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Local market commentary – February 2019

06 March 2019

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by Peter Little, Fund Management

Finance minister Tito Mboweni delivered his much-anticipated budget speech during February, with the main talking point a government pledge of R69bn over 3 years to support Eskom, which will be restructured into three units in an attempt to create a more stable and efficient power utility. Expected revenue from tax collections was revised lower based primarily on more conservative economic growth expectations (more in-line with market consensus for GDP growth), while expenditure cuts are to come predominantly from allowing natural attrition and early retirement to trim the government wage bill by R27bn over the next 3 years. The net effect is an increase in the fiscal deficit, which should result in government debt peaking at 60% relative to GDP in 2022/2023. Moody’s, the only major rating agency that still considers South Africa’s government debt as investment grade, will opine on 29 March whether the latest budget has done enough to ward off a downgrade.

The rand, which had given up much of its January gains leading into the budget speech, then stabilised as the market digested the budget, perhaps waiting for more colour on the Eskom restructure, leaving it 6% weaker MoM vs the US dollar (the worst-performing EM currency in February). Local government bonds responded more positively to the budget speech, with the R186 bonds (due in December 2026) recovering about two-thirds of the pre-budget losses to end the month with its yield 0.15% higher at 8.7%.

The FTSE/JSE Capped SWIX Index was up 1.2% for the month delivering the largest divergence from the FTSE/JSE All Share Index (which rose 3.4%) in the 7 years for which data is available for the former. Most of the difference can be explained by the All Share Index’s significantly higher weight in Richemont (up 18%), Naspers (up 3.3%) and miners, which were comfortably the best-performing sector in the month, with a commensurately lower exposure to financials, which were the laggards. While BHP was the biggest contributor to the performance of the indices off the back of surging iron ore prices, resulting from the supply disruption in Brazil, it was the platinum group metal (PGM) miners that saw the most spectacular performance in February. Palladium (one of the PGM complex) is now up 70% in the last six months (and 23% YTD), benefitting from an increasing supply deficit as the switch from diesel to petrol vehicles drives increasing demand for palladium required for emissions control in petrol vehicles. Fears of strikes affecting the PGM miners added to price momentum. Most local PGM miners reported earnings during the month, many showing positive cash flow for the first time in years. Impala Platinum ended the month up 55%.

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