Global attention remained on the coronavirus outbreak as the number of confirmed cases rose and China's factories try to reopen. Equities were mostly stronger for a second straight week while bond yields stayed unchanged, a sign that investors are cautiously optimistic.
In the U.S., Federal Reserve (Fed) Chair, Jerome Powell’s commentary took centre stage, where he acknowledged that the coronavirus is likely to weigh on global growth but stopped short of signalling further rate cuts, stating that the U.S. economy is in a good place.
The European Commission kept its economic forecast for moderate eurozone growth for 2020 and 2021 but raised slightly its projection for inflation, noting the spread of the coronavirus was the key downside risk.
For the week, global equities were mixed. In the U.S., the Dow Jones (+1.02%), S&P 500 (+1.58%) and Nasdaq (+2.21%) posted positive gains. Asian & European markets were mixed with the Shanghai Composite (+1.43%) and Euro Stoxx 50 (+1.12%) ending the week in positive territory whilst returns were negative for the Nikkei 225 (-0.59%) and FTSE 100 Indices (-0.77%).
Market Moves of the Week
Locally, President Cyril Ramaphosa delivered his fourth State of the Nation Address (SONA) on Thursday, during a tense sitting in parliament. Overall, it was well received, confirming several initiatives already in the pipeline, but also emphasised the liberation of the energy market as well as embracing finance minister Tito Mboweni's strategy to grow the economy.
Other local news included the reporting of South Africa’s 4Q19 unemployment rate which remained stubbornly high at 29.1% and Eskom losing its bid to have a court overrule the state energy regulator and allow higher tariffs. Eskom sought increases of 16.6% and 16.7% for 2020 and 2021 respectively but were only allowed to raise prices by 8.1% and 5.2%.
For the week, the JSE All Share Index ended the week up 1.02%, with industrials (+0.98%), financials (+0.80%) and resources (+1.95%) all stronger.
Key takeaways from SONA included:
- Load Shedding: load shedding will likely continue in the near future as Eskom completes “fundamental maintenance”.
- Energy Reform: Private companies and mines will be allowed to produce their own electricity above the current 1MW limit with the National Energy Regulator processing applications within 120 days.
- Municipalities will be allowed to buy their own power from IPPs: Municipalities in good financial standing will be allowed to buy their own power from independent power producers.
- A 'social compact' will be established to save Eskom: Following a new proposal from Cosatu, which wants the PIC to take over some of Eskom debt, Ramaphosa said that unions, business, community organisations and government have been meeting at Nedlac over the past two weeks to agree on the principles of a "social compact" on electricity.
- Measures to be introduced to cut public sector spending: Finance minister Tito Mboweni will outline a series of measures to reduce public sector spending and “improve its composition” during his upcoming budget speech.
- A sovereign wealth fund and state bank to be established: South Africa will establish a sovereign wealth fund as “a means to preserve and grow the national endowment of our nation”. Details of the wealth fund and state bank will be released in Mboweni’s budget speech.
- Mboweni’s economic reform plan to be implemented: Finance minister Tito Mboweni’s ‘Economic Transformation, Inclusive Growth and Competitiveness’ paper will be implemented, including plans to charge government departments interest on late payments, reducing red tape by 25% in five years, and the better financing of farmers.
- Water use licences will be issued within 90 days: Water use licences have previously taken up to 5 years to process, but these licences will now be issued within 90 days.
- Durban port to be overhauled: The Southern Hemisphere’s third-largest container terminal, Durban port, will have a “fundamental overhaul” to reduce delays and costs.
- Nine new TVET colleges to be built, and a new science university at Ekurhuleni: Nine new technical and vocational education and training (TVET) college campuses will be built across the country next year.
- Robotics at schools: Coding and robotics will be introduced at grades R to 3 in 200 schools in South Africa in 2020, with a plan to implement it fully by 2022.
- 1% of budget to youth unemployment: One percent of the national budget will be set aside to deal with the high levels of youth unemployment in South Africa.
- State will be forced to buy from local companies: The state will designate 1,000 locally produced products that must be procured from small to medium companies in South Africa.
- Spectrum to be released by the end of 2020: After several years delay, spectrum regulator ICASA has undertaken to conclude the licensing of high demand spectrum for industry via auction before the end of 2020.
- 700,000 hectares of state-owned land to be released for agriculture production: The government also stands ready, following the completion of the Parliamentary process to amend section 25 of the Constitution, to table an Expropriation Bill that outlines the circumstances under which expropriation of land without compensation would be permissible. A new beneficiary selection policy for land allocation now includes compulsory training for potential beneficiaries before land can be allocated to them.
- Cannabis production: The state will open up and regulate the commercial use of hemp products in 2020 to provide opportunities for small-scale farmers.
- Ministers to sign performance agreements: Ramaphosa said to strengthen the capacity of the state and increase accountability, he will be signing performance agreements with all ministers before the end of this February.
Chart of the Week
Cheap Oil: having spiked above $70 per barrel at the beginning of this year amid fears that the US airstrike may have triggered an escalation in geopolitical tensions disrupting global energy supplies, the price of brent crude oil has settled down to $57. Lower oil prices add a tailwind to the global economy, but if you take note of the chart above, there is an 18-month lead time. Other factors can override this and it doesn't have a perfect track record, but it does help that it aligns with accommodative monetary & fiscal policy tailwinds globally.
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