Author Archives: IJGResearch

PSCE – February 2016

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Overall

Total credit extended to the private sector increased by N$430.5 million, or 0.5%, in February 2016, taking total credit outstanding to N$79.9 billion. On an annual basis PSCE growth slowed slightly from 13.8% in January to 12.7% in February. A total of N$9.0 billion worth of credit has been approved over the last 12 months with N$1.2 billion worth of credit being approved in 2016 thus far. Of this N$9.0 billion worth of credit issued during the last 12 months, approximately N$3.6 billion was taken up by businesses, while N$5.3 billion was taken up by individuals.

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Credit extension to households

Credit extension to households expanded by 0.4% on a monthly basis and 12.9% on an annual basis in February. Credit extension to households has continued to slow as interest rate hikes change consumer trends. It is worth remembering however that the transmission mechanism between rate hikes and PSCE contractions is relatively slow, particularly when interest rate increases are small. We do expect to see further rate hikes going forward and this should lead to a continuation of the slowdown of credit extension to households and possibly contractions on a monthly basis.

Household mortgage loans expanded by 0.8% month on month and 13.7% year on year and continue to make up the majority of credit extended to households or individuals. On a year on year basis the rate at which individuals are taking up mortgage loans has been increasing from below the average rate of private sector credit extension to households to well above it. On a year on year basis mortgage loan issuance is thus driving credit extension to individuals.

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Instalment credit, the second largest component of loans extended to individuals, grew at 13.1% year on year in February, down from 14.5% in January, well off the long term average growth for this component. On a month on month basis instalment credit grew by 0.1%. The lackluster instalment credit growth can be attributed to tighter monetary policy as well as a slowdown in credit extension by credit providers due to less than ideal liquidity conditions.

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Credit extension to corporates

Credit extension to corporates grew by 0.7% on a month on month basis and 12.2% year-on-year in February, growing slower than credit extended to households for the first time since January 2014, mainly due to base effects given strong growth seen over the last two years. Credit extended to corporates during February was again primarily driven by exceptional growth in mortgage loans, up 20.4% year on year and 0.6% month on month. Instalment credit extended to corporates grew at a rate of 8.7% year on year and 0.5% month on month, while overdraft facilities grew by 5.5% year on year and contracted 2.7% on a month on month basis. Although corporate credit has been growing at a far quicker rate than credit extended to individuals, the relatively low base from which this growth stems means that the majority of private sector credit still sits with the individual.

Reserves and money supply

The stock of foreign reserves increased significantly by the end of October due to the inclusion of the proceeds of the successfully issued second Eurobond. Foreign reserves decreased slightly during February. The decrease primarily came as a result net government payments. International reserves stood at N$25.216 billion at the end of February, down from N$25.292 billion at the end of January. The Eurobond proceeds are a major boost to the reserve position of the country which has been declining in real terms. Picture5

Outlook

Private sector credit extension continues to grow at a rapid rate, adding approximately N$1 billion to the total outstanding private sector credit each month. While the rate of growth has been slowing slightly in recent months, the base off of which it is calculated has grown significantly. A slowdown in the growth rate of credit extended to individuals since 2014 has been compensated for by the rapid growth of credit extended to corporates. The current rate hiking cycle is likely to put further pressure on credit extended to individuals in the coming months. Should we see a slowdown in the rate of mortgage loans extended to individuals we could experience contractions in the overall credit extended to individuals. The outlook for credit extended to corporates continues to look good although further rate hikes this year as well as looming drought conditions may put pressure on this measure.

Current banking sector liquidity conditions should put further pressure on credit extension growth as funding becomes more expensive. While not ideal, negatives to the slowdown in credit extension, especially to individuals, may be outweighed by longer term positives. A slowdown in credit extension growth should lead to a reduction in the amount of money flowing out of the country for consumptive purposes, boosting the international reserve position of Namibia. Higher interest rates should also lead to an increase in saving by individuals which is at low levels at present. A slowdown in credit extension to more natural rates (GDP growth) should be positive for the economy and prevent it from overheating.

“When it rains gold, put out the bucket, not the thimble” – Warren Buffett

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Gold bullion has rallied 15% since beginning of the year and gold mining stocks have also rallied significantly over the same period after a brutal bear market over the last five years.

Given gold’s proven ability to hold its value in the face of rising inflation and extremely accommodative monetary policy, we believe it plays an important role in any diversified portfolio.

Price – 01.01.2016 Current Price % Growth
Anglogold Ashanti Ltd ZAR 114.80 ZAR 212.80 85%
DRD Gold Ltd ZAR 2.77 ZAR 6.14 121%
Gold Fields Ltd ZAR 43.50 ZAR 59.84 53%
Harmony Gold Mining Co Ltd ZAR 17.28 ZAR 59.00 209%
Sibanye Gold Ltd ZAR 24.57 ZAR 58.93 132%

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Technical trading patterns suggest gold may finally be breaking out into a bull market.

Year-to-date, gold prices have leaped by more than 15% and the USD gold index has surged by more than 50% as the trade weighted US dollar softened and Rand strengthen against the dollar.

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Despite the recent rally, gold remains bullish

Despite the surge we’ve seen in gold and gold mining stock prices in recent months, attitudes don’t change overnight. Trading volume and upside volatility are coming back, but investor’s hesitance to buy gold may signal an even bigger shift in global sentiment. Buying gold today may be comparable to buying stocks in April 2009.

The gold miners’ stocks are rocketing higher again, multiplying wealth for smart contrarian traders who bought them low in recent months.  But after such a blistering surge, traders are naturally wondering how much farther gold stocks can run.  Soon it might be time to realize gains, or buy aggressively for greater gains to come?

If you’re really intent on investing in  gold as a way to diversify beyond a well-balanced portfolio of stocks and bonds, we suggest exposure of 5% to 10% of your total portfolio to some form of gold (bullion, coins or, more likely, an ETF that invests in physical gold) and then rebalancing periodically and/or buying or selling gold so that the value of your gold stake maintains roughly the same percentage of your assets regardless of whether gold prices have been rising or falling.

The rationale behind this strategy is that over the long-term gold can provide a decent hedge against inflation and Rand/ Namibia Dollar weakness and offer some protection for your portfolio in turbulent economic and political times.

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Since gold prices don’t always move in sync with stock prices, the price of gold rose 26% from the late 2007 pre-financial crisis stock market high to its trough in early 2009 while stock prices slumped more than 55% – owning some gold may be able to mitigate the ups and downs of a traditional stock and bond portfolio.

The result is that many investors end up adding gold to their portfolio when all the drama, anxiety and hype has driven gold to higher levels from which it can drop precipitously and weakening for years.

The last time the uproar for gold reached a fever pitch was back in August 2011 when the debt problems of Greece, Italy and Spain and concerns about Eurozone debt overall dominated the headlines. And, indeed, gold appeared full of promise back then, zooming from just under $1,400 an ounce at the beginning of 2011 to nearly $1,900 by early September for a gain of more than 36% in less than nine months.

But as the worries of a Euro debt meltdown faded, so did the price of gold, eventually retreating to less than $1,100 an ounce by the end of last year. This time round it seems that fears around a possible Brexit are underpinning the demand for gold.

We believe the Fed’s decision to hike interest rates into an economic slowdown will limit its ability to normalize interest rates in the coming year. Additional rate hikes are possible if global markets are relatively calm when the backward-looking, model-obsessed FOMC. However, further tightening would only increase the odds of a policy reversal as the year drags on. If we are correct, short-term interest rates may rise ever-so-slightly for a brief period, but will inevitably fall back toward zero (and even below zero with the likely introduction of negative interest rates), as we’ve seen with every other central bank that has tried and failed to raise rates in recent years.

Gold has been deeply out of favour for years thanks to the Fed’s surreal stock-market levitation sucking capital away from alternative investments.  And that gold antipathy climaxed in mid-December the day after the Fed’s first rate hike in 9.5 years when gold plunged to $1051.

This year’s stock turmoil and worries about global growth have pushed up the price of gold again, by roughly 15% so far this year. Still, at this point at least, investors who moved into gold nearly four and a half years ago for perceived safety, a shot at potential gains or whatever reason, are sitting on losses of about 30%.

If the current market turbulence continues and global growth prospects remain uncertain, we suppose gold could expand the gains it’s made so far this year and possibly even get back to or exceed its near-$1,900-an-ounce peak of 2011. On the other hand, if stocks revive and fears of an economic slowdown subside, investors’ enchantment with gold could fade and its price could stagnate or decline.

If you’re considering investing in gold, you should know that it is extremely volatile and, after periodic spikes in price, can fall to and remain at depressed prices for a long time. You can make the volatility work to your advantage somewhat by taking the approach I described above — that is, putting a certain percentage of your portfolio in gold and maintaining that percentage whatever the price of gold may be doing.

This strategy requires discipline and being a bit of a contrarian, as you may be buying less gold (or even selling) when everyone is crazy over gold and its price has soared and you may be buying more when the metal is unpopular and its price has slumped.

Sticking to such a regiment is difficult for many people. Most investors prefer to go with the crowd. The more popular approach is what we’re starting to see now is people jumping into gold when fear is running high and people crave safety. It’s essentially an emotional reaction and potentially dangerous one, as you run the risk of buying in only after anxious investors have already significantly boosted the price.