Super cycle and rand good for equities
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Global economic prospects remain bullish as many countries expect a strong surge in GDP growth rates for 2021.
These expectations boost the current super cycle for commodity prices. Foreign demand for South Africa’s commodities and exports had increased the trade surplus in June to another record level of R57.7 billion. This foreign demand, together with the weaker rand, led to equity prices on the JSE to continue their weekly gains.
A new record level of for the ALSI for 2021 of 69 565 was reached on Thursday after three days of sharp increases in especially resources, rand hedging industrial shares and the recovery in the price of Naspers. This new record level for the year had put the ALSI on JSE on Thursday up by 10 156 (17.1%) since the opening at the beginning of the year. On Wednesday evening the US Federal Reserve announced at a press conference that it will keep the bank rate near zero as the Fed forecasts that the US economy will continue to recover quickly despite concerns over Covid-19. This expectation was confirmed on Thursday when the US announced that its economy had grown by 6.5% in Q2 2021. Personal consumption expenditure had grown by an annualised 11.8% over the quarter.
Together with the bullish stance by the Fed, the healthy economic recovery and a surge in listed company earnings on Wall Street, US equities once again recorded record levels last Thursday. Earnings for the year of 89% of companies on Wall Street outperformed expectations and 87% had beat revenue forecasts. On Friday, despite favourable data showing that US consumer spending rose more than expected in June, equities on Wall Street traded lower as Amazon’s Q2 revenue was far less than expected.
The stronger rand, the retreat in US tech stock, the drop in European equities from a record high and the retreat in share prices in Asia after a renewed regulatory tightening in China had a big negative effect on the JSE on Friday. Most indices were sold off and decreased around 1.0%. This sell-off was led by the price for Naspers and Prosus that lost 1.3% and 1.2% for the day respectively.
For the week the ALSI gained 907 points (1.3%) to close on 68 970. This is the record weekly close for the index in 2021. The Resources 10 index ended the week 5.62% in the green, and has now gained 9% over the last two weeks. Given the stronger rand and the sharp drop in Naspers on Friday, the Industrial 25 index lost 1.6% over the week, while financial shares (0.8%) and listed property (0.6%) gained marginally.
The rand exchange rate recovered somewhat last week with the currency appreciating against the dollar with 23 cents (R14.59) against the pound with 8 cents (R20.30) and with 12 cents against the euro (R17.31). On the capital markets rates remained flat with the R186 short-term bond gained 0.13% as the rate moved marginally lower from 7.35% to 7.34%.
This coming week investors and analysts will concentrate on the release of South Africa’s total new vehicle sales for June, and the IHS Markit Purchases Managers’ Index (PMI) for July. Absa will also release its manufacturing PMI for July.
On global markets all attention will be on the July job data (non-farm payrolls) for the US that will be released on Friday. During the week most developed countries will publish their various PMI data for July and retail sales for June. The Bank of England will announce its latest interest rate decision on Thursday.
Chris Harmse is the economist of CH Economics (Pty) Ltd.
BUSINESS REPORT ONLINE