SARB rate decision probably net supportive of ZAR but rate cutting is unlikely for the near future as the SARB is reluctant to be pro-cyclical, even with GDP growth tepid.

• Unanimous decision to hold repo at 6,5% and thus prime at 10%. Follows 25 basis point cut in March.

• Risks to inflation outlook due to geopolitical hostilities impact on oil, ZAR volatility, wage pressures (including government), and uncertainty on Eskom tariffs.

• Output gap expected to close over medium term.

• ZAR has fallen 6% against the US dollar since March meeting but less than 3% on a trade weighted basis.

• 2018 GDP forecast rises to 1,7% from 1,2% in November 2017 but the same as March.

• 2018 headline CPI 4,9% takes in to account VAT rise to15%. 5,2% in 2019.

• Nominal wages at 7% with government negotiations on the bloated public service unclear.

• 2018 oil forecast now $70/bbl. versus $63/bbl. with 2019 at $67/bbl. versus $62/bbl.

• South Africa has real interest rates of approximately 2%. This is attractive but not overwhelmingly so. This suggests caution on rate cutting too. Real rates are 5% in Russia, 3,8% in Brazil, 3% in Mexico, and 2,5% in China. 

• R186 has eased back up to 8,4% from just below 8% recently and is a necessary correction. Underlying fiscal challenges have not diminished even if the political optics have improved. 

• ZAR/USD currently R12,44. Gold at $1,302/oz or R521 000/kg. The metal is just on the right side of comfort, but gold mining economics remain tenuous. Ideally, R600 000/kg would be the “new” R500 000/kg given inflation and cost pressures.

• I would be very cautious in trading golds right now (including HAR) and prefer bulks (KIO) and energy (SOL).

• Higher assumed Brent with ZAR at current level remain supportive of Sasol. Spot earnings for F2019 are roughly 5300 cents, 30% higher than my base case for EPS in F2019.

• Kumba EPS likely to be R25 this year and possible as high as R30, which would be the same as F2017 due to firm iron ore and quality premium.

• Banks have retreated from overbought levels and with rates likely to be on hold present values for DCF valuations are still a little too rich for me and I would tend to a softer trend in FSR, SBK, BGA, and NED and thus a short positioning.

Wishing you profitable investing, until next time.

Mark N Ingham