MACRO-ECONOMIC OVERVIEW Johann Els Senior Economist at Old Mutual Investment Group
EXECUTIVE SUMMARY Global recovery slow with considerable regional differences Inflation remains low, thus global policy expansionary US rate hikes to start, but slow, moderate cycle Commodity prices remain under pressure Difficult environment for EM s SA Economy in a slow growth bind Inflation remains well contained Moderate further rate hikes Current account deficit to narrow Rand at risk from US rate hikes BUT it is not all bad news: 215 still somewhat better than 214 PLUS trade & current account improvement & OK inflation should help Rand and keep interest rate cycle moderate 2
MAIN MACRO THEMES FOR THE REST OF 215 Global Goldilocks? SA suffers China transition Low return world 3
Goldilocks?
GLOBAL GROWTH UNEXCITING, BUT 6 4 Real World GDP growth (y-o-y % ch) 199 214 ave Excl 28/9 6 4 2 2-2 -2-4 9 93 96 99 2 5 8 11 14-4 5
GLOBAL GROWTH GEOGRAPHICAL DIFFERENCES Composite Purchasing Managers Indices (combined manufacturing & services) 6 US Europe 7 55 5 45 4 6 5 4 35 5 7 9 11 13 15 5 7 9 11 13 15 3 54 China Global (JPM) 65 52 55 5 45 48 5 7 9 11 13 15 5 7 9 11 13 15 35 6
GLOBAL INFLATION REMAINS VERY LOW 1 1 China 8 6 4 US Euro area USA & Euro Inflation target China target 8 6 4 2 2-2 2 4 6 8 1 12 14 16-2 7
GLOBAL INTEREST RATES EXPANSIONARY POLICIES A few exceptions 6 % % 18 Brazil 15 4 New Zealand 2-2 Denmark Switzerland Australia Korea UK Israel US Euro Japan Sweden 1 12 14 16 Russia Turkey Indonesia India SA China Poland Hungary Thailand 1 12 14 16 1 5 8
US LOW INFLATION REMAINS A CONCERN FOR FED PCE deflators 6 Total Total 6 Core Core 4 4 2 2-2 9 95 5 1 15 5 7 9 11 13 15-2 9
US: STRONG DOLLAR COULD KEEP INFLATION LOW US Dollar (y-o-y % ch) 3 Import prices (y-o-y % ch) 3 2 2 1 1-1 -1-2 -2-3 2 4 6 8 1 12 14-3 1
US: STRONG DOLLAR IMPACTING ON EXPORTS & ECONOMY Growth in US exports 3 ISM manufacturing export orders 7 2 6 1 5-1 4-2 -3 US Dollar (y-o-y % ch) 2 4 6 8 1 12 14 3 11
US: FED S HIKING CYCLE LIKELY SLOW, MEASURED 7 6 US policy interest rate Core inflation Unemployment rate (inverted scale) 3 4 5 5 4 6 3 7 2 8 1 9 2 4 6 8 1 12 14 16 1 12
FED S EXPECTED RATE PROFILE FLATTER THAN PREVIOUS CYCLES 216 & 217 y-end median forecast lowered 1 8 Fedfunds rate FOMC forecast for year end fedfunds rate 215 216 217 Sept '14 1.4 2.9 3.8 Dec '14 1.1 2.5 3.6 Mar '15.625 1.875 3.3 Median projection of FOMC members Sep 214 meeting Dec 214 meeting March 215 meeting June 215 meeting 4 3 6 Jun'15.625 1.625 2.875 4 2 Median projection of FOMC members (June meeting) 2 1 9 92 94 96 98 2 4 6 8 1 12 14 16 13 15 17 13
China transition
CHINA LOOKS WEAK Some recovery in May & June IP growth 3 25 Apr: 5.9% yy May: 6.1% yy June: 6.8% Retail sales growth Apr: 1.% yy May: 1.1% yy June: 1.6% 3 25 2 2 15 15 1 1 5 5 7 9 11 13 15 5 7 9 11 13 15 5 M2 growth 3 25 2 Apr: 1.1% yy May: 1.8% yy June: 11.8% Bank lending growth Apr: 14.1% yy May: 14.% yy June: 13.4% 35 3 23 15 17 1 5 5 7 9 11 13 15 5 7 9 11 13 15 12 15
COMMODITY PRICES UNDER PRESSURE Commodity prices excluding gold in real dollar terms 16
CHINA: LOW INFLATION 15 1 5-5 Total CPI inflation PPI inflation -1 3 6 9 12 15 CPI excl food Food inflation 3 6 9 12 15 25 2 15 1 5-5 -1-15 8 6 2 Total CPI inflation PPI inflation CPI excl food Food inflation 15. 1. -2 5. -6 11 12 13 14 15 11 12 13 14 15. 17
CHINA: LOW INFLATION ROOM FOR MORE POLICY EASING 25 2 15 Bank's Reserve Ratio Requirement Central Bank policy rate Inflation target CPI inflation 25 2 15 1 1 5 5-5 95 97 99 1 3 5 7 9 11 13 15-5 18
SA suffers
GROWTH DISAPPOINTMENT ACTUAL GDP GROWTH AND FORECASTS FOR EACH YEAR: SARB FORECASTS 5 Real GDP growth 5 4 Bars = Actual Lines = SARB forecasts 212 213 214 215 216 215 & 216 = OMIG estimates 4 3 3 2 2 1 21 211 212 213 214 215 216 1 2
SLOW GROWTH KEEPS UNEMPLOYMENT HIGH Unemployment rate 37.5 37.5 35. 35. 32.5 Total (expanded definition) = 7.3m unemployed 32.5 3. 3. 27.5 25. Total (official/narrow definition) = 5.2m unemployed 27.5 25. 22.5 22.5 2. 7 9 11 13 15 2. 21
SHORT TERM OUTLOOK NOT GREAT 11 SARB leading indicator Political constraint on investment in manufacturing 8 95 84 6 73 64 9 95 5 1 15 4 2 Standard Bank SA PMI 56 54 52 5-2 48 Consumer confidence 46 1 11 12 13 14 15 9 95 5 1 15-4 22
Q2 GDP GROWTH DOWN TO ZERO? GDP saar 8 6 4 2-2 -4 Q2 est data edge Q2 15 Q1 Q4 Q-o-q saar Mining May -5.1 9.8 15.3 Manufacturing May -4.3-2.3 1.8 Electricity May -1.9 1.4-2.4 Wholesale Sales May -7. 8.3-8.6 Retail Sales May 3.9 3.7 5.6 Building plans passed April 25.6-46.9 22.1 Car sales June -15. -21. -22. Commercial vehicle sales June -15.7-8.7 7.5 Consumer credit extended June 3.1 3.5 2.8 Corporate credit extended June 15.3 11.4 5.2 GDP June Between.% & +1.% 1.3 4.1-6 5 7 9 11 13 15 23
ELECTRICITY INTENSITY OF GDP CAN PROBABLY NOT GO MUCH LOWER so it is now a real binding constraint on further GDP expansion 16 GDP, real, 2 = 1 Electricity use, 2 = 1 Electricity : GDP 1.15 1.1 14 1.5 1. 12.95.9 1.85.8 8 9 93 96 99 2 5 8 11 14 17.75 9 93 96 99 2 5 8 11 14 17 24
TOURISM RECEIPTS BEING UNDERMINED Ebola related slump struggles to reverse on visa troubles 25 Tourist arrivals, Net tourism receipts, % of GDP 2.5 2 2. 1.5 15 1. 1.5 5. 9 93 96 99 2 5 8 11 14 17 -.5 9 93 96 99 2 5 8 11 14 17 25
CAR SALES SLIPPING FAST Car sales (seas adj, ') 43 Commercial vehicle sales (seas adj, ') 22 35 18 3 14 24 11 2 3mth ma 3mth ma 9 16 2 4 6 8 1 12 14 2 4 6 8 1 12 14 7 26
CONSUMERS EVEN MORE DEPRESSED Total consumer confidence 4 4 2 2-2 -4 SA economic position Household financial position Time to buy durables 9 95 5 1 15-2 -4 27
RAND HURTING Amongst the weakest in a basket of EM & commodity currencies Currencies per USA Dollar, indexed Jan 211 = 1 24 24 22 2 18 Weaker Stronger Russia Brazil South Africa Turkey 22 2 18 16 14 12 Indonesia India Australia Hungary Mexico Canada Czech Rep 16 14 12 1 New Zealand South Korea 1 8 11 13 15 8 28
BUT RECENT MOVES IN LINE WITH OTHERS BEING HURT BY STRONG DOLLAR & WEAK COMMODITY PRICES Currencies per USA Dollar, indexed Jan 214 = 1 15 BRAZIL 15 14 Weaker 14 13 Stronger HUNGARY 13 12 NEW ZEALAND AUSTRALIA SOUTH AFRICA 12 11 11 1 INDIA 1 9 14 15 16 9 29
Is there any good news in the SA economy?
TRADE IMPROVEMENT Two consecutive trade surpluses Balance Rbn 2 Seas adj, $m, 3 mnth mov ave Imports 975 Exports 1 8 7-1 575-2 5-3 5 7 9 11 13 15 5 7 9 11 13 15 41 31
THANKS TO RECOVERING GOLD & PLATINUM EXPORTS; FALLING OIL IMPORTS seas adj, $m, 3 mth ma Gold, platinum & diamonds Oil imports 225 24 15 15 12 95 8 6 55 4 4 3 5 7 9 11 13 15 3 5 7 9 11 13 15 25 32
AND MANUFACTURED EXPORTS LOOKING BETTER! Manufactured exports as % of total 46 46 4 4 36 36 33 33 29 29 26 97 99 1 3 5 7 9 11 13 15 26 33
CURRENT ACCOUNT DEFICIT COULD SHOW SHARP IMPROVEMENT IN Q2 But gain at risk from commodity prices in H2 215 Current account balance as share of GDP 4 4 2 2-2 -2-4 -4-6 -6 34-8 9 92 94 96 98 2 4 6 8 1 12 14 16-8
SOME GOOD NEWS IN REAL ECONOMY SARB coincident indicator 12 Car exports (' units per month) 35 11 3 95 88 25 2 8 15 73 1 65 5 59 9 95 5 1 15 9 95 5 1 15 35
CONSUMERS UNDER LESS PRESSURE THAN IN PREVIOUS CYCLES % 4 3 Disposable income growth Inflation plus prime rate (& forecast) Real consumer spending growth 4 3 2 2 1 1-1 98 2 4 6 8 1 12 14 16-1 36
CORE INFLATION DIPPING y-on-y % change 14 Headline: 4.7% in June (from 4.6% in May) 12 Core: 5.5% in June (from 5.7% in May) 14 12 1 1 8 8 6 6 4 4 2 2 95 97 99 1 3 5 7 9 11 13 15 37
FOOD INFLATION: SOME PRESSURE FROM GRAIN, BUT LITTLE ELSEWHERE Food inflation on an upcycle, but likely moderate 38 3 2 1-1 1 3 5 7 9 11 13 15 8 6 4 2-2 CPI food inflation Economist food index in Rand -4 1 3 5 7 9 11 13 15 Graphs below year-on-year % change Maize & Wheat CPI food inflation PPI food inflation Weighted futures prices CPI grain 1 3 5 7 9 11 13 15 Fruit, meat & vegetables Weighted market prices Weighted CPI 1 3 5 7 9 11 13 15 8 6 4 2-2 -4 5 4 2-2
RAND SENSITIVE INFLATION COMPONENTS 3 2 Vehicles Furniture Appliances Clothing & footwear Vehicles Clothing & footwear Appliances Furniture 7 6 4 1 2-2 -1-4 -2 9 93 96 99 2 5 8 11 14 1 12 14-6 39
FORECAST RISING TOWARDS YEAR-END; COULD TOP TARGET IN Q1 15 Cycle still moderate 15 1 Assumptions Rand/$: 12.25 end 15; 12.25 end 16 Oil $/bbl: 65 avg 15; 7 avg 16 Electricity: +13% in 15, +13% in 16 etc Food infl: 5.% end 15; 6% end 16 15 1 5 5 Forecast July: 5.3%; Dec: 6.% Avg: 5.% in 215; 5.5% in 216 4 6 8 1 12 14 16 4
Low return world
PRICE: LONG-TERM ASSET ALLOCATION VIEW Real return View Comment SA Neutral More balanced outlook Equity 5.% Neutral Key risk is earnings delivery as economy battles Property 4.5% Neutral Growing risk following huge bull market Bonds 2.5% + Lack of alternatives makes SA bonds attractive Cash.5% Hawkish Reserve Bank helping boost returns Global* Neutral Maintain diversification for risk management Equity 5.% + Best risk adjusted returns Bonds -1.% Record low yields = low returns Cash -1.% Cash is trash 42 NB: These are long-term, real returns expected over the next five years, as at 15 July 215 * The international return expectations above are in US Dollar terms; any rand depreciation will add to returns in rands.
SA MACRO FORECASTS FOR 215-216 INDICATOR Avg 84-93 Avg 94-3 Avg 4-7 212 213 214 215 216 HCE 1.4 3.5 6.6 3.4 2.9 1.4 2. 2.4 GFCF -2.9 5.1 12.5 3.6 7.6 -.4 1.7 2.5 GDP 1. 3. 5.2 2.2 2.2 1.5 2.1 2.2 C/A : GDP 2.2 -.7-4.8-5.2-5.8-5.4-4.3-4. R/$: y/e 2.54 6.36 6.46 8.5 1.49 11.58 12. 12. Target CPI: avg 15. 7.4 5.5 5.7 5.4 5.5 5. 5.5 Prime: y/e 17.78 16.88 12.13 8.5 8.5 9.25 9.75 9.75 43, MacroSolutions: 4 August 215
REGULATORY INFORMATION Old Mutual Investment Group (Pty) Limited Physical Address: Mutualpark, Jan Smuts Drive, Pinelands, 745 Telephone number: +27 21 59 522 Old Mutual Investment Group (Pty) Limited (Reg No 1993/323/7) is a licensed financial services provider, FSP 64, approved by the Registrar of Financial Services Providers (www.fsb.co.za) to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 22. Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuates, an investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance. The investment portfolios may be market-linked or policy based. Investors rights and obligations are set out in the relevant contracts. In respect of pooled, life wrapped products, the underlying assets are owned by Old Mutual Life Assurance Company (South Africa) Limited who may elect to exercise any votes on these underlying assets independently of Old Mutual Investment Group. In respect of these products, no fees or charges will be deducted if the policy is terminated within the first 3 days. Returns on these products depend on the performance of the underlying assets. Disclosures: Personal trading by staff is restricted to ensure that there is no conflict of interest. All directors and those staff who are likely to have access to price sensitive and unpublished information in relation to the Old Mutual Group are further restricted in their dealings in Old Mutual shares. All employees of the Old Mutual Investment Group are remunerated with salaries and standard incentives. Unless disclosed to the client, no commission or incentives are paid by the Old Mutual Investment Group to any persons other than its representatives. All inter-group transactions are done on an arms length basis. We outsource investment administration of our local funds to Curo Fund Services (Pty) Ltd, 5% of which is owned by the Old Mutual Investment Group. Disclaimer: The contents of this document and, to the extent applicable, the comments by presenters do not constitute advice as defined in FAIS. Although due care has been taken in compiling this document, Old Mutual Investment Group does not warrant the accuracy of the information contained herein and therefore does not accept any liability in respect of any loss you may suffer as a result of your reliance thereon. The processes, policies and business practices described may change from time to time and Old Mutual Investment Group specifically excludes any obligation to communicate such changes to the recipient of this document. This document is not an advertisement and it is not intended for general public distribution. The recipient is advised to assess the information with the assistance of an advisor if necessary, with regard to its compatibility with his/her own circumstances in view of any legal, regulatory, tax and other implications. The information herein does not constitute an offer to sell or a solicitation of an offer to buy any securities. This document is expressly not intended for persons who, due to their nationality or place of residence, are not permitted access to such information under applicable law. Old Mutual Investment Group has comprehensive crime and professional indemnity insurance. For more detail, as well as for information on how to contact us and on how to access information please visit www.oldmutualinvest.com. 44