Shares shine, but inflation pressures are a concern

JOHANNESBURG – South African share prices continue to increase steadily and are less volatile since the beginning of the year. Although the uncertainty on the Brexit deal and the US-China trade war has contributed to weaker emerging market currencies, including the rand, and nervous volatility on Wall Street and other developed markets bourses, financial markets in South Africa have remained resilient.  

The news that the RMB/BER business confidence index had fallen by 3 points to 28 points during the first quarter of this year also did not affect buying appetite for domestic shares last week. The business confidence index is now the lowest since the second quarter of 2017. 

The reintroduction of load shedding by Eskom last week, however, still poses a threat to the rand exchange rate and further downgradings by the rating agencies. 

Given the steady increase in the oil price to levels higher than $67 (R963.84) a barrel, the weaker rand, trading above R14.40 to the greenback, and the intended increase of the fuel levy by 20 cents a litre, consumers are likely to face a stiff increase in petrol prices of more than 100c a litre at the beginning of next month. 

Together with the increase of 74c a litre for petrol and 81c a litre for diesel this month, the inflation rate is likely to increase by about 0.7 percent over the next two months. 

Given the steep 9.7 percent electricity price hike awarded to Eskom, another 0.75 percent increase in the inflation number is looming. The combined effect of these two factors is likely to push the inflation rate towards 5.5 percent at the end of next month. This will considerably increase the risk of an earlier than expected rise in interest rates.  

On the JSE, most share prices increased steadily last week. Banking shares, financials and listed property share prices, however, remained under pressure. Over the week the all share index gained 551 points, or 1 percent, ending last Friday at 56 040.21 points.

The Resources 10 index improved by 1.4 percent, while the Industrial 25 index was up by 1.3 percent. Financials retreated 0.2 percent and listed property shares gave up 1.6 percent. This week investors will look out for the release of South Africa’s inflation rate for February and retail sales for January. 

Globally, attention will shift to the interest rate decisions of the US, UK and Russia. Most developed countries will release their latest inflation and employment figures, various types of Purchaser Managers Indices and economic activity indices. The EU will also hold various meetings on the Brexit issue.  

Chris Harmse is the chief economist at Rebalance Fund Managers. The views expressed here are his own.


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