Taquanta Asset Managers

"Beyond QE: An end to cheap money?"
There can be no doubt as to the significant impact the unwinding of the US quantitative easing program will have on world markets. Statements by Mr Bernanke in June triggered a sell off in global markets as investors'factored in their pricing an end to an era of cheap money. Data coming out of the US will be of importance going forward as the Federal Reserve Chairman stressed that changes to the QE program will be dependent on economic data. Locally, the flow reversal in non-resident capital that was evident last month was stronger in June. Last year total non-resident flows were positive at over R83bn in the bond and equity markets combined. In contrast, the year to date non-resident flows for 2013 are currently around R18bn. This figure may be eroded in the coming months if the current trend for capital flows continues. The sensitivity of the Rand and the bond yields to the flow of capital has negative implications on local imported inflation, the current account deficit and the financing costs for government debt. Continued weakness and lackluster growth figures may force the SARB to increase rates while the economy is weak, if inflation figures remain firmly above the 6% target limit.

The most recent PPI and CPI inflation figures showed moderation from the previous month's figures and both numbers came in below consensus expectations. CPI inflation figures were lower than the previous month by 0.3%, printing at 5.6% y-o-y. This was lower than the consensus expectation. Although the decrease in the petrol price contributed to the lower y-o-y CPI inflation figure, food inflation increased by 0.4% to 6.7% y-o-y. Inflation is expected to remain within the SARB target band in the short term, although temporary breaches may occur. The lower PPI figure of 4.9% y-o-y from 5.4% last month, lends some support to this view. In light of the current data, we expect the MPC to maintain the current monetary policy stance while inflation figures remained contained in the band and growth figures remain weak.

Growth in money supply and PSCE y-o-y figures decreased from last month's figures. M3 printed at 9.8% y-o-y while PSCE came in at 9.1%. The decrease in credit numbers was due to a deceleration in both corporate and household credit growth, although the percentage decrease in household credit growth was the larger of the two.

Further moderation in credit figures is expected given the challenging business environment and the high levels of indebtedness of consumers. Consequently, the SARB should not be too concerned with the somewhat weak demand pressures on inflation which support the current accommodative stance.

The Nedgroup Investments Money Market Fund continues to comfortably out-perform its benchmark. The Fund continues to be exposed largely to banks (87% in May) while 13% of the fund is in government and corporate debt.

The lower inflation figures provide support to the current monetary policy and the forecast shows that the SARB will likely hold the repo at 5% until year end. There is risk to this outlook due to the uncertainty of when the US will begin unwinding QE and the market reaction that would follow. The low interest rate environment is expected to persist, however the markets are pricing in rate hikes within 12 months. Any changes in monetary policy, domestic and abroad, will be dependent on significant changes in economic data.

''After the 13th Baktun...."
From Mayan predictions to super storm Sandy to near sovereign crises – we and the markets have survived. The Eurozone still exists after sovereign default fears over Greece and Spain. Obama is still president of the US after a nail biting election and he managed to cut a deal in Congress to avert the full impact of the fiscal cliff. With an increase in last minute resolutions, it seems politicians and national treasuries were doing all they could in the past year to keep markets guessing!

Locally, GDP forecasts were revised downwards and are now a far cry from the 7% growth needed to alleviate unemployment. After championing “doing more with less”, the fiscus will now expect higher budget deficits. In the private sector, labour wage settlements were higher than inflation after violent protests while productivity is not increasing at the same pace. There is a lot of work ahead in the coming year (not least for the Government), and given disappointing growth numbers, we expect the low interest rate environment to persist.
Inflation was in line with the consensus estimate and unchanged from the previous month’s figure at 5.6% y-o-y. Inflation has been on a downward trend over the year and contained within the target band. Food prices continue to push recent inflation figures higher and the upcoming changes to the inflation basket in the New Year are expected to add to the y-o-y figures. PPI was unmoved from last month’s figure at 5.2% y-o-y, just under the market estimate. Views on inflation and monetary policy are currently neutral with the market wary of significant changes in growth and inflation data in the months ahead.

Growth in money supply increased, coming in at 6.3% y-o-y. PSCE was on an upwards trajectory over the year, from 6.2% in January 2012 to the current month’s figure of 9.6% y-o-y. Concerns continue to be raised with regards to the unprecedented growth of unsecured lending, and we may see the introduction of regulation aimed at reducing over-indebtedness of households in the coming year. Mortgage advances still show slow growth despite the low interest rate environment. Current credit figures, however, are unlikely to cause a change in the monetary policy over the short term.

The Nedgroup Investments Money Market Fund continues to outperform the benchmark. The Fund continues to be exposed largely to banks (96% in December), while the remaining 4% is invested in Government securities or short-term corporate debt.

It has been a year of averting disasters and the risks to global growth from sovereign crises remain. Local politics and labour unrest remain a concern in the coming year and against this backdrop, local growth figures are likely to be suppressed. Inflation, however, is well within the mandated target band. Given that the SARB aims to stimulate growth while balancing inflation risks, the current data indicates that interest rates will be low for some time to come.

Banks were once again in the headlines after the announcement of haircuts to be applied to depositor balances in Cyprus. The involuntary 'bail-in' by depositors was a funding requirement so that Cyprus could access €10 billion in financial assistance. Concerns remain that this may set a precedence in the resolution of continued sovereign debt and bank capitalisation woes - a move that is sure to heighten social tensions and may instigate another liquidity crisis in the banking sector. Though Cyprus is small compared to rest of the Eurozone (0.2% of GDP), these events highlight that we are not yet out of the woods and there is still a risk to global growth if a banking blowout occurs. In the domestic market, the SARB kept the repo rate at 5% while citing weak growth in an environment with upside risk to the inflation forecast. Interest rates should be flat in the short term with possible policy tightening expected in the 12-month forecast. If growth figures continue to disappoint while inflation trends upward, the scope for further monetary policy easing will be reduced.

After coming in below consensus last month, inflation figures surprised on the upside this month at 5.9% y-o-y against a market forecast of 5.6%. The inflation figure could have been higher, were it not for the larger-than-expected decrease in food inflation. Core inflation also ticked upwards from 4.7% to 5.3% y-o-y. he inflation figures did not alter the monetary policy stance by the MPC, however, close consideration by the SARB to demand-led inflation and persistent rand depreciation can be expected in upcoming meetings. Year-on-year inflation was forecasted to temporarily exceed the SARB mandated upper target during the year, but it now seems the breach may occur earlier than expected. The market rates reflect a reduced likelihood of a rate cut by year end and seem to have priced in an interest rate hike in the next 12 months.

Growth in money supply increased to 7.7%, from 6.7% y-o-y last month. PSCE fell for a second month to 7.9% y-o-y. Credit extension to households remains steady. However, advances to corporates were down to 5.6% y-o-y from 7.5% the previous month. Unsecured lending to households appears to have moderated and mortgage advances figures were firmer. Current credit figures are neutral for short-term monetary policy changes and signal possible moderation in consumer spending in the short term as well as somewhat shaky confidence in the business environment.

The Nedgroup Investments Money Market Fund continued to comfortably outperform its benchmark. The Fund is exposed largely to banks (86% in March), while the remaining 14% of the fund is invested in government and corporate debt.

On the international front, the Eurozone and the impact of the Cypriot resolution continue to draw attention. Locally, the focus is on domestic inflation and the risk is to the upside. Given the market reaction to the recent labour unrest, further depreciation in the rand post the upcoming wage negotiation season will not improve the inflation outlook. The current monetary policy position is expected to remain unchanged in the short term, however, increasing inflation figures may force the SARB's hand and we may see interest rate hikes earlier than expected.