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Sep 2017
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More Rate Cuts Likely as Inflation Moderates

 

September 2017

 

I’ve mentioned in my previous newsletter, as moderate Rand depreciation is good for offshore funds and generally good for most South African equity funds,  the unexpected strengthening of the Rand during 2016 has hurt the three fund of funds we are managing.

 

However, the stronger Rand has a silver lining at the moment.  The Rand is of course not stronger because of a strong South African economy, it is more because of its relative strength compared to a weaker Dollar.  Economists say that the most important indicator of the future direction of the South African economy is the value of the Dollar compared to the Euro and the other developed market currencies.  The Dollar lost nearly 4% of its exchange value for this quarter.  Dollar weakness has brought a small degree of strength to emerging market currencies and this has caused industrial metal prices to improve since 2016, because the rest of the industrial and emerging market world, has begun to play catch-up with the revival of the US economy.

 

A stronger Europe and Japan imply more competitive interest rates and returns outside the USA.  Hence less demand for Dollars and more for the competing currencies and metals.

 

The recent strength of the Rand and metal prizes offer monetary policy the opportunity to do what it can to help the economy by reducing interest rates.  Inflation has come down and lower interest rates will lift spending and will also boost depressed growth rates and government revenues.

 

The latest inflation figure is now 4.6%, close to the Reserve Bank’s comfort level of 4.5%.

 

Economic growth is likely to remain weak for the rest of this year, with Standard Bank expecting 0.5% compared to 0.3% in 2016.  Elna Moolman, economist at Macquarie Group, said the group expects a GDP growth of 2.2% for the second quarter and 0.7% for 2017.

 

Friendly greetings

 

Andre Delport

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