Absa commentary on possible outcomes

Absa commentary on possible outcomes

Commentary from Craig Pheiffer: Chief Investment Strategist, Absa Stockbrokers & Portfolio Management

  • While it is true that consumer confidence is at a low point, the economy is barely growing and household credit growth is sluggish, the retail sales numbers have confounded most for the duration of this year.
  • Real retail sales growth (i.e. after taking inflation into account) swung from a 1,7% y/y contraction in January to last month’s growth number of +5,4%.
  • One could try and explain this by considering that lower inflation improved real disposable incomes and also that the tiny rate cut of 25 basis points provided an additional small tailwind for consumer spending. 
  • It would have been fair to expect a tapering off of consumer spending in the current environment but the consumer appears to be fairly resilient at present and a dramatic slowdown isn’t expected.
  • As with last year, however, one would expected that consumer spending for the festive period would be front-loaded in November rather than December.
  • The rising popularity of Black Friday domestically is making a noticeable difference in the shape of spending over year-end and it’s highly likely that many of those festive gifts are going to be purchased this week rather than just before the festive period begins.

ADDITIONAL COMMENTARY: Jacques du Toit, Property Analyst, Absa Home Loans

  • There is currently a lot of uncertainty and speculation regarding the political environment and the country’s credit rating, with some rating agencies expected to announce their decisions and views at the end of the week.
  • If these factors are to deteriorate further and/or levels of uncertainty continue and increase towards year-end, consumer confidence and consumption are to remain under pressure and may be negatively affected over the festive season.
  • With this week’s macro focus on credit ratings and monetary policy, the SARB’s business cycle indicators for September are unlikely to attract much market attention but these may still offer interesting clues on the near-term outlook for economic activity.

ADDITIONAL COMMENTARY: Kwaku Koranteng: Head Asset Consulting, Absa Consultants and Actuaries

  • This week marks an important milestone in the South African economy with :

Rating reviews by the rating agencies against a challenging economic, fiscal and political backdrop

A Monetary Policy Committee meeting to decide on the future of short term interest rates

  • Against a  background of a high possibility of a foreign and possible local currency rating downgrade to junk status, and an uncertain interest rate outlook with the a chance of interest rates remaining on hold, retirement savings investors could naturally  be concerned about the future of their retirement savings. Whilst these are troubling times for the local economy, the outcome of these two events may not necessarily  have a significantly  adverse impact on the average South African retirement investor, but the future cannot predicted with certainty.
  • Retirement savings advice by Absa Consultants and Actuaries follows a long term and robust  framework that avoids timing markets and recognizes that the local and global economy can  go through negative economic and political events over time.
  • In addition it should be remembered that :

Markets often  anticipate and price in  future vents before they actually happen, which is the case with bond markets prior to any announcement this week.

The foreign currency denominated debt which constitutes 10% of the country’s total debt remains the most vulnerable to a downgrade to junk status.

Local currency ratings are vulnerable but the majority of South African investors invest in local bonds which are highly rated on the national ( not international) scale ratings.

Rand vulnerability and weakness  often generates positive returns for our local equity  markets via for example rand hedge shares and companies with offshore earnings

  • Bearing in mind the factors mentioned above, the investment principles of having a long term view in mind, diversification across securities, economic sectors, asset classes, geographical regions and currencies remain as important as ever.
  • In addition maintaining the discipline of adequate contribution to the individual’s chosen retirement savings vehicle provides a higher chance of  an individual meeting their long term retirement goals.
  • While retirement  investors should not be complacent given these prospective developments during the week as we investors may experience  heightened market  volatility.
  • However, they should be focused on the longer term retirement planning and ensuring that their level of savings contributed towards retirement planning remains adequate.