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Periodical Elephant Book Summary - South Africa (6 February 2018)

Core Content Overview

• This report provides an economic overview and analysis of 65 companies in South Africa and the broader emerging market (EM) context.
• The focus is on South Africa's economic outlook and its potential for recovery, with an emphasis on equity and fixed income performance.
• The report highlights the global economic backdrop, particularly the supportive environment for EM due to US growth and EM asset performance.
• The South African economy is described as being at a crossroads, with growth expected to improve in 2018 due to rising confidence and household spending.

Global Economic Outlook

• US economic outlook: US tax reform is unlikely to significantly change growth, but investors are optimistic about the rally. US equities are expected to continue boosting EM assets.
• Emerging markets (EM): The overall growth outlook is positive, with inflation risks being a key concern. The Fed's cautious stance and ECB's response to the momentum and surprise indicators support the US$ not turning against EM.
• Global growth forecast: Expected to rise from 3.8% in 2017 to 3.9% in 2018, with 3.8% in 2019.

South African Economic Outlook

• Growth forecast: South Africa is expected to grow at 1.7% in 2018, up from 1% in 2017, driven by confidence recovery and increased household spending.
• Inflation: Expected to remain 4-5.5%, reaching 4.6% YoY by year-end, with subdued pressure due to negative output gap, falling food inflation, and a strong rand.
• Interest rates: The SARB is likely to keep rates on hold in 2018, but rate cuts are possible if domestic and external environments remain supportive.
• Political factors: ANC internal politics and Zuma's future will dominate news flow, but also create hope for economic recovery.

Currency and Fixed Income Analysis

• Rand valuation: The rand is not yet a constraint for appreciation, and positive spillovers from political developments are noted.
• Fixed income outlook: A bullish bias on local rates, especially in 10-15Y bonds, is maintained.
• Short-end rates: Expected to receive support, but with less room for performance.

Equity Market Outlook

• Equity performance: The business cycle in South Africa is expected to transition into an early recovery phase.
• Total returns: Possibly 10-15% for the year, based on improving macroeconomic conditions and interest rate cuts.
• Sector performance:
  • Financials: Banks, Financial Services, Insurance, and Property are expected to outperform.
  • Industrial and cyclical sectors: General industrials, chemicals, industrial engineering, and life insurance are likely to benefit from SA's cyclical recovery and US growth.

Key Risks

• Policy paralysis: Due to political fragmentation and fiscal cut-backs, which could hinder growth.
• Inflation risks: Expected to rise from Q2 onwards, potentially reaching 5% by year-end.
• Rating downgrade: A second rating downgrade is still a substantial risk, though narrowly avoidable if growth and confidence improve.

Contributing Analysts

• A list of analysts who contributed to the report, including their contact details and email addresses.

Table of Contents

• Index to the shares: Includes page numbers and company names.
• International summary: Covers US, EU, and other key economies.
• South African economy: Details on growth, inflation, and policy.
• Fixed income analysis: Focuses on local bonds and interest rate trends.
• Equity review: Includes sector-specific forecasts for financials, mining, non-mining resources, and industrials.

Key Economic Forecasts (Figure 1)

Exchange Rate Forecasts (Figure 3)

• South Africa: ZAR is expected to appreciate against the USD, with forecasts ranging from 12.13 to 12.77.
• Other currencies: EUR, JPY, GBP, CZK, HUF, PLN, RUB also have forecasts and forward rate comparisons.

Government Bond Yield Forecasts (Figure 4)

• South Africa: 10Y bond yield is expected to rise from 8.65% to 9.39%, with a target of 9.50%.
• Other countries: Forecasts are provided for Czech Republic, Hungary, Israel, Poland, Russia, Turkey, and developed markets like US, UK, Germany, Italy.

Policy Rate Forecasts (Figure 5)

• South Africa: Policy rates are expected to remain at 6.75% in 2018, with no significant changes.
• Other regions: Emerging Europe, Middle East & Africa, Asia (ex-Japan), and Latin America have different policy rate trends, with some rises and falls in rates.

Conclusion

• The report concludes that 2018 could be a year of hope for South Africa, with growth improving and equity returns potentially reaching 10-15%.
• Fixed income is expected to perform well, with bullish bias on local rates.
• Equity sectors with strong domestic and global growth ties are likely to outperform, including financials, industrials, and cyclical sectors.
• Key risks include inflation pressures, policy paralysis, and rating downgrades, which could affect economic forecasts and market performance.