Sanlam Namibia, All Namibia Fund – Economic commentary
By Basson van Rooyen
Sanlam Investment, Portfolio Manager
As we shake off the dust from 2017 and take stock of the year that has passed, one can agree that it was definitely one of the more interesting and volatile years from recent memory with some unexpected developments.
Namibia and South Africa flirting with credit ratings outside of the investment grade bands, new regulation developments channelling more funds in to the Namibian markets and some significant political changes to our neighbours here in Southern Africa. With all of this volatility and many market commentators being negative, 2017 favoured the investor holding more local assets especially in the equity space, even with the inclusion of the drop in value of Steinhoff shares.
Looking down the road into 2018, one has to wonder if short term trends will continue or if this market is positioned for more volatility and uncertainty. Positioning portfolios requires patience and commitment to long term goals where one has to keep looking for well positioned, positively valued investments and not get swept along by short term profit seeking investment decisions.
Inflation both for Namibia and South Africa remained below 6% for the 4th quarter of 2017 with our December year on year inflation rate standing at 5.2% and the average rate for 2017 at 6.2%. The contributors to the December inflation numbers was mainly housing, water, electricity, gas and other fuels at 9.2%, education at 7.8% and transport at 6.7%. While the food, alcoholic beverages and tobacco ended the year on a downward trend after their large contribution to inflation numbers in the 3rd quarter. We’re expecting NCPI to remain relatively in line with the SA inflation target band of 3% to 6% and our forecast is for an annual average of 5.1% in 2018. The risk for an unexpected move in the inflation number stems from the potential for exchange rate volatility as well as the impact of commodity prices in the short term.
The economic growth numbers continue to disappoint and together with revisions made by the Namibian Statistics Agency, we have had only one positive quarter in the last year and a half. The 2016 full year GDP growth stood at 1.1% and the Bank of Namibia’s current projection of growth for 2017 is at 0.6%, which means the 4th quarter growth of 2017 needs to come in at 7.1% which seems to be a bit of a stretch. Construction remains one of the main detractors from growth and as it now stands this sector has contracted for the 7th straight quarter, mainly due to the cut in government expenditure on construction projects. There is a strong likelihood that 2017 will be the first annual contraction that Namibia records in the last decade.
The Monetary Policy Committee of the Bank of Namibia cited support for the domestic economic growth, slowdown in inflation and private sector credit extension as to keeping the repo rate unchanged for the last quarter of 2017 and in line with that of South Africa at 6.75%. Although we’ve seen a general upward trend from the US Fed Fund Target rate since late 2016 and a recent increase in UK Bank of England Repo rate, the market is still pricing in a drop of approximately 50 basis points towards the middle of 2018.
The 2017/18 mid-term budget review did not bolster confidence in the objective of fiscal consolidation when we saw unbudgeted expenditure and additional strategic resource allocations not previously included in the budget. The current projected budget deficit for 2017/18 has been revised from N$4.04 billion to N$9.4 billion (3.5% of GDP) which was mainly attributed to outstanding invoices coming out of the 2016/17 period. Revenue collection seems to be on track with prior years and the much relied on SACU revenue of N$9.8 billion has been received to date. Unfortunately, the SACU revenue which makes up more than 30% of our total revenue is expected to remain under pressure in the medium term, due to the low growth environment across the SACU regions. Further cutting on expenditure will become very difficult as the public-sector wage bill has now steadily increased to over 40% of the total government expenditure, cutting this could risk possible public unrest. Another option is further cutting of developmental projects which has already seen minimal allocations compared to previous year’s budgets.
Unfortunately, the medium term budget policy statement did not seem to quell the concerns from the international ratings agencies and Fitch cut our long term outlook to BB+, following Moody’s decision in August to rank our debt instruments outside the investment grade band. South Africa is similarly rated outside the investment grade band by Fitch and Standard and Poor’s, with only Moody holding the rating at Baa3 (lowest investment grade) stating it’s on review for a downgrade.
The exchange rate has had a favourable quarter with the Namibian Dollar strengthening from 13.55 to 12.38 against the US Dollar, levels last seen in 2015.
Bond yields continued on a bumpy path during the 4th quarter with yields going sharply up and then coming almost all the way back down, going almost full circle during the quarter. The Namibian 10-year government bond yield started the quarter at 10.44% and subsequently traded weaker during October, in particular after the delivery of the South Africa Medium Term Budget Policy Statement when it went up to 11.16%. It continued weaker during November, but traded much stronger during December as local interest rates rallied during the last few weeks of the year.
The local 10-year yield made back almost all the lost ground and finished the quarter within 5 basis points where it started the quarter, ending the year at 10.47%. Looking at the premium over the SA bonds it seems that the trend of lowering premiums (Namibian bonds trading more favorably compared to their SA counter parts) has come to an end during the 3rd quarter and has remained mostly constant, the current premium over SA 10 year yield rate is 1.65% (still quite a bit off from our 5 year average of around 1.2%).
With the premiums staying mostly steady for the quarter and yields doing the full circle, the IJG Bond Index showed a return of 2.65% for the 4th quarter outperforming the IJG Money Market index which delivered 1.99% for the same period. On the short term government treasury bill auctions we’ve seen the yields picking up in the 4th quarter after 6 months of lowering yields, with the current 1 year TBs clearing at around 8.6% compared to the 7.9% from September. It seems that there is more pressure on government to raise financing on the short side compared to the longer bond auctions.
The events surrounding Steinhoff dominated headlines during December with the local equity and credit markets both being affected, but this did not detract from how well the equity markets performed in total for 2017. The JSE All Share delivered a total return of 20.95% for the 12 months, the NSX including dual listed shares delivered 26.45% and the Locally listed shares 14.40%.
As an investment house we remain positive on bonds and neutral local cash and equity.
With the good performances of the equity markets in 2017 we still see the Namibian and South African equity market to be selectively attractive. The fund holds positions not only in the dual listed shares, but also in the locally listed Namibian companies, which although has lagged their SA and Dual listed counterparts in 2017, offers a reasonable upside outlook from current levels.
We slightly increased our position in conventional bonds as the asset class offers an approximate 5% real yield, which is attractive when compared to domestic bonds of similarly rated countries. Inflation remains under control and well within the acceptable level. Cash continued to be enhanced over the quarter via the addition of select credit assets at attractive yield pick-ups over money market rates.