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Economic and market overview - July 2019


The US-China trade war dominated global news in June as Presidents Trump and Xi continued to spar around trade tariffs and company sanctions. At the G20 Summit that took place in Japan during the last weekend of the month, the two statesmen agreed to resume trade talks. According to BBC News, this eased a long row that has now contributed to a slowdown in the global economy. Mr Trump said he would allow US companies to continue to sell to the Chinese tech giant Huawei, in a move seen as a significant concession. He also confirmed that the US would not be adding tariffs on $300bn worth of Chinese imports, and that he would continue to negotiate with Beijing "for the time being".

On the political front, the election of a new Conservative Party leader (and by implication new British Prime Minister) enjoyed a lot of interest with Boris Johnson and Jeremy Hunt chosen as the two candidates. Their somewhat differing views on Brexit may well be the deciding factor in the end. The 160 000 members of the Conservative Party will submit their votes from 6 July and as it stands, Johnson is most likely to be announced as the UK’s next Prime Minister on 22 July.

The U.S. Federal Reserve held interest rates steady at their June meeting but signalled possible rate cuts of as much as half a percentage point over the remainder of this year, as it responded to increased economic uncertainty and a drop in expected inflation. This is in stark contrast to just a year ago where several increases were still in the pipeline. If these rate cuts occur, it has the potential to weaken the Dollar against its trading partners’ currencies. A weaker dollar can make dollar funding easier and cheaper to obtain for US corporates. Along with a potential trade agreement between the US and China, this can help them to expand internationally and develop their supply chains. A weaker dollar can also encourage investment in developing countries and improve the terms of trade of commodity exporters. All of this tends to increase both global trade and global economic growth. Most importantly, this (coupled with a rising equity market) would strengthen President Trump’s hand as he aims to win a second US presidential term.

In such a scenario, global multi-asset portfolios should retain significant exposure to growth assets (equities, property and credit) as these are likely to outperform the safer havens of global bonds and cash.

South Africa

Economic growth at the southern tip of Africa continues at a pedestrian pace, at best. The well-publicised levels of unemployment, operational and financial struggles of state-owned enterprises, a lack of business and consumer confidence and relatively high real interest rates, all act as headwinds to a resurgence in economic activity. According to Kevin Lings of Stanlib, the shock 3.2% quarter on quarter decline in South African GDP, together with the subdued inflation data (especially core inflation), makes a strong argument for the South African Reserve Bank (SARB) to cut interest rates soon. Local inflation is still forecast to drift higher over the coming months, rising briefly above 5.5% in the first quarter of 2020. While this could encourage the Reserve Bank to keep rates on-hold in the short-term, adopting a “wait-and-see” approach to monetary policy, the pending sharp reduction in the petrol price, subdued core inflation, the weak domestic economy and dovish statements from the Federal Reserve and European Central Bank could entice the SARB’s Monetary Policy Committee to reduce rates by 0.25% in July.

In what can be described as a somewhat disappointing State of the Nation Address in June. President Ramaphosa listed five fundamental goals for the next decade, namely:

  • No person in South Africa will go hungry
  • The economy will grow at a much faster rate than the population
  • Two million more young people will be in employment
  • Schools will have better educational outcomes and every 10-year-old will be able to read for meaning
  • ​Violent crime will be halved.

He also announced additional funding for Eskom in 2019 and intends to front load the R230 billion fiscal support that was promised over the next ten years.

The independence of the Reserve Bank was also re-affirmed with the President highlighting that the Reserve Bank must pursue its constitutional mandate independently, without fear, favour or prejudice. Lastly the issue of land expropriation without compensation was discussed but with no further clarification.

Among all the doom and gloom, it’s perhaps useful to note that the time to have been most concerned about South Africa was ten years ago. The challenges we deal with today are the result of decisions made a decade ago. The silver lining is that the South African government has made a start in dealing with most of these challenges, and this may yet turn out to be the unfolding of a multitude of opportunities.


Market performance

According to Granate Asset Management, financial markets had a very strong month buoyed by dovish central banks and optimism about a possible positive resolution of trade negotiations. This performance came against a backdrop of generally softer economic data in both emerging and developed markets.

Lower growth and inflation, as well as a likely reduction in policy rates, have driven the US 10-year treasury bond below 2% for the first time since 2016. The positive global backdrop supported South African bonds which, despite foreign selling, had a strong month which helped the asset class to deliver a return of 7.6% year to date.

South African equities also recovered in June after its dismal performance in May and the broad FTSE/JSE All Share index ended the month nearly 5% higher. Nine of the top ten performers among the larger companies came from the resources sector – both for the month of June and the year to date. Impala Platinum (+90%) and Kumba Iron Ore (+84%) have had a spectacular recovery in 2019, while Sappi (-31%), Netcare (-30%) and Aspen (-26%) have struggled so far this year. For the last 6 months, the All Share Index has added 12.2%.

Listed property had a positive month (+1.6%) and is now in the green (+3.2%) from the start of the year.

The Rand gained territory against most major currencies and is now around 2% stronger against the US Dollar, Euro and Pound Sterling when compared to its 1 January levels. 

South African Multi-Asset High Equity Funds delivered an average of 3.4% to investors during the last 12 months with their low equity counterparts ending 5.7% higher.

Commentary – Less talk and more action

South Africa has the second largest economy in Africa (after Nigeria) with an annual gross domestic product that will likely be between R5 trillion and R5.5 trillion in 2019. This makes South Africa the 32nd largest economy in the world. Of the total economic output, agriculture makes up a surprisingly small portion of around 3% (about R150 billion).

It is, however, true that good things often come in small packages. In a country where there’s more than enough doom and gloom, it was particularly refreshing to learn how some of our citizens already figured out a way to overcome the very sensitive issue of land redistribution to the economic benefit of all involved. We came across this story of less talk and more action in the most unlikely of places – the 2019 NAMPO Harvest Day.

Organised by Grain South Africa, NAMPO Harvest Day (it should really be called a Harvest Week) is presented annually during May and is the largest privately organised agricultural event of its kind in the Southern Hemisphere. In 2019, more than 80 000 visitors attended this four-day trade show. The NAMPO Park Exhibition Site is situated about 20 km north of Bothaville in the North-eastern Free State. It provides a unique opportunity to all manufacturers and distributors of agricultural machinery, products and services to exhibit and demonstrate a vast range of agricultural products to targeted customers (and curious city dwellers alike). After the land reform debate, drought and low grain prices of the past year, the joviality and positive attitude of producers were noticeable. “It is noteworthy that the uncertainty is less than last year. I noticed a solution and growth-driven attitude among producers,” said Jaco Minnaar, chairperson of Grain SA.

It’s at NAMPO’s “Nation in conversation” recording studio where we learnt about the amazing progress that’s been made in agriculture with respect to land issues. We highlight one of these initiatives below. It lights the way for other industries (such as mining and manufacturing), that contribute far more to South Africa’s economic development, to overcome challenges of the past to unlock exponential growth.

Sinelizwe Fakade is a rural development specialist for Grain SA in the Eastern Cape. The challenge that he and his team faced is the inferior crop productivity on communal land farmed by subsistence farmers when compared to that of commercial farmers. One of the advantages that the commercial farmers have is that they can borrow against the security of the land they own, whereas small traditional producers typically don’t individually own the land and therefore have very little security to ensure a production loan. This leads to low crop productivity and sub-optimal use of land which results in a lack of economic development.

Grain SA started a mentoring program and in Sinelizwe’s region there are now more than 4 000 traditional farmers that form part of this program. Through training, supervision, mentoring and partnerships with commercial farmers, they’ve been able to increase the yields on their crops from one or two tonnes per hectare to between four and five, which in some cases is ahead of typical commercial yields. In very practical terms, they assisted the communal farmers with soil testing, improved planting techniques, appropriate fertiliser and pesticide use, mechanised harvesting and distribution to markets that were previously inaccessible to them. They also came up with an alternative funding plan that uses the expected crop rather than physical land as security against loans.

The most important aspect of Sinelizwe’s project is to get the buy-in of traditional leaders, subsistence farmers and community members alike. It took some time to build trust among all the role players that this initiative is designed for the greater good, but once all stakeholders were on board they’re smiling when they reap the rewards.

Without changing land ownership or traditional leadership structures, Grain SA, along with its many private and public partners, have managed to turn traditional farming into a commercial setup that can compete on a national stage. They’ve done this in the belief that a solution exists, and if their plans are transparent and benefits all involved, the project will sustain its momentum.

In the bigger scheme of South Africa’s R5 trillion economy, this may not move the needle much. It may, however, inspire many others to try and find a way in their industry to overcome what seems to be insurmountable challenges to kickstart spectacular growth. It was Victor Marie Hugo, the French author, that said: “On résiste à l'invasion des armées; on ne résiste pas à l'invasion des idées”. This can be paraphrased as “There is one thing stronger than all the armies in the world, and that is an idea whose time has come.”

Perhaps the future of South Africa’s economic success lies in more than just the big decisions facing President Ramaphosa. There may just be a chance that it lies in the small contribution from each one of us.