Where lies the fortune in the uphill we face?

THE GLOBAL macroeconomic cycle, particularly in the US, is currently in the late-cycle stage. Although the South African economy mostly missed out on the global economic upswing due to various factors, it is necessary to put this into perspective.

I calculated the behaviour of some important South African economic indicators over the various stages of the macroeconomic cycle from 1995 to 2018. I defined the stages as follows: In the early cycle of the upswing, the US Purchasing Managers’ Index (PMI) rises above 50 points but stays below 55 points. When growth accelerates to reach the late cycle of the expansion, the PMI rises above 55 points and stays raised. When the growth rate stalls, the PMI drops below 55 points but stays above 50 points. Recessionary conditions exist when the PMI drops below 50 points.

The annualised average monthly performances of the economic indicators given the stage in the global macroeconomic cycle were calculated for the nominal effective exchange rate, business confidence, the FTSE/JSE All Share Index (Alsi), the FTSE/JSE Financial and Industrial Index, and the gold price in terms of rands. The returns on three-month cash deposits were also calculated.

Absolute changes were calculated in the 10-year government bond index, the Consumer Price Index (CPI), the three-month banker’s acceptance (BA) rate, and the 10-year government bond yield gap between South Africa and the US, respectively, for the different stages of the macroeconomic cycle. The rand held its own during the current cycle, which started in January last year.

The rand’s annualised monthly return was 3.1 percent, compared with 2.2 percent during all late cycles. The change in the CPI inflation rate, at –1.3 percent, was also in line with previous late cycles, while the SA 10-year bond yield and the gap between SA and US 10-year government bonds and the yield on cash deposits were roughly in line with all late cycles. Business confidence, at an annualised monthly growth rate of 1.8 percent, significantly fell short of the average of 4.6 percent in all late cycles.

It was echoed by the Bureau for Economic Research Purchasing Managers’ Index’s average reading of 48 points, which came in much lower than the average of 52 points in all late cycles.

The JSE returns were also significantly lower, with the Alsi’s annualised monthly growth rate of 14.5 percent, compared with 23.7 percent in all late cycles.

The jury is still out on when the slowdown stage in the macroeconomic cycle will begin. It does not augur well for the domestic economy, though.

On average, during previous slowdown cycles, the rand’s annualised growth rate fell to –11.7 percent, the inflation rate moved 0.5 percent higher, business confidence contracted by an annualised monthly rate of 5.1 percent, the three-month BA rate moved 1.2 percent higher, while the gap between SA and US government bonds widened. The return on cash deposits increased to 8 percent in slowdown stages.

How the JSE will perform is a mystery. In all previous slowdown stages, the annualised monthly growth rates of the Alsi and the Financial and Industrial Index came in at more than 17 percent and 19 percent, respectively.

The annualised monthly growth rates of the JSE sectors during the current late-cycle stage are a mixed bag and differ considerably from what would have been expected during all previous late cycles.

The only sectors that came close to the previous cycles were consumer services and basic materials. Taking a cue from all previous slowdown stages, consumer goods, real estate and general industrials could lead the way. With regard to other assets available to SA investors, the annualised monthly growth rates of emerging-market equities, SA bonds (All Bond Index), developed-world equities, global consumer staples and global bonds in the current late cycle are roughly in line with all previous late cycles. Therefore, I have more confidence in the rankings and annualised monthly growth rates recorded in previous slowdown stages in the macroeconomic cycle. Global consumer-staple equities, global bonds and gold bullion are likely to catch the local investor’s eye.

British American Tobacco is an excellent proxy for the MSCI Global Consumer Staple Index. It is currently at a five-year low against the Alsi and at a seven-year low against the Financial and Industrial Index.

On the global bond side, the US 10-year government bond is trading at yields last seen in January 2014.

Taking a cue from all previous slowdown stages in the macroeconomic cycle, consumer goods, real estate and general industrials could lead the way.

Ryk de Klerk is an independent analyst. rdek@iafrica.com