Category Archives: Team Commentary

Team Commentary

PSCE – December 2014

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Overall

Credit extended to the private sector increased by N$1,093.9m, or 1.6%, in December 2014, taking total credit outstanding to N$69.4bn. On an annual basis PSCE growth accelerated to 16.5%, a slight uptick from November. A net total of N$9.82bn worth of credit has been extended during 2014, the highest level of net issuance seen over a 12 month period to date, as high growth continues to be seen off an ever increasing base. Of this N$9.82bn, approximately N$4.85bn was issued to businesses, while N$4.89bn was taken up by individuals.

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Credit extension to households

Credit extension to households expanded by 1.8% on a monthly basis and 13.3% on an annual basis in December. The growth in credit extension to households can be largely ascribed to prolonged and historically low interest rates in Namibia, allowing for the relatively cheap uptake of credit by interest sensitive households. While interest rates have now started to increase, the transmission mechanism is relatively slow, particularly when interest rate increases are small, as have been the recent hikes.

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Mortgage credit is still by far the biggest component of credit extended to households, contributing 39.2% to the total PSCE outstanding, and 65.5% of credit extended to households. N$2.90bn worth of mortgage credit was issued during 2014, expanding by 12.0% year-on-year and continues to grow on the back of low interest rates and a strong local economy.

Installment credit makes up the second largest component of credit extended to households (16.6%) but is the fastest growing component with a year on year growth rate of 18.8% compared to the 13.3% growth seen in total credit extended to households. This points to a nation that is becoming more comfortable with the use of debt for private consumption. Installment credit is often used to purchase consumer goods and could be seen as a non-productive utilization of credit, and much of this is spent on imported goods.

Credit extension to corporates

Credit extension to corporates grew by 21.4%year-on-year in December, meaningfully higher than the growth of credit extended to households. Mortgage loans, the largest component of credit extended to corporations, grew by 22.5% or N$1.48bn during 2014. Overdraft facilities, the second largest component, grew by 21.6% and now amounts to 25.0% of the total credit extended to corporations. The continued growth in PSCE is indicative of the strength of the Namibian economy even amid global divergence and despite South African economic weakness.

Outlook

Looking forward we expect to see further strong credit growth. Real income growth is expected to remain elevated given the expansive economic conditions that are still prevalent within Namibia which will continue to reinforce demand for credit as Namibian’s leverage off increased income.

 

Massive ECB QE lays case for bull run

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Going into yesterday’s QE announcement we were tracking the factors listed here in order to gauge the significance of the program and possible market reaction. After the fact, analyzing Draghi’s speech, it is evident that the ECB did not come to the table to play around, announcing a sizable bond buying program aimed at stimulating growth in the Eurozone. Only time will tell whether or not this program will be enough to kick start Euro economy, but one thing is more certain and that is that this program, and the resultant global liquidity injection, is very positive for equity markets.

So what does the QE program entail?

  • Bull point: The program is €1.08 trillion in size which is way ahead of the €600 billion that was the make or break level in our view. The size of the program is 1.73x the market capitalization of the Top40, 1.05x the market cap of the DAX and 0.44x the market cap of the FTSE 100.
  • Bull point: The program stretches from March 2015 to September 2016 which matches market consensus of 18months.
  • Bull point: While the program is designed to last 18 months, the ECB made it clear that it would be extended if required, with a long term goal of inflation at 2% in the monetary block.
  • Neutral: The program is set to start March 2015, which is not instantaneous, however it is still within the first quarter of 2015 which was our cutoff date.
  • Bull point: The purchasing rate came out at €60 billion a month, ahead of expectations (and the previous day’s leaked number of €50 billion a month). Japan’s QE program is currently purchasing securities at a rate of US$60 billion a month. Put together the two programs inject slightly less than US$130 billion a month into the global economy which is 50% more than QE3 in the US.
  • Bull point: The program will be buying both public and private debt which is very bullish in our view, as the combination will ensure the most optimum injection of funds into the Euro economy.
  • Bull point: The program is targeting debt securities with maturities between 2 and 30 years which is very bullish. Our view was that longer duration should be favored over short term, which we believe will be the case.
  • Bullish point: The ECB is willing to buy bonds at a negative yield. Considering the number of bonds trading at a negative yield it would have put significant restrictions on the program should the ECB only have been interested in yields higher than zero.
  • Bullish point: The vote was unanimously in favor of the program.
  • Bear point: The program is limited to investing in investment grade securities which automatically excludes Greek debt, however this will be revised as early as July after the SMP bond redemption, if certain conditions are met.

Further consequences of ECB QE:

Bull point: Many central banks across the world have cut interest rates, further increasing global liquidity, including the Swiss National Bank, Bank of Canada and the Danish Central Bank. Moreover, other central banks, such as the Bank of England, are also expect to join the party over coming months, and there is an ever increasing probability of the SARB doing the same.

Bull point: Further postponement of a rate hike in the US. Consensus forecasts were expecting a rate hike by the Fed in 2015, with this prospect creating jitters in global financial markets. With the first Fed rate hike moving further out, markets will be more calm and bullish.

Bull point: Decreased volatility. Markets were exceptionally volatile over the past couple of months, with volatility measures like the VIX spiking out of its normal trading ranges and brokerage houses significantly increasing margin requirements. Lower volatility will most definitely boost market sentiment.

South African Equity Markets

In our view the recent drop in bond yields is positive for equity markets as it decreases the required rates of return for the market and theoretically justifying higher valuations given the forecasted earnings, cash flows and dividends (thus equity selection is critical).

Bond yields relative to earnings yields and dividend yields suggest very attractive relative valuations for equity markets.

The fundamentals of consumer discretionary, consumer staples, financials and healthcare are all positively impacted by QE, lower interest rates, rand strength, lower inflation and increases in real disposable income. We expect to see these sectors to show upward earnings revisions and for them to drive the rally on the JSE.

The JSE is currently trading at the same levels seen February 2014, implying that the market is coming off a low base.

The QE announcement will in our view see the JSE TOP40 index breaking to the top side of out of a symmetrical triangle which is very bullish and suggest a 6000 (approximately 14%) point move higher in the index over coming months.