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SARB rate decision market implications by Mark Ingham


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     


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