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JOHANNESBURG - Currently, the global macroeconomic cycle and especially in the U.S. is currently at the late cycle stage. While we all know that the South African economy mostly missed out on the global upswing due to various factors it is necessary to put it into perspective and look further out. 

I calculated the behaviour of some important South African economic indicators over the various stages of the macroeconomic cycle from 1995 to 2018, where I defined the stages as follows: In the early cycle of the upswing the U.S. PMI rises above 50 but stays below 55. 

When growth accelerates to reach the late cycle of the expansion the PMI rises above 55 and stay raised. When the growth rate stalls, the PMI drops below 55 but stay above 50. Recessionary conditions exist when the PMI drops below 50.

The annualised average monthly performances of the economic indicators given the stage in the global macroeconomic cycle were calculated for the nominal effective exchange rate, business confidence, the JSE All Share Index, the JSE Financial and Industrial Index, the gold price in terms of rand. 

The returns on 3-month cash deposits were also calculated. Absolute changes were calculated in the South African 10-year government bond index, the CPI inflation rate, 3-month BA rate and the 10-year government bond yield gap between South Africa and the U.S., respectively for the different stages of the macroeconomic cycle. 

It was interesting to note that the rand held its own during the current cycle which started in January last year. 

The rand’ annualised monthly return was 3.1% compared to 2.2% during all late cycles. 

The CPI inflation rate change with minus 1.3% was also in line with previous late cycles while the S.A. 10-year bond yield and the gap between S.A. and U.S. 10-year government bonds and the yield on cash deposits were roughly in line with all late cycles.

Business confidence with an annualised monthly growth rate of 1.8% significantly fell short of the average of 4.6% in all late cycles. It was echoed by the BER Purchasing Managers Index’s average reading of 48 which came in much lower than the average of 52 in all late cycles. The JSE returns were also significantly lower with the JSE All Share Index’s annualised monthly growth rate of 14.5% compared to 23.7& in all late cycles.

The jury is still out on when the slowdown stage in the macroeconomic cycle will begin. It does not auger well for the domestic economy, though. 

On average, during previous slowdown cycles the rand’s annualised growth rate fell to minus 11.7%, the inflation rate moved 0.5% higher, business confidence contracted by an annualised monthly rate of 5.1%, the 3-month BA rate moved 1.2% higher while the gap between S.A. and U.S. government bonds widened. 

The return on cash deposits also increased to 8% in slowdown stages.

How the JSE will perform is a mystery. In all previous slowdown stages the annualised monthly growth rates of ALSI and Financial & Industrial Indices came in more than 17% and 19% respectively. 

The annualised monthly growth rates of the JSE sectors during the current late cycle stage is a mixed bag and considerably differ from what would have been expected during all previous late cycles. 

The only sectors that came close to the previous cycles was consumer services and basic materials. Taking a cue from all previous slowdown stages in the macroeconomic cycle, consumer goods, real estate and general industrials could lead the way.

In regard to other assets available to South African investors, the annualised monthly growth rates of emerging market equities, S.A. bonds (All Bond Index), developed world equities, global consumer staples and global bonds in the current late cycle stage are roughly in line with all late cycles. 

Therefore I have more confidence in the ranking and annualised monthly growth rate numbers recorded in previous slowdown stages in the macroeconomic cycle. 

Global consumer staple equities, global bonds and gold bullion are likely to catch the local investor’s eye. 

British American Tobacco PLC is an excellent proxy for the MSCI Global Consumer Staple Index and is currently at a 5-year low against the JSE All Share Index and at a 7-year low against the JSE Financial & Industrial Index. On the global bond side, the U.S. 10- year government bond is trading at yields last seen in January 2014. 
“There’s gold in them thar hills” – Mark Twain

Ryk de Klerk is an independent analyst Contact