China’s Stimulus: A Boost for South Africa’s Economy?

Falling rates, China’s stimulus, and the rand’s path—what do these mean for SA markets in 2024? Chief Investment Officer Duane Gilbert explains. 

• China’s Stimulus Impact: China’s aggressive stimulus could boost South Africa’s commodity-driven sectors. However, the long-term effect depends on sustained Chinese growth and export demand.
• Rand’s Short-Lived Strength: Although the rand has recently gained against the dollar, its strength is expected to be temporary, with further weakening likely unless a new commodity super-cycle emerges.
• U.S. Growth Focus: Duane Gilbert sees U.S. growth stocks and small caps benefiting from falling interest rates globally, making the U.S. the top investment destination.
• South Africa’s Challenge: While South African equities are cheap, they're vulnerable to global market sell-offs. Gilbert suggests careful stock selection and minimizing exposure to South African government bonds.
  
  

Global Markets
While the first US interest rate cut was aggressive, we do not expect the cutting cycle to be large in magnitude, unless the US enters a recession – which is not a likely scenario. The updated projections show that monetary policy will gradually return to neutral by the end of 2026.

Chart 1: US Interest Rates and US Recessions (Source: Market Watch)


Chart 2: US Interest Rates Projection (Source: Alpine Macro)



The US dollar fell sharply in response to the interest rate cuts as investors rotated out of US treasuries and cash into emerging markets. As a result, emerging markets had a particularly good month in September. The MSCI Emerging Markets index ended the month up by a whopping 6.7%. The dollar index almost broke 100, which is a strong phycological barrier, but eventually strengthened in October in response to rising geopolitical tensions between Israel and Iran.

Chart 3: US Dollar Index (Source: Trading Economics)

 
In a surprising turn of events, China unveiled its most aggressive stimulus package since the Covid-19 pandemic shortly after the Federal Reserve cut interest rates. Needless to say, this contributed to the emerging market rally in a big way. The MSCI China index rallied 24% for the month. Commodity exporting countries like South Africa also benefitted.

The stimulus package has 3 parts to it (three arrows). First is a reduction in policy rates and bank reserve requirements. Second, is a reduction in existing mortgage rates and re-allowing investment demand for property – a departure from the mantra “housing is for living, not for speculating” is now obsolete.

Third is providing funding to non-bank financial institutions to buy shares, and providing capital to corporates to fund share buy backs. Interestingly, it seems as if rising stock prices are now a key confidence indicator for the economy.

This is a strong contrast to the policies that were implemented post covid that targeted sectors like real estate, education, healthcare and internet companies – which were seen to be contributing to income inequality. 

Chart 4: Summary of Chinese Government Stimulus Package (Source: ThinkChina)

 
The impact on these stimulus measure on the Chinese economy and global economy remains to be seen. However, the timing of the announcement is convenient. We know that China thrives when the Yuan is weak as it benefits their exports. As we mentioned, the September rate cut from the Fed put the dollar on a downward trajectory. It is not unreasonable to speculate that the Chinese authorities are telling market participants what they need to hear in order to keep the Yuan weak relative to the dollar.

LOCAL MARKETS
Local equities had great month in August on the back of emerging market demand and the Chinese stimulus announcement. The FTSE JSE All Share index ended the month up 4.0% in ZAR, touching a new all-time high. The Financials 15 Index ended the month up 2.5%, while the Industrial 25 Index ended the month up 5.4% and the Resource 10 Index ended the month up 3.7%. 

Chart 5: FTSE/JSE ALSI reaches new highs (Source: Infront)

 
The JSE All Bond Composite gained 3.9% for the month. The short end of the curve benefitted from expectations that the SARB will follow developed markets in cutting interest rates, while the long end of the curve benefitted from “search-for-yield” buying. The rand gained 2.9% against the dollar. The prospect for sustained Chinese government stimulus could drive the South African equities and bonds, as well as the rand, for months to come.

While it is pleasing to see this change in sentiment, the reality is that Government expenditure continues to expand aggressively. Government expenditure has almost doubled in the past 8 years, with interest expenditure increasing from roughly 9% to 18% as a percentage of revenue over the same period. Eventually, this will have to feed into higher bond yields.

Chart 6: National Government Expenses (Source: Stats SA)


Chart 7: South Africa Public Debt and Debt Service Costs (Source Alpine Macro)
 

In economic news, the SARB cut its repo rate by 0.25% to 8% in September, marking its first interest rate cut since the Covid-19 pandemic. Unlike the US Fed, the SARB is very hawkish and will not cut rates as aggressively. A milder cutting cycle should encourage more investment into our bond market and create a tailwind for the rand. 

Chief Investment Officer, Duane Gilbert’s Commentary
Our market outlook for 2024 remains bullish. Falling interest rates globally will be supportive of equity markets (and bond markets to a lesser degree). The US remains our destination of choice – growth stocks and small caps in particular. If Chinese stimulus is strong then that rally could broaden out to Europe and emerging markets. That said, we believe the current rand strength will be short-lived and that, in the absence of a commodity super-cycle, the ZAR will continue to drift weaker in the medium to long term. South African equities are particularly cheap but vulnerable to a global sell-off. One needs to carefully pick companies that can grow their earnings in a low growth environment. Given the continuing decline in investor sentiment towards South Africa, we maintain a low exposure to South African government bonds. We prefer exposure to high-quality secured credit. We maintain a modest cash position, which gives us the dry powder we need to take advantage of bargains that may arise from a market sell-off. 

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