raymondparson

Michael Avery

Time for ‘The Week That Was’. As always, with Warwick Lucas, Private Clients Portfolio Manager at Vunani, and Professor Raymond Parsons from the NWU Business School and University of the Western Cape.

A short week in South Africa, but hardly a quiet one, though. Wall Street back at record highs and the JSE has given back almost 3% over the past week. American inflation is behaving. Oil certainly hasn’t. And back home, we have the rather uncomfortable combination of banks talking about ‘green shoots’, while the IDC says ‘corporate South Africa’ remains in ‘survival mode’.

So, Warwick, let’s start with that contrast, which is becoming quite stark. The S&P 500 has pushed to another record. What is the JSE starting to tell us about the global cycle?

Warwick Lucas

Well, good afternoon to you and the listeners, Michael.

This is, I guess, some profit-taking here, but I wouldn’t dismiss the signal either. The JSE’s got a very strong ‘commodity-led’ run. So, if resources fall off sharply, well, that would be investors taking money off the table.

But the bigger concern, of course, is that resources in our market are exposed to the global cycle driven by China and industrial demand, precious metals, and so on.

The contrast of the S&P 500 is quite important. Because when the US market is being carried by tech and AI, and also the idea that benign inflation – these will keep the Fed on hold. Not withstanding that, frankly, US inflation measures were a bit odd on a good day. Because housing and rental are such an enormous part of the US CPI. I think it distorts it quite a bit.

But that aside, it also means the US Fed will have less of a problem with ‘headline inflation’. I put that in inverted commas. Most other central banks actually measure it more sensibly.

It’s a warning light, but it’s not a serious signal I would worry about yet.

Michael Avery

And Raymond, we spent quite a bit of time last month asking whether markets were becoming a little bit too complacent about Iran and the oil shock. We saw US producer prices come in flat for July as well. Expectations of another Fed hike have been pared back quite sharply.

Have markets earned the right to relax a little? Brent is still around $87 a barrel. It’s still up roughly 4% for the week. And the Strait of Hormuz remains anything but resolved.

Raymond Parsons

Hi Michael. I think we’re dealing with a very mixed picture of economic signals, both globally and domestically at this stage.

As far as the US is concerned, the important point is: I’m inclined to give Fed Chairman Kevin Warsh the benefit of the doubt for now. Because if you look at some of the data he’s dealing with, it’s mixed. Such as:

Firstly, we know that the unemployment figure recently rose slightly, although it’s still only at 4.2%. The Fed has a dual mandate

Secondly, recent inflation is easing. But it has now remained well above the Fed’s original target of 2% for several years

Thirdly, you’ve got the continued geopolitical uncertainties around the Strait of Hormuz, to which you’ve also referred

And then, finally, not forgetting that President Trump is also breathing down Warsh’s neck about the midterm elections and US economic prospects by November

The outlook at the moment therefore is that ‘the jury is still out’. So, I can understand why someone like Warsh is still cautious, despite the bond market signals. He will want to see the economic data over the next few weeks, before he finally decides what the US Fed will do about interest rates at their September meeting.

Michael Avery

We’ve got, Warwick, US retail sales and consumer sentiment. What matters more to markets now? Inflation continuing to cool, or evidence that the American consumer can keep spending without forcing the Fed back into the fight?

Warwick Lucas

I think the perfect number, of course, is a ‘soft-landing’ number, which everyone hopes for and speaks about much more often than they actually see it.

But I guess that would look like a consumer still spending, but not ‘overheating’. Markets want enough retail strength to support earnings, but not so much that the Fed has to worry about inflation being reignited.

And that exposure to housing in the CPI numbers is likely to be key to that. So, I mean, inflation itself obviously matters, but the consumer is the next test.

And so that’s a bit of an open-ended question. We haven’t seen a rampant consumer, but we haven’t seen a consumer that’s ‘folded in a heap‘ either. So, consensus seems to be modest retail sales growth, but let’s see.

Michael Avery

And then, locally, Standard Bank rather spoiled the gloomy mood yesterday, with record first-half headline earnings. And the share responded accordingly.

I spoke to Sim Shabalala, the CEO, about this yesterday. What really struck me was the growing confidence that infrastructure reform and corporate activity are finally beginning to show up in customer behaviour, lending demand, and the bank’s books.

Maybe I can bring you in on this, Warwick. Are banks becoming the more interesting expression of a South African ‘recovery story’ than, maybe, the commodity shares we were unpacking earlier?

Warwick Lucas

I suppose it’s a clearer expression of a local recovery. Sure, resources are still important, very much so, but they are driven by variables that South Africa doesn’t control.

The Standard Bank numbers were important because they weren’t just some cost-cutting profits. Banks give you a read on domestic confidence, credit demand, infrastructure activity, transaction volumes, and payments.

So, yes, Standard Bank’s numbers weren’t just cost-cutting or anything. They’re supported by fee and trading revenues, as well as strong net interest income growth in corporate and investment banking.

So you’ve got management pointing to stronger second-half banking revenue growth, even as rate ‘headwinds’ ease.

So, it means that, if corporates are borrowing for activity rather than survival, banks are a place where it could potentially show up early. So, banks are an interesting SA recovery proxy.

Michael Avery

Yes, and a good ‘leading indicator’ for the broader economy. Although, Raymond, this is where the story gets a lot more interesting and difficult to reconcile.

On the one hand, we’ve got banks becoming early indicators of greater corporate activity, ‘the canaries’, so to speak, in a positive way. Operation Vulindlela indicated progress in some of the major network industries.

On the other hand, the IDC has effectively put a large ‘red warning light’ over productive investment, saying that weak fixed investment has become a ‘binding structural constraint’ on South Africa.

Manufacturing ran a 310 billion rand trade deficit in the first five months of the year, while non-financial corporates are sitting on cash reserves, all those that are not banks, approaching two trillion rand.

When companies have the money but refuse to deploy it, what do you think corporates are actually waiting for now, Raymond?

Raymond Parsons

Michael, yes, indeed, the question of corporate investment activity is a lot more complicated than, for example, Standard Bank’s performance may reveal. Because later this week, apart from the earlier IDC report, what did Nedbank tell us in their broad survey of Capital Expenditure Project Listings for the first half of this year?

It shows a sharp decline in fixed investment plans in both the public and private sectors. In fact, they indicate that the value of new projects in the first half of this year showed an 81% decline, from R718 billion in 2025 to R137 billion now,

The bulk of such investment that did occur was concentrated in the renewable energy sector. So the update is another signal we’ve got to take into account in assessing the bigger picture – a ‘wait-and-see’ investor stance.

Yes, there could be negative global factors that also contributed to this setback in fixed investment in the earlier part of this year. But the investment outlook, says Nedbank remains uncertain. It now depends on the trajectory of business confidence, consumer spending, and, of course, any further global headwinds in the period ahead

So, while Nedbank is indicating that, yes, there could be a mild investment recovery over the next couple of years, we are still looking at investment levels that are far too low to support the much higher growth and job-creation we want and need

And I think that’s the broader signal that has emerged and we need to see that warning signal for what it is.

Warwick Lucas

Yes, Michael, if I may?

Michael Avery

Yes.

Warwick Lucas

I’m seeing that companies are not necessarily being conservative.

They’re simply saying: show me stable electricity. Show me rail that works. Show me ports that move goods. Show me municipalities that can issue permits, supply water and maintain roads. Show me demand. Show me politicians that don’t have their damn fingers in the till. Show me policing that works.

And until then, cash is an insurance policy. From a market perspective, trapped cash is not ‘bullish’. It is not ‘bullish’ unless it starts moving.

And government: a certain amount of self-reflection by government, municipalities, and so on – is absolutely critical to actually ‘turning the corner’ – stop blaming, and start fixing problems instead of talking.

Raymond Parsons

Michael, a large part of ‘turning this economic corner’ now also revolves around the pending local elections. There’re broader messages, both nationally and locally, that will need to emerge from these elections to help turn this economy around faster on a more sustainable basis.

Michael Avery

Yes – which we’ll unpack next week in greater detail.

Thank you very much, both. Couldn’t have said it better myself. Raymond Parsons and Warwick Lucas.