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Since 2015 South Africa experienced a net outflow of foreign holdings of SA equities as risks have been perceived to be heavily tilted to the downside. Specifically, economic growth has been weak to contracting, credit rating downgrades have occurred on deteriorating government finances, and the poor fiscal health of many major state-owned entities has required assistance from the government purse.
With the country now in a run-up to the national election in 2019, and the ANC’s presidential election at the end of this year, little is expected to change to meaningfully accelerate GDP growth, and weak outcomes are forecast, with foreigners likely to continue to sell off their equity holdings on a net basis.
Market sentiment could improve substantially if the newly elected leader of the ANC is favoured by the markets.
JSE performance
The JSE has seen a positive performance over the last six months, evincing a total return of 5.0% over the period before, or 7.6% from open to close (end March to September 2017) – despite the foreign net sell-off of domestic equity holdings to the value of R49bn over the period.
The JSE lifted from 52 233 to 55 580, and with a 25bp cut in the repo rate in July, optimism rose on the expectation that SA had entered a shallow interest rate cut cycle. The lift in global markets over the six month period also assisted the JSE, with the general trend one of risk-on, and hence equity positive sentiment on global bourses.
Domestic debt
On the domestic debt front, government bonds remained recipients of the global risk-on trend into emerging market debt, with net foreign purchases of R40.9bn over the period.
The rand traded in a tighter range than it has done in other periods historically (ranging between a high of R13.96/USD, R15.94/EUR, R18.32/GBP and a low of R12.56/USD, R13.87/EUR R16.07/GBP), with the lower volatility of the domestic currency likely having proved helpful to the JSE over the period.
While SA has seen a recent recovery in economic growth (of 2.5% on the quarter, annualised, in Q2.17), led by the cessation of drought in many areas of the country, this rebound is anticipated to be temporary and the year is still set to record growth of below 1.0% y/y.
A gradual rise in economic growth is anticipated out to 2022, reaching a still weak 2.0%. The risks are seen to remain tilted to the downside, with a 54% chance currently of further credit rating downgrades, contractions in GDP and depressed investor sentiment. However, the outcome of the ANC elective conference this December could yet prove a game changer to this negative tilt (probability) of the domestic risk outlook.
Investec Chief Economist on IMF growth forecast for South Africa
Investec Chief Economist on IMF growth forecast for South Africa
About the author
Annabel Bishop
Chief Economist of Investec Ltd
Annabel holds an MCom Cum Laude (Economics and econometrics) and has worked in the macroeconomic, risk, financial market and econometric fields, among others, for around 25 years. Working in the economic field at Investec, Annabel heads up a team, which focusses on the macroeconomic, financial market and global impact on the domestic environment. She authors a wide range of in-house and external articles published both abroad and in South Africa.
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