Anchor’s Coffee Table Economics note by Casey Delport will be distributed intermittently and is a collection of Casey’s opinions on key economic factors and events shaping markets globally and in South Africa (SA). It is essentially Casey’s thoughts and perspectives on the multiple dynamics at play in the global and local economy.
Executive summary
In this week’s edition, we highlight the following:
- Market Monoliths: The Enduring Dominance of Developed Markets in the Global Stock Arena. Despite facing challenges from burgeoning financial markets in emerging economies, the US is poised to maintain its dominance in the global stock market for the foreseeable future. While emerging markets (EMs) have been steadily gaining traction, the enduring dominance of developed markets (DMs) underscores their resilience and continued attractiveness to investors.
- The SARB maintains a hawkish hold on interest rates amid a surprise uptick in inflation. As expected, the South African Reserve Bank (SARB) looked through the first-round inflation impact of the recent supply-side shocks and kept the repo rate on hold at 8.25% at its last Monetary Policy Committee (MPC) meeting for the year, with the prime rate remaining at 11.75%. This latest MPC decision supports our view that the inflationary effects of these current supply shocks are transitory and, as such, do not warrant an immediate policy response. As the year comes to a close, we believe that interest rates have reached their peak and will remain at current levels for some time.
- Dysfunction at SA’s ports: Transnet’s woes continue to mount. The dysfunction of state-owned enterprises (SOE) in South Africa (SA) appears to have reached an all-time high, with Transnet dominating the news headlines recently for all the wrong reasons. The backlog at SA’s key ports is naturally considered a serious economic challenge, impacting the country’s fiscal position, trade balance, and economic growth.
Market Monoliths: The Enduring Dominance of Developed Markets in the Global Stock Arena
DMs have historically profoundly influenced the global stock market, standing as pillars of financial strength and stability. Economies such as those of the US, Japan, and the European Union (EU) have long dominated the landscape, boasting mature financial infrastructures, sophisticated regulatory frameworks, and robust investor confidence. These DMs consistently attract significant capital inflows, contributing to their substantial market capitalisation and reinforcing their position as key players in the global financial arena. Their well-established stock exchanges serve as primary destinations for domestic and international investors seeking a secure and liquid environment. As such, whilst global gross domestic product (GDP) distribution has diversified over time, the global stock market remains dominated by a few developed financial markets. In 2022, the US accounted for 59% of the world’s total stock market capitalisation, with a 21% share of global GDP. To put that in context, China makes up just 4% of the global stock market despite accounting for 16% of global GDP.
To better understand this divergence between individual stock market contributions relative to GDP, one needs to understand the fundamental difference between the two measures of GDP and stock market capitalisation. GDP represents the total value of all the goods and services produced in an economy during any given year, including government spending. On the other hand, stock market capitalisation reflects the US dollar value of all outstanding shares in the stock market, which are priced based on several factors, including current and projected financial performance and economic conditions. In essence, changes in GDP reflect the overall health and growth of an economy, providing a retrospective view. On the other hand, stock market valuations adopt a more forward-looking approach, tracking the anticipated value delivery by specific companies and industries to their shareholders. Beyond these inherent distinctions, two additional factors contribute to the potential divergence between stock markets and GDP:
- Financial market maturity: Not all economies boast equally developed or accessible financial markets. Mature financial markets, exemplified by the US, create a more favourable environment for businesses seeking access to public capital.
- Economic composition: The composition of an economy may not always align with its stock market representation. For instance, a country’s GDP might be significantly influenced by its agricultural sector, which, while substantial in GDP terms, may not be proportionately represented in the stock market due to its perceived profitability.
Furthermore, external elements such as a country’s political stability and regulatory environment are pivotal in shaping investor sentiment and influencing their willingness to engage with its stock markets.
If we look past the last 120 years or so, back in 1900, the global stock market and global economy were surprisingly diverse. The UK had the largest stock market, while the US held the largest share of GDP. During this period, China was the second-largest global economy, contributing 11% of global GDP. Yet, its representation in the worldwide stock market was comparatively modest, constituting only 0.4%. Notably, China was governed by the Qing Dynasty until 1911, marking the culmination of its imperial era. In 1901, the US surpassed the UK to become the largest stock market globally. The US further solidified its dominance, commanding nearly half of the global stock market value and 28% of the world’s GDP by 1945. Despite the subsequent decline in its share of global GDP as other economies flourished, the US stock market share continued to ascend, reaching its zenith at 71.6% in 1966.
However, this pinnacle was short-lived, as Japan’s economy underwent a remarkable recovery, altering the global economic landscape. In the aftermath of World War II, the Japanese economy experienced a remarkable transformation, transitioning from post-war devastation to a period of rapid economic growth. Guided by government initiatives, export-centric policies, and technological advancements, Japan’s slice of global GDP surged from 3% in 1950 to surpass 8% by the 1980s. Concurrently, Japan’s presence in the worldwide stock market expanded from under 1% in 1950 to a significant 40% by 1988, momentarily claiming the title of the country with the largest stock market. However, this economic surge experienced a downturn in the early 1990s, marking the onset of Japan’s “lost decade.” Since then, the US economy and the country’s stock market have consistently held the distinction of being the largest globally.
The commencement of the 21st century solidified the US’ stronghold in the global stock market, buoyed by the ascendancy of tech behemoths such as Apple, Alphabet (Google), and Amazon. Concurrently, the global economic landscape underwent a transformative shift with the rise of EMs, most notably China, boasting average annual growth rates of approximately 10% YoY. By 2010, China had secured a 14% share of the global GDP. However, the growth of China’s stock markets did not mirror this rapid economic expansion, as US stock exchanges continued to dominate equity markets throughout the 2000s. As of 2022, the US commanded over half of the world’s stock market capitalisation, with Japan trailing considerably. The prominence of the US stock market can largely be attributed to its stringent regulatory framework, providing a stable business and political environment for companies to flourish. Additionally, the US boasts 31 of the world’s 50 most valuable companies spanning diverse industries. In contrast, China’s stock market grew from 0% in 2000 to 3.6% of the global total. Although its share in the global stock market is relatively modest, China’s colossal economy represents c. 16% of the global GDP, underscoring its substantial economic influence on the world stage.
The bottom line
Whilst many emerging economies in Africa and Asia are anticipated to experience rapid growth in the coming decades (potentially expanding their slice of global GDP), their respective stock markets might not quite mirror this trajectory. Despite facing challenges from burgeoning financial markets in EMs, the US is poised to maintain its dominance in the global stock market for the foreseeable future. While EMs have been steadily gaining traction, the enduring dominance of DMs underscores their resilience and continued attractiveness to investors.
The SARB maintains a hawkish hold on interest rates amid a surprise uptick in inflation:
Surprising to the upside, October’s CPI printed at 5.9% YoY, up from 5.4% in September and above market expectations. The main drivers of this acceleration were food and non-alcoholic beverages (NAB), housing and utilities, and transport costs. Core inflation (which strips out the more volatile price categories of food and energy costs) continued its downward trend for the seventh consecutive month, printing at 4.4% in October, just below the midpoint of the SARB’s target range. Price pressures were generally contained across the core basket – an encouraging signal for the current inflationary outlook.
Concerningly, inflation in food and NAB rose to 8.7% YoY from 8.1% YoY in September. This reflected a sharp increase in the prices of fruit and vegetables, which jumped to 23.6% from 15.3% in the previous month. Positively, egg prices, boosted by a severe avian flu outbreak, have already started to ease. While prices of the various poultry products have generally been drifting higher amid the avian flu outbreak, the impact remains far more muted than for egg prices. October CPI also witnessed a substantial surge in fuel prices, which experienced a 11.2% YoY rise compared to the 1.5% YoY increase observed in September. The surge was predominantly attributed to elevated oil prices during October and the depreciation of the Rand, influenced by the prevailing narrative of fiscal deterioration. These factors collectively fuelled an uptick in transport inflation, reaching 7.4% YoY in October and marking a notable rise from the 4.2% recorded in September.
Against this backdrop, as expected, the SARB looked through the first-round inflation impact of these supply-side shocks and kept the repo rate on hold at 8.25% at its last MPC meeting for the year, with the prime rate remaining at 11.75%. This latest MPC decision supports our view that the inflationary effects of these current supply shocks are transitory and, as such, do not warrant an immediate policy response. In the past, the MPC has consistently signalled its intention to look through temporary price fluctuations and focus on the medium-term outlook for inflation and growth. Nonetheless, given that inflation expectations remain above the mid-point of the target range and tend to show high sensitivity to food inflation, the tone of the MPC statement remained hawkish, with the MPC cautioning about the significant upside risks to the inflation outlook remaining. Should these risks materialise, the MPC emphasised that it remains vigilant and stands ready to act.
The bottom line
Looking ahead, we believe inflation will start to ease in November, primarily due to an expected fall in petrol prices and a further moderation in core inflation. As Brent crude oil prices moderated, fuel prices fell by 6.0% MoM in November. The current over-recovery data from the Central Energy Fund suggest that another big fuel price cut is likely in early December. However, we see food prices as a key upside risk given the various ongoing supply shocks, particularly ahead of the forecast El Niño weather pattern and amid relatively large swings in crucial commodity prices (including oil) and the rand exchange rate. Regardless, as the year comes to a close, we believe that interest rates have reached their peak and will remain at current levels for some time. The forward-looking real interest rate is already high enough for the prevailing economic backdrop, with inflation forecasts remaining inside the target range and demand-driven and wage inflation remaining modest. Any possible interest rate cuts will likely only materialise towards the end of 2024 and depend on the inflation outlook (locally and abroad) and global interest rate developments as we progress into the new year.
Dysfunction at South Africa’s ports: Transnet’s woes continue to mount
SOE dysfunction in SA appears to have reached an all-time high, with Transnet dominating the news headlines recently for all the wrong reasons. Congestion at our leading ports has reached unprecedented levels, with Durban harbour facing a backlog with approximately 63-plus vessels awaiting processing, leading to a delay of four-and-a-half months. About 70,000 shipping containers are stranded on the ships in a congestion crisis that threatens festive season shopping and the greater economy. The Durban terminal, handling a substantial portion of SA’s container traffic, is Transnet’s largest container terminal. Chaos at the Port of Richards Bay, in turn, has resulted in the suspension of cargo receipts, sparking legal threats from local authorities. Of even more concern, Transnet government officials have stated that this could last until February next year. On a slightly positive note, Transnet announced on 29 November that it had cleared the backlog at the Cape Town Container Terminal after successfully getting additional equipment to the harbour to improve operations.
Transnet Port Terminals (TPT), the division of Transnet that manages the terminals specifically, has incurred significant losses amounting to an estimated R160mn since the start of September. Transnet blames the delays on poor weather conditions, equipment breakdowns, and shortages. However, years of mismanagement, lack of maintenance and underinvestment are the real culprits. The backlog has naturally prompted concerns from major retailers amid the festive season surge, and shipping companies are now threatening that they will need to impose congestion surcharge fees from early December.
Transnet has been attempting to implement the necessary measures (including equipment upgrades) to try and address the situation, but a sustainable resolution will take time. Furthermore, the collapse of Transnet’s railway system has led to a surge in truck traffic to ports, causing additional problems. Business Unity SA (Busa) has called for an urgent resolution, emphasising the shared responsibility of all stakeholders in the logistics network. Notably, President Cyril Ramaphosa has attributed the dysfunction at Richards Bay TPT, in particular, to incompetence and lethargy in management. Whilst this frank acknowledgement is a welcome change from the usual political spin, it needs to be followed by urgent action. Cargo movers warn that the crisis at SA’s ports is impeding the daily movement of goods valued at about R7bn.
The bottom line
The backlog at SA’s key ports is naturally considered a serious economic challenge, impacting SA’s fiscal position, trade balance, and economic growth. At the end of the day, ports are critical drivers of economic growth. They provide a platform for businesses to connect with global markets, attracting foreign investment and fostering domestic economic development. A well-functioning port can stimulate industrial activity and create jobs. Moreover, countries with efficient ports are more competitive in the global market. Businesses can take advantage of quicker turnaround times, reduced shipping costs, and reliable transportation networks, making their products more competitive internationally. As such, the damage done to SA’s key ports and the related loadshedding crises will significantly impact the economy, which will become apparent only when the 4Q23 economic performance data come out next year. The bottom line, however, is simple – the current crises at Transnet pose a significant challenge to SA’s ability to participate in global trade.
