
SA credit cycle is in a downswing in 2014
due to National Credit Regulation lending
constraints, high debt levels, rising short
term interest rates, income loss due to
labour strikes and minimal job growth.
Shift in job mix to lower income group
together with expanding social grants
expected to support non-discretionary
goods spending.
Rising inflation and sharp increase in ZAR
price of imported goods, especially
discretionary consumer goods, likely to
force a rotation away from discretionary
towards non-discretionary goods
spending.
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
SA consumer under pressure – cont.
Components
Investment theme
Industry impact
Sector position
There is a degree of demand offset from expanding international and
regional inbound tourism which is consumption supportive especially
in the main metropolitan shopping malls.
Strike related income disruption, higher
inflation and rising credit costs are likely to
bear disproportionately on the lower
income groups while the higher income
groups remain relatively better off. The
middle class is being negatively impacted
by increasing indirect taxation related to
licences, municipal rates, utility costs and
road tolls which are eroding their growth in
discretionary income.
Apparel specialist retailers
benefit; premier urban shopping
centres benefit from regional
tourist demand. Grocery retailers
in cities close to SA’s borders
with neighbouring state benefit
from overland tourist demand
Grocery retailers offer the best
exposure to neighbouring
country cross border retail
demand
Surprising strength in apparel possibly
driven by expanding middle class and
migration up the LSM scales
Cost-pushed inflation likely to
erode building hardware and
apparel retail demand. Credit
retailers likely to be hit hardest in
2014
Be highly selective in apparel
retails focus on upper income
end of the market; credit
headwinds
Urban retail is decentralising which is
driving store expansion
Increasing logistic cost in
decentralising urban retail
Focus on convenience rather
than discretionary retailers
SA grocery and apparel retails pushing
into Africa.
African push is concentrated on
southern Africa and careful
considered penetration into West
and East Africa
Recent strength in the retail mix in apparel and building and DIY
hardware.
There is a growing logistic function in wholesalers and retailers given
the expanding import content and urbanisation forcing
decentralisation of urban retail.
Most of SA's retailers continue to expand into Africa. The rate of
expansion is measured given logistical and regulation constraints.
Page 25
4 April 2014
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Grocery retail and mobile
telecom appear to be the most
successful areas of penetration
into African consumer markets
ZAR vulnerability
Components
Investment theme
The SA trade deficit was over 6% of GDP in 2013 and this is
expected to narrow to between 4.5% and 5% of GDP in 2014 due to
a partial recovery in mining production and reduced import growth.
The key risk in the improved trade balance to GDP ratio forecast is
the expected elasticity of imports due to the higher import prices
associated with the weaker ZAR. This is a key assumption in the
expected improvement in the net trade deficit.
SA suffers a 6% to 7% of GDP national savings shortfall relative to
investment. National savings rates are unlikely to recover
meaningfully in 2014 which without a major slowdown in investment
dictates continue high dependence on foreign savings to stabilise the
ZAR.
Widening inflation differentials with major trading partners increases
the long term depreciation rate.
A narrower trade deficit expected in 2014
due to slower growth in imports and
higher mining production volumes,
assuming reduced production disruption
from strike action.
SA's national savings shortfall forces
persistent dependence on foreign savings
to stabilise the ZAR, which makes the
ZAR vulnerable to capital outflows.
Industry impact
Sector position
Slower imports expected in
domestic consumer good
markets, mostly food, beverage
and apparel
SA consumption of imported
consumer goods expected to
slow, especially apparel and
durables
Capital goods imports unlikely to
slow other than for heavy
vehicles and luxury cars and
appliances
Capital equipment for
infrastructural expansion
expected to continue to be
imported due to project
schedules
No respite likely in national
savings but could be a further
lowering of corporate savings
ratios
Weaker consumer confidence
with no savings offset as credit
access tightens and becomes
more expensive
In a weak credit market,
domestic importers likely to come
under greater strain
ZAR hedge orientation remains
in place
SA’s terms of trade are likely to improve somewhat in 2014 as food
commodity exports improve.
Capital flows will dominate the movement
of the ZAR rather than trade flows.
Foreign investor sentiment
remains critical to support
existing foreign portfolio
investment in SA markets
There was a sharp reduction in foreign portfolio capital flows in H2:13
and outflows in December 2013 and January 2014. The rising real
US yields are attracting international investors away from emerging
markets.
Foreign investor sentiment will be driven
by changes in the country risk premium
(affected by international credit rating
changes, shifts in political risk associated
with policy changes) and changes in
emerging market bond index spread over
Treasuries.
Unlikely to see the long end of
the yield curve rising significantly
unless domestic inflation
expectations start to rise
Anchored long end of domestic
yield curve improves the
valuation prospects for bond and
real estate valuations
Little GDP growth benefit from
foreigners buying existing
companies in SA
Creates a moderate valuation
boost for existing shareholders
but does not affect GDP
Foreign equity investors attracted
by unique access that SA
companies have to African
markets and their high growth
Grocery retailers, banks and
select logistics companies
benefiting from push into African
markets
The weaker ZAR should boost
net inbound long haul tourism
Improving hotel and car hire
demand growth
The Reserve Bank has limited foreign exchange reserves and so is
unlikely to deploy them in an attempt to stabilise the currency.
Foreign direct investment has taken the form of buying existing
companies in SA rather than greenfields project development so is
not adding to job creation and new capacity investment.
There is a net flow of foreign direct investment out of SA to expand
their business's international footprint.
There is expected to be a reduction in the service account in the
current account as the weaker ZAR boosts foreign inbound tourism
and slows South African tourism abroad.
Page 26
4 April 2014
The ZAR is expected to strengthen
modestly against the USD from the 11.3
level and GBP but more strongly against
the Euro and Yen in 2014 driven by
‘cheapness’ against PPP measures and
increased attractiveness for foreign
investors from materially higher bond
yields.
The weaker ZAR is expected to reduce
the services deficit due to increased
international and regional tourism
attracted by improving affordability from
the weaker ZAR.
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Forecasts
Table 1 : International Macroeconomic Forecasts – output, inflation and unemployment IMF January 2014 update
Page 27
4 April 2014
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
The latest full IMF World economic outlook database was published in Oct-13. The next full update will be
in Apr-14.
Table 2 : International Macroeconomic Forecasts – output, inflation and unemployment
Output annual % change
World
Advanced Economies
Major advanced economies (G7)
United States
Euro Area
European Union
Japan
Other Advanced Economies
Emerging and Developing Economies
Regional Groups
Central and Eastern Europe
Commonwealth of Independent States
Developing Asia
ASEAN-5
Latin America ad the Caribbean
Middle East and North Africa
Sub-Saharan Africa
South Africa
World annual output USD bn
World
Advanced Economies
Emerging and Developing Economies
At Purchasing Power Parities
GDP deflators %
Advanced Economies
United States
Euro Area
Japan
Other Advanced Economies
South Africa
Consumer Prices %
World
Advanced Economies
Major advanced economies (G7)
United States
Euro Area
European Union
Japan
Other Advanced Economies
Emerging and Developing Economies
South Africa
Regional Groups
Central and Eastern Europe
Commonwealth of Independent States
Developing Asia
ASEAN-5
Latin America ad the Caribbean
Middle East and North Africa
Sub-Saharan Africa
South Africa
Unemployment %
World
Advanced Economies
Major advanced economies (G7)
United States
Euro Area
European Union
Japan
Other Advanced Economies
Emerging and Developing Economies
2007
5.3
2.7
2.2
1.8
3.0
3.4
2.2
5.0
8.7
2008
2.7
0.1
(0.3)
(0.3)
0.4
0.6
(1.0)
1.7
5.8
2009
(0.4)
(3.4)
(3.8)
(2.8)
(4.4)
(4.4)
(5.5)
(1.1)
3.1
2010
5.2
3.0
2.8
2.5
2.0
2.0
4.7
5.9
7.5
2011
3.9
1.7
1.6
1.8
1.5
1.7
(0.6)
3.2
6.2
2012
3.2
1.5
1.7
2.8
(0.6)
(0.3)
2.0
1.9
4.9
2013
2.9
1.2
1.2
1.6
(0.4)
0.0
2.0
2.3
4.5
2014
3.6
2.0
2.0
2.6
1.0
1.3
1.2
3.1
5.1
2015
4.0
2.5
2.5
3.4
1.4
1.6
1.1
3.3
5.3
2016
4.1
2.6
2.6
3.5
1.5
1.8
1.2
3.4
5.4
2017
4.1
2.6
2.5
3.4
1.6
1.8
1.1
3.4
5.5
2018
4.1
2.5
2.4
3.1
1.6
1.9
1.1
3.5
5.5
5.4
8.9
11.5
6.2
5.7
6.0
7.1
5.5
2007
56,425
40,437
15,988
67,452
3.2
5.3
7.3
4.7
4.2
5.0
5.7
3.6
2008
61,823
42,617
19,207
70,538
(3.6)
(6.4)
7.7
1.8
(1.2)
3.0
2.6
(1.5)
2009
58,602
40,217
18,385
70,608
4.6
4.9
9.8
7.0
6.0
5.5
5.6
3.1
2010
63,991
42,014
21,977
75,090
5.4
4.8
7.8
4.5
4.6
3.9
5.5
3.5
2011
70,782
45,040
25,742
79,346
1.4
3.4
6.4
6.2
2.9
4.6
4.9
2.5
2012
72,216
44,996
27,221
83,193
2.3
2.1
6.3
5.0
2.7
2.1
5.0
2.0
2013
73,454
45,175
28,279
86,698
2.7
3.4
6.5
5.4
3.1
3.8
6.0
2.9
2014
76,888
47,042
29,846
91,234
3.3
3.8
6.6
5.5
3.5
4.2
5.7
3.3
2015
81,347
49,244
32,103
96,753
3.5
3.7
6.7
5.4
3.7
4.1
5.6
3.4
2016
86,256
51,682
34,573
102,739
3.7
3.7
6.7
5.5
3.7
4.2
5.5
3.5
2017
91,408
54,152
37,256
109,134
3.7
3.7
6.7
5.5
3.7
4.4
5.7
3.5
2018
96,904
56,707
40,197
115,927
2007
114.1
97.3
104.3
98.0
113.4
115.1
2007
4.1
2.2
2.2
2.9
2.1
2.4
0.1
2.0
6.5
7.1
2008
116.2
99.2
106.3
96.7
116.5
124.4
2008
6.0
3.4
3.2
3.8
3.3
3.7
1.4
4.3
9.2
11.5
2009
117.0
100.0
107.3
96.2
118.1
134.7
2009
2.5
0.1
(0.1)
(0.3)
0.3
0.9
(1.3)
1.3
5.3
7.1
2010
118.2
101.2
108.2
94.1
120.6
144.4
2010
3.6
1.5
1.4
1.6
1.6
2.0
(0.7)
2.2
5.9
4.3
2011
119.8
103.2
109.5
92.4
122.2
153.1
2011
4.8
2.7
2.6
3.1
2.7
3.1
(0.3)
3.1
7.1
5.0
2012
121.2
105.0
110.9
91.6
123.7
161.4
2012
4.0
2.0
1.9
2.1
2.5
2.6
(0.0)
2.0
6.1
5.7
2013
122.7
106.4
112.4
91.3
125.6
172.2
2013
3.8
1.4
1.3
1.4
1.5
1.7
0.0
1.5
6.2
5.9
2014
124.7
108.2
113.8
93.2
127.8
182.7
2014
3.8
1.8
1.8
1.5
1.5
1.7
2.9
2.1
5.7
5.5
2015
126.9
110.4
115.3
94.4
130.1
194.3
2015
3.6
1.8
1.8
1.8
1.4
1.7
1.9
2.4
5.2
5.1
2016
129.1
112.7
117.0
95.3
132.6
206.8
2016
3.5
1.9
1.9
2.0
1.5
1.7
1.9
2.4
5.0
5.0
2017
131.5
115.0
118.8
96.6
135.3
220.1
2017
3.5
2.0
2.0
2.1
1.6
1.8
2.0
2.4
4.8
5.0
2018
133.9
117.4
120.6
98.0
138.0
234.2
2018
3.5
2.1
2.1
2.2
1.6
1.8
2.0
2.4
4.8
5.0
6.0
9.7
5.3
4.5
5.4
10.6
6.4
7.1
2007
5.5
5.5
4.6
7.6
3.8
4.0
-
8.1
15.6
7.4
9.2
7.9
12.4
12.9
11.5
2008
5.8
5.9
5.8
7.6
4.0
3.9
-
4.7
11.2
3.0
3.0
5.9
6.3
9.4
7.1
2009
8.0
8.0
9.3
9.6
5.1
5.2
-
5.3
7.2
5.3
4.4
5.9
6.5
7.4
4.3
2010
8.3
8.2
9.6
10.1
5.1
5.0
-
5.3
10.1
6.3
6.0
6.6
9.2
9.3
5.0
2011
7.9
7.7
8.9
10.2
4.6
4.6
-
5.8
6.5
4.7
3.9
5.9
10.8
9.0
5.7
2012
8.0
7.4
8.1
11.4
4.4
4.5
-
4.1
6.5
5.0
4.9
6.7
12.3
6.9
5.9
2013
8.1
7.3
7.6
12.3
4.2
4.6
-
3.5
5.9
4.7
5.1
6.5
10.3
6.3
5.5
2014
8.0
7.3
7.4
12.2
4.3
4.6
-
3.5
5.9
4.3
4.4
6.0
9.2
5.7
5.1
2015
7.8
7.0
6.9
12.0
4.3
4.6
-
3.6
6.0
4.1
4.1
5.5
8.4
5.6
5.0
2016
7.4
6.6
6.4
11.5
4.3
4.5
-
3.6
6.0
4.0
3.8
5.2
8.3
5.5
5.0
2017
7.1
6.3
5.9
11.1
4.2
4.4
-
3.6
6.0
4.0
3.7
5.1
8.2
5.5
5.0
2018
6.9
6.1
5.6
10.7
4.2
4.3
-
Source: IMF WEO Oct-13 update
Page 28
4 April 2014
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Table 3 : International Macroeconomic Forecast – fiscal balances
General Government Fiscal Balances and Debt
Major Advanced Economies
Net Lending/Borrowing
Output Gap
Structural Balance
Net Debt
Gross Debt
United States
Net Lending/Borrowing
Output Gap
Structural Balance
Net Debt
Gross Debt
Euro Area
Net Lending/Borrowing
Output Gap
Structural Balance
Net Debt
Gross Debt
Germany
Net Lending/Borrowing
Output Gap
Structural Balance
Net Debt
Gross Debt
France
Net Lending/Borrowing
Output Gap
Structural Balance
Net Debt
Gross Debt
Italy
Net Lending/Borrowing
Output Gap
Structural Balance
Net Debt
Gross Debt
Japan
Net Lending/Borrowing
Output Gap
Structural Balance
Net Debt
Gross Debt
United Kingdom
Net Lending/Borrowing
Output Gap
Structural Balance
Net Debt
Gross Debt
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
0.5
1.8
(2.3)
45.8
72.9
(1.8)
0.1
(3.7)
51.4
79.8
(7.3)
(4.6)
(6.1)
61.7
93.0
(6.1)
(3.0)
(6.1)
66.7
99.6
(4.7)
(2.7)
(5.4)
71.9
103.6
(4.1)
(2.6)
(4.7)
76.0
107.9
(2.7)
(2.9)
(3.4)
77.5
107.7
(1.8)
(2.5)
(2.7)
78.7
108.3
(1.1)
n/a
n/a
78.7
107.7
(0.7)
n/a
n/a
78.3
106.7
(0.3)
n/a
n/a
77.8
105.5
(0.0)
n/a
n/a
77.1
104.1
(2.7)
0.8
(2.9)
46.5
64.4
(6.5)
(1.8)
(5.0)
52.4
73.3
(12.9)
(6.4)
(7.8)
64.6
86.3
(10.8)
(5.5)
(8.0)
72.8
95.2
(9.7)
(5.2)
(7.3)
79.9
99.4
(8.3)
(4.2)
(6.3)
84.1
102.7
(5.8)
(4.5)
(3.9)
87.4
106.0
(4.7)
(4.0)
(3.2)
88.3
107.3
(3.9)
(2.8)
(2.7)
87.7
107.0
(3.9)
(1.7)
(3.2)
87.1
106.5
(3.8)
(0.8)
(3.5)
86.6
106.0
(3.8)
(0.2)
(3.7)
86.4
105.7
1.9
3.1
(2.6)
52.1
66.5
0.5
2.2
(3.3)
54.1
70.3
(3.9)
(2.9)
(4.7)
62.4
80.1
(3.7)
(1.7)
(4.6)
65.6
85.7
(1.5)
(0.8)
(3.7)
68.2
88.2
(0.9)
(1.8)
(2.3)
72.2
93.0
(0.4)
(2.7)
(1.4)
74.9
95.7
0.2
(2.5)
(1.1)
75.6
96.1
0.6
(1.9)
n/a
75.4
95.3
1.2
(1.3)
n/a
74.4
93.8
1.6
(0.8)
n/a
73.4
92.0
2.0
(0.4)
n/a
72.0
89.9
2.7
2.7
(1.1)
50.6
65.4
2.3
2.3
(0.9)
50.1
66.8
(0.8)
(3.7)
(1.1)
56.7
74.5
(2.0)
(1.4)
(2.2)
56.2
82.4
1.1
0.7
(1.0)
55.3
80.4
2.3
0.3
0.1
57.4
81.9
1.7
(0.4)
(0.1)
56.3
80.4
1.8
(0.2)
0.0
54.6
78.1
1.9
(0.0)
0.0
53.1
75.2
1.9
0.1
0.1
51.2
71.9
2.0
0.1
0.1
50.8
69.8
2.0
0.1
0.2
50.4
67.7
(0.3)
2.5
(4.2)
59.6
64.2
(0.7)
1.1
(4.1)
62.3
68.2
(5.4)
(3.0)
(5.7)
72.0
79.2
(4.8)
(2.2)
(5.7)
76.1
82.4
(2.8)
(1.0)
(4.6)
78.6
85.8
(2.5)
(1.8)
(3.5)
84.0
90.2
(2.0)
(2.5)
(2.1)
87.2
93.5
(1.5)
(2.5)
(1.6)
88.5
94.8
(0.7)
(2.1)
(1.2)
88.5
94.8
0.1
(1.6)
(0.9)
87.5
93.7
0.9
(1.1)
(0.4)
85.4
91.7
1.7
(0.6)
(0.0)
82.5
88.8
(1.6)
3.1
(3.5)
87.1
103.3
(2.7)
1.6
(3.8)
89.3
106.1
(5.4)
(3.7)
(4.1)
97.9
116.4
(4.3)
(1.9)
(3.6)
100.0
119.3
(3.7)
(1.8)
(3.5)
102.6
120.8
(2.9)
(3.4)
(1.3)
106.1
127.0
(3.2)
(4.8)
(0.2)
110.5
132.3
(2.1)
(4.0)
(0.0)
111.2
133.1
(1.8)
(3.2)
(0.0)
110.1
131.8
(1.1)
(2.1)
(0.0)
108.0
129.3
(0.5)
(1.1)
0.0
105.4
126.2
(0.2)
(0.4)
0.0
102.8
123.0
(2.1)
0.7
(2.2)
80.5
183.0
(4.1)
(1.0)
(3.6)
95.3
191.8
(10.4)
(6.7)
(7.5)
106.2
210.2
(9.3)
(2.7)
(7.9)
113.1
216.0
(9.9)
(3.6)
(8.5)
127.4
230.3
(10.1)
(2.2)
(9.2)
133.5
238.0
(9.5)
(0.9)
(9.2)
139.9
243.5
(6.8)
(0.5)
(6.7)
141.8
242.3
(5.7)
(0.3)
(5.7)
144.0
242.4
(5.0)
(0.1)
(5.0)
145.9
242.3
(5.1)
0.0
(5.1)
147.2
241.4
(5.6)
0.0
(5.6)
147.8
241.1
(2.8)
3.7
(5.3)
38.4
43.7
(5.0)
1.7
(6.6)
48.0
51.9
(11.3)
(2.1)
(10.3)
62.4
67.1
(10.0)
(1.8)
(8.4)
72.2
78.5
(7.8)
(2.5)
(6.0)
76.8
84.3
(7.9)
(2.9)
(5.8)
81.6
88.8
(6.1)
(2.7)
(4.0)
84.8
92.1
(5.8)
(2.4)
(3.9)
88.0
95.3
(4.9)
(2.1)
(3.2)
90.6
97.9
(3.7)
(1.8)
(2.3)
91.2
98.5
(2.7)
(1.5)
(1.5)
90.9
98.2
(2.0)
(1.0)
(1.2)
89.4
96.7
Source: IMF – World Economic Outlook- Oct-13
Page 29
4 April 2014
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Table 4 : International Macroeconomic Forecast –fiscal balances cont.
General Government Fiscal Balances and Debt
Canada
Net Lending/Borrowing
Output Gap
Structural Balance
Net Debt
Gross Debt
Spain
Net Lending/Borrowing
Output Gap
Structural Balance
Net Debt
Gross Debt
Portugal
Net Lending/Borrowing
Output Gap
Structural Balance
Net Debt
Gross Debt
Ireland
Net Lending/Borrowing
Output Gap
Structural Balance
Net Debt
Gross Debt
Greece
Net Lending/Borrowing
Output Gap
Structural Balance
Net Debt
Gross Debt
China
Net Lending/Borrowing
Output Gap
Structural Balance
Net Debt
Gross Debt
Brazil
Net Lending/Borrowing
Output Gap
Structural Balance
Net Debt
Gross Debt
Russia
Net Lending/Borrowing
Output Gap
Structural Balance
Net Debt
Gross Debt
India
Net Lending/Borrowing
Output Gap
Structural Balance
Net Debt
Gross Debt
South Africa
Net Lending/Borrowing
Output Gap
Structural Balance
Net Debt
Gross Debt
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
1.5
1.7
0.5
22.9
66.5
(0.3)
0.9
(0.9)
22.4
71.3
(4.5)
(3.1)
(2.7)
27.7
81.3
(4.9)
(1.5)
(4.0)
29.7
83.1
(3.7)
(0.8)
(3.2)
32.4
83.5
(3.4)
(0.9)
(2.8)
34.7
85.3
(3.4)
(1.3)
(2.6)
36.5
87.1
(2.9)
(1.3)
(2.2)
38.0
85.6
(2.3)
(1.0)
(1.8)
38.8
84.9
(1.8)
(0.5)
(1.5)
38.9
84.0
(1.4)
(0.2)
(1.3)
38.6
82.8
(1.4)
(0.1)
(1.3)
38.4
81.7
1.9
3.3
(1.1)
26.7
36.3
(4.5)
2.2
(5.3)
30.8
40.2
(11.2)
(2.3)
(9.3)
42.5
54.0
(9.7)
(2.5)
(8.1)
50.1
61.7
(9.6)
(2.2)
(8.1)
58.6
70.4
(10.8)
(3.6)
(6.3)
73.5
85.9
(6.7)
(4.2)
(4.9)
80.8
93.7
(5.8)
(3.6)
(4.3)
85.8
99.1
(5.0)
n/a
(3.5)
88.9
102.5
(4.0)
n/a
(2.8)
90.8
104.6
(3.0)
n/a
(2.1)
91.9
105.5
(2.0)
n/a
(1.4)
91.8
105.1
(3.2)
1.9
(4.2)
63.7
68.4
(3.7)
1.3
(5.4)
67.5
71.7
(10.2)
(1.5)
(9.2)
79.7
83.7
(9.9)
(0.3)
(9.0)
89.6
94.0
(4.4)
(1.6)
(6.6)
97.9
108.4
(6.4)
(3.9)
(4.0)
112.4
123.8
(5.5)
(4.5)
(3.4)
117.5
123.6
(4.0)
(3.8)
(1.9)
119.3
125.3
(2.5)
n/a
(1.3)
118.4
124.2
(2.0)
n/a
(1.4)
116.0
121.6
(1.7)
n/a
(1.5)
113.4
118.8
(1.4)
n/a
(1.4)
110.8
116.0
0.1
6.6
(8.7)
10.5
24.9
(7.3)
3.6
(11.9)
21.2
44.2
(13.8)
(3.0)
(9.9)
38.6
64.4
(30.5)
(3.8)
(8.3)
70.4
91.2
(13.1)
(1.7)
(7.0)
85.1
104.1
(7.6)
(1.7)
(5.9)
92.8
117.4
(7.6)
(1.8)
(5.1)
105.5
123.3
(5.0)
(1.2)
(3.6)
107.9
121.0
(2.9)
n/a
(2.2)
107.0
118.3
(2.4)
n/a
(2.1)
105.3
116.2
(2.0)
n/a
(2.0)
103.0
113.6
(1.7)
n/a
(2.0)
99.6
109.8
(6.8)
10.0
(10.8)
106.9
107.2
(9.9)
9.9
(14.3)
112.4
112.9
(15.6)
7.3
(19.1)
129.3
129.7
(10.8)
3.3
(12.3)
147.4
148.3
(9.6)
(2.6)
(8.3)
168.0
170.3
(6.3)
(7.7)
(2.6)
154.8
156.9
(4.1)
(10.7)
0.6
172.6
175.7
(3.3)
(9.5)
1.1
172.6
174.0
(2.1)
n/a
0.9
165.5
168.6
(0.7)
n/a
1.2
158.2
160.2
(0.6)
n/a
0.5
148.2
151.0
(0.8)
n/a
(0.4)
139.9
142.6
0.9
1.0
19.6
(0.7)
(0.5)
17.0
(3.1)
(2.6)
17.7
(1.5)
(0.9)
33.5
(1.3)
(0.2)
28.7
(2.2)
(0.9)
26.1
(2.5)
(1.2)
22.9
(2.1)
(1.0)
20.9
(1.5)
(0.6)
19.3
(0.9)
(0.2)
17.7
(0.3)
0.1
15.7
0.4
0.4
13.5
(2.7)
(3.0)
45.1
65.2
(1.4)
(2.1)
38.0
63.5
(3.1)
(2.7)
41.5
66.8
(2.7)
(3.8)
39.1
65.0
(2.5)
(3.0)
36.4
64.7
(2.7)
(2.7)
35.2
68.0
(3.0)
(3.0)
34.0
68.3
(3.2)
(3.2)
34.3
69.0
(2.3)
(2.3)
34.1
68.8
(2.4)
(2.4)
33.8
68.4
(2.3)
(2.3)
33.6
67.5
(2.2)
(2.2)
33.4
66.7
6.8
6.1
8.5
4.9
3.9
7.9
(6.3)
(3.2)
11.0
(3.4)
(1.9)
11.0
1.5
1.9
11.7
0.4
0.3
12.5
(0.7)
(0.5)
14.1
(0.3)
(0.1)
14.6
(0.7)
(0.6)
15.1
(1.4)
(1.4)
15.3
(1.5)
(1.5)
15.4
(1.5)
(1.5)
15.5
(4.4)
(4.8)
74.0
(10.0)
(9.5)
74.5
(9.8)
(9.5)
72.5
(8.4)
(9.0)
67.0
(8.5)
(9.1)
66.4
(8.0)
(8.1)
66.7
(8.5)
(8.2)
67.2
(8.5)
(8.2)
68.1
(8.3)
(8.1)
67.8
(8.2)
(8.1)
67.4
(8.1)
(8.1)
67.3
(8.0)
(8.0)
67.3
1.4
(1.2)
24.0
28.3
(0.4)
(2.4)
22.9
27.8
(5.5)
(3.4)
26.3
31.3
(5.1)
(3.6)
29.4
35.8
(4.0)
(4.1)
32.5
39.6
(4.8)
(4.3)
35.6
42.3
(4.9)
(4.3)
38.2
43.0
(4.7)
(4.2)
40.4
44.7
(4.1)
(3.9)
41.9
46.2
(3.8)
(3.8)
42.3
46.8
(3.7)
(3.7)
42.5
47.0
(3.5)
(3.6)
42.4
47.0
Source: IMF – World Economic Outlook-Oct-13
Page 30
4 April 2014
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2
Table 5 : Domestic Macroeconomic Forecast
Units
Real GDP growth
%
Current account balance
% of GDP
CPI (headline)
Reuters Consensus: Feb-14
Q1:14 Q2:14 Q3:14 Q4:14
Q1:15
Q2:15
Q3:15
2014
2015
2016
2.20
2.40
2.60
2.90
2.90
2.90
3.00
2.40
2.90
3.20
-5.80
-5.70
-5.60
-5.40
-5.30
-5.30
-5.20
-5.60
-5.10
-5.20
% YoY
5.80
6.10
6.00
6.10
5.70
5.60
5.50
6.00
5.60
5.50
PPI (all items)
% YoY
6.60
6.80
6.60
6.60
6.00
5.70
5.80
6.60
5.90
5.50
Repo rate (end-of-period)
%
5.70
6.00
6.10
6.10
6.40
6.50
6.60
6.20
6.60
6.70
R208 (end-of-period)
%
8.40
8.50
8.50
8.50
8.60
8.60
8.60
8.60
8.60
8.70
11.00
10.80
10.70
10.50
10.40
10.30
10.20
10.50
10.00
9.90
R/US$ (end-of-period)
Source: BER, Reuters
Definitions:
Real GDP growth: seasonally adjusted and annualised quarter-on-quarter percentage change;
Current acc balance: Balance on the current account of the Bop, seasonally adjusted and annualised (R billion);
CPI (headline): year-on-year change in unadjusted all-items CPI index (average for the period);
PPI: year-on-year change in unadjusted all-items PPI index (average for the period);
Repo: Rate at which commercial banks borrow from the SARB (at end of period);
10y bond (R208): R208 government bond yield (at end of period);
R/US$: Rand per US dollar exchange rate (at end of period).
Note: ZAR/USD not updated in Feb-14 so carried forward from Jan-14 survey.
Page 31
4 April 2014
Monthly Equity Strategy – Macro and Investment Theme Analysis Part 2