Major themes from last week

  • Wild West image of back to the future character

    What a wild start to the year it has been! 

    The two things that stand out the most to me so far are; the ferocious relief rally that we have seen in most global markets and, the very poor retail sales numbers that were reported by SA retailers.

    On the international front

    Over the last week we saw some fairly bullish news coming out of international markets. First off, the US Fed gave some very dovish guidance with regard to the projected interest rate path for the US. In plain English, the US Fed indicated that they do not see any reason to be putting up interest rates at this time, nor do they see much of an arguable case to put interest rates up aggressively throughout the course of the coming year. Markets of course love this kind of news and it spurred a continuation in the very strong performance we have seen coming from Emerging Market currencies as well as global equities. In other words, the Rand strengthened on the back of this news and the US markets traded higher. We'll take the wins were we can, but we must also remember that markets are fickle creatures and that the tremendous positive shift in sentiment could be a short lived as the extreme negative sentiment we saw at the end of last year. So a pinch of salt then... 

    The next major item to come out of the international arena over the last week again comes from the US. Trade talks with China seem to be going well and the vocal President Trump is using words and phrases like "tremendous progress" when he describes talks with the Chinese. A research note from Investec noted that "As part of last week’s talks, Vice Premier Liu He pledged to President Donald Trump that China would purchase an additional five million tonnes of soybeans. Beijing looks to be making good on that promise, with state firms COFCO Group and Sinograin announcing in separate statements over the weekend that they had each purchased more than one million tonnes of US soybeans." It seems that things are on the right track. 

    Perhaps this is my bearish bias creeping in, but a word of warning. Market sentiment is at time a fast swinging pendulum, it can swing for extremely bearish to extremely bullish in a matter of a few short weeks. Just as we heard the rhetoric of "the world is ending" during December and now that the "markets are going to the moon" during January... let's just keep in mind that things can change very rapidly and that we must try our very best to stay not only logical, but also focused on the longer term during times of such extreme volatility in share prices and market sentiment. Also, from a purely trend following technical standpoint, the market trend is currently down and until the market starts making higher highs again, we must assume that the market is at the very least in a zone where it is trying to decide which way it will trend going forward. 

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    The local market

    Our local market has come under some pressure of late. Well, let's be honest here, it's been a difficult few years for our market and we've only had a brief moment of hope when we had a bullish breakout early last year... which was short lived and now our market is right back in the going nowhere slowly range. It's really not been easy for traders and portfolio manager and investors out there.

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    We know that the SA economy is really in the doldrums and that unemployment is a huge, huge, huge problem. We also know that the SA consumer has been under pressure, but believe it or not, household debt to income has greatly improved since the introduction of the National Credit Regulation framework. Which leads us down a logical path of reasoning. Credit extension is more difficult, consumers are less indebted and unemployment is constantly rising, not to mention that the rate of emmigration is increasing.... so what is driving the ever increasing retail sales?

    Well, Amelia Morgenrood presented an interesting theory last week. One that makes so much sense, but has never been thought of (well, at least not by me). Corruption. We've seen now with the Zondo commission, at least the tip of the iceberg, that corruption is much more prevalent that we'd ever imagined and that the numbers involved, the sheer amount of money that was leaking from government, is staggering. The theory is that over the last few years, retail sales have been doing rather well simply because so many people were illegally getting money under the table that they collectively supported the retail sector sales growth. Think about it... a trend amongst retailers over the last few years was that there has been a steady growth in cash sales, all while more and more cash is being siphoned out of government and into the hands of the corrupt. What would you do with R300k in cash every month? Probably go shopping I'd guess. Now imagine the hundreds of millions, if not Billions of Rands that are 'unaccounted for' each year... where is that going? Well, in theory, it's been going to the retailers and the restaurants. Amelia pointed out that over the last three years, the fastest single growing item sold by Massmart was French Champagne. The real deal French Champagne. I'll be honest, I don't know many people who drink real French Champagne every week, or even more than once or twice a year. 

    This sort of explains why retail sales reported last week and the week before were so terribly poor. Cyril Ramaphosa has promised to stomp out corruption... and the corrupt are less willing to pay or accept bribes because they are afraid of getting caught... and just like that, retail sales collapse. Interesting. Whether true or not, I doubt we will ever truly know, but honestly, I very credible theory.


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  • Chris Gilmour
    Chris Gilmour Fascinating thought. I must admit, this theory of conspicuous consumption by political thieves has long intrigued me and there may well be some substance to it. If, as you suggest, the level of corruption is so deeply ingrained in SA society, then one of...  more
    February 10, 2019 - 2 like this