STANLIB Podcasts

SA’s latest inflation data for May was encouraging, with a 0.2% m/m increase, keeping annual inflation at 5.2%. This is still above the SA Reserve Bank’s target of 4.5%, but June’s petrol price decrease is expected to be followed by another in July, which will further bring down inflation, possibly towards 4% by year-end. As a result, some forecasters believe there could be three interest rate cuts by the SARB this year of 25 bps each, starting in July. STANLIB’s own forecast is for two interest rate cuts of 25 bps each, starting in September. Interest rate cuts, together with greater political stability if the Government of National Unity is successful, could help to stimulate the economy and attract foreign investment back to SA.

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SA’s latest inflation data for May was encouraging, with a 0.2% m/m increase, keeping annual inflation at 5.2%. This is still above the SA Reserve Bank’s target of 4.5%, but June’s petrol price decrease is expected to be followed by another in July, which will further bring down inflation, possibly towards 4% by year-end. As a result, some forecasters believe there could be three interest rate cuts by the SARB this year of 25 bps each, starting in July. STANLIB’s own forecast is for two interest rate cuts of 25 bps each, starting in September. Interest rate cuts, together with greater political stability if the Government of National Unity is successful, could help to stimulate the economy and attract foreign investment back to SA.

In the podcast, Kevin Lings discusses SARB’s decision to keep interest rates unchanged at 8.25%, with the MPC indicating that the risks to SA inflation are now “balanced”. Fittingly, he also focuses on the recent SA elections. The rand lost a significant 4% of its value against the US dollar during in the past nine trading days, as investors became more concerned about the likely outcome of SA’s elections.

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SA’s April inflation data surprised on the downside: it was up 0.3% for the month vs market expectations for 0.4%. As a result, the annual inflation rate has moderated to 5.2%, with core inflation at 4.6%. Food inflation has slowed over the past three months and is now at 4.4% y/y – a year ago it was at 14%. The main contributors to inflation are administered prices, including electricity at +15%, which are outside the control of monetary policy. This makes it increasingly likely that the SARB will begin interest rate cuts in the second half of the year.

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The Global Select Fund has done exceptionally well over a long period of time. Amit Parmar, JPMAM International Equity Group vice president and investment specialist, explains to STANLIB’s Chief Economist, Kevin Lings, that the fund’s recent performance has been driven by stock selection, especially of semiconductor and media companies. Parmar cites the example of how the team took an early position in Texas Instruments in 2016 and realized profits as the stock became more expensive, reallocating those profits to other well-priced opportunities. There is constant dialogue among the global team to analyse where returns are coming from and how each stock justifies its place in the portfolio.

US economic data shows inflation slowing in April, with core inflation now at 3.6% y/y. The main drivers are shelter inflation, which continues to rise above the long-term average, and a 22.4% y/y increase in motor insurance costs. Both categories are expected to slow down over the coming months. If inflation falls below 3% and the US labour market weakens slightly, STANLIB anticipates one or two interest rate cuts should be possible from the US Federal Reserve this year.

In SA, key economic sectors were all negative in Q1 – mining, manufacturing and retail – signalling a likely decline in Q1 GDP growth. At the same time, unemployment has risen to 32.9%. However, the rand/dollar has strengthened by about 5% over the past month, partly due to dollar weakness but also some local factors, e.g. less concern about the election outcome and better electricity production. While commodity price moves have also buoyed the local equity market, investors are showing more confidence in an improved second half for the economy.

SA’s manufacturing production data for March was shocking, down 2.2% m/m from -1% m/m in February, and down -6.4% y/y. This, together with weak mining and consumer data, is likely to translate into a very disappointing Q1 GDP outcome. However, the absence of load shedding in April could stimulate manufacturing. There is clearly an underlying improvement in the country’s electricity generation, with Kusile units coming on line, fewer breakdowns and a contribution from private sector investment in solar. What is critical is whether electricity generation and private sector participation in infrastructure will continue after the National Election. If that happens, SA’s GDP growth rate could lift in the second half of the year and in the longer term.

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A range of recent US labour market data, including jobs created, the unemployment rate and wage growth, are encouraging signs of declining inflation and may lead to interest rate cuts. Equity and bond markets rallied after the data was released. If these trends continue, we expect that a US interest rate cut could happen before the end of this year.

In SA, electricity supply is showing early signs of improvement, which has had a positive effect on some economic data, e.g. the manufacturing PMI for April. Electricity supply appears to have benefited from investments in solar energy, a scale-back in fleet maintenance (which may not be sustainable), the use of diesel in the early evening, and the return of some generating units to service. While Eskom may have made some progress, SA may not be able to avoid load shedding for the rest of the year.

Marius Oberholzer, STANLIB’s Head of Multi-Asset, says trends are positive for equities in 2024, but the team is managing expected market volatility. Once interest rate cutting begins, corporate activity should accelerate and earnings growth should start to materialise. In SA, there are still risks, including the looming elections, but signs of economic improvement in China should underpin demand for commodities and benefit emerging markets in general. Marius also discusses how the Multi-Asset team works closely with the J.P. Morgan Asset Management team to bring different insights and in-depth research to its decision-making. This podcast lays out the fund’s positioning in more detail.

The STANLIB Enhanced Multi Style Equity Fund, an active SA equity fund, outperforms its benchmark, the JSE’s Capped Swix Index, by taking rational decisions, says Rademeyer Vermaak, Head of STANLIB’s Systematic Solutions business. Rademeyer says the fund may underperform when the market is irrational, but ultimately investors will always prefer stocks that offer higher quality, good growth prospects and are cheap relative to others. Listen to Rademeyer explain the fund’s philosophy.