Market Survey March 2014

It is true that these movements took place against the backdrop of a slowly improving or recovering world economy, with specifically the USA at the forefront. Still, US growth figures were disappointing in January, but that could be due to the extremely cold weather the US experienced. Since then, we have seen some encouraging figures from the US with job creation and PMI figures improving slightly. The same can be said about Europe, although deflationary conditions are still a factor to be reckoned with.

The Chinese economy continues to slow down as the Yuan starts to weaken for the first time in many years. In Japan, most benefits of the sharp depreciation in its exchange rate have not yet resulted in proper economic growth and further help to the economy may be needed.

While emerging markets are the most inexpensive, with Russia being the cheapest market in the world by far, recent events in the Ukraine again just confirmed that the market is mostly correct in its "judgement” of a region’s prospects.

In South Africa, the "Minister of the Budget” delivered a fairly uninspiring budget speech, perhaps because he would have preferred not to do it in an election year, but did not have much of a choice.

The budget was presented against a backdrop of an economy that is rapidly deteriorating with consumers under pressure due to limited salary increases, higher petrol prices, e-tolling, rising electricity tariffs and a general level of too much debt. This left the minister with little room to move. On top of that, credit rating agencies are watching the stability of SA’s public finances like a hawk.

In light of this, the surprise of the budget was perhaps the fact that there were so little surprises.

From a macro-economic stability viewpoint, the goal of a 4% budget deficit was the best that could be expected in current circumstances.

On the revenue side, the Minister’s hand was tied due to sluggish economic growth in the country, while on the expenditure side there was a reasonable mention of future spending on welfare. The changes that were announced were actually just inflation adjustments.

The real surprise, however, came for people wishing to retire, in the sense that they can now withdraw R500 000 of their retirement funds, tax free. This is a positive development for people who are retiring and wish to withdraw a reasonable amount from their retirement funds.

Everything suggests that the rand is currently too weak. Again, I think that the situation with regards to the shortages is already discounted in the weaker rand. Based on purchasing power parity, the rand might perhaps be undervalued by 15%, but might struggle to win everything back due to the fragile economy and low confidence levels.

Nonetheless, the stock market performed well over the past year. The result was a high PE, but profits are expected to rise thanks to the poor exchange rate which will normalise the market valuation again. However, from a foreigner’s viewpoint the exchange had a poor performance over the past year. Foreigners can see the oversold situation in our market as a buying opportunity, especially if the negative sentiment regarding the "fragile five” should change. The danger is that South Africans will sell their shares at the wrong time and miss out on an opportunity, again.