Land reform a dampener on SA markets, should we be worried?

Cape Town - The ANC’s resolution to support the expropriation of land without compensation has cast a shadow across South Africa’s financial markets, denting the euphoria that swept the country in the first days of Cyril Ramaphosa’s presidency.

How worried should we be?

In some quarters, Ramaphoria has turned to Ramaphobia. However, anxiety over the issue of land expropriation is overblown, said Overberg Asset Management (OAM) in its weekly economic and market overview.

"The idea of expropriating productive farms is completely inconsistent with the new government’s clearly stated objective of lifting investor confidence.

"In its final set of resolutions on land expropriation the ANC stated that land expropriation 'must not undermine future investment in the economy, or damage agricultural production and food security' and in addition 'must not cause harm to other sectors of the economy',” said OAM.

"The most likely target for land expropriation will be the former homelands and government-owned land. These areas comprise around 30% of South Africa’s land and are home to an estimated 17 million people. Offering these people land title and ownership will unlock capital, reduce poverty, raise agricultural productivity, and create tax revenue for infrastructure development."

According to the analysts at OAM, the result will be a massive boost to the country’s GDP. (Read more in bottom line below)

South Africa economic review

• Retail sales increased sharply in February by 4.9% year-on-year, accelerating from the upwardly revised 3.3% growth rate in January. For the year-to-date retail sales grew by 4.1% on the year a marked improvement on the 1.4% contraction in the same period last year. On a month-on-month basis, retail sales grew in February by 1.8%.

By retail category, “household furniture, appliances, equipment” grew 14.2% on the year, followed by “textiles, clothing, footwear and leather” with growth of 7.1%. The outlook for retail sales is brightening helped by falling inflation and interest rates, rising jobs growth prospects, and the potential for increased household credit extension.

These factors should more than compensate for the impact of the VAT increase.

• Consumer price inflation (CPI) eased by more than expected in March to a seven year low of 3.8% year-on-year down from 4.0% in February and well below the 4.1% consensus forecast. The main contributor was a muted increase in transport prices of just 2.8%, reflecting the decline in petrol and diesel prices.

However, core CPI excluding food and energy prices remained unchanged for a third straight month at 4.1% suggesting inflation may struggle to fall any lower given the anticipated upturn in food prices, rising global oil prices and the slight depreciation in the rand over the past month. Moreover, the VAT increase on 1st April will cause a short-term inflation spike over coming months. 

The week ahead

• Reserve Bank composite leading business cycle indicator: The composite leading business cycle indicator is expected to have stalled in February after rising in January to its highest level since 2012. The chief culprits are uncertainty over land expropriation and increased global concerns over rising US government bond yields and trade protectionism.

• BER consumer confidence index: The BER consumer confidence index is expected to have improved further in the first quarter (Q1) helped by a brightening economic outlook, lower inflation and lower interest rates, greater political certainty and the credit rating reprieve granted by Moody’s.

Buoyant retail sales growth over the quarter suggests the consumer confidence index may have regained positive territory after registering -8 in Q4 2017.

• Producer price inflation: Producer price inflation (PPI), having fallen sharply from a year-on-year reading of 5.1% in January to 4.2% in February, is expected to have eased further in March to 4.0% according to consensus forecast. Lower food and fuel price inflation are cited.

However, the VAT increase and the comparative effect of a rising base level suggests the March reading may represent the low point in the PPI cycle.

Technical analysis

• Having broken the key resistance levels at R12.50/$, the rand has returned to its appreciating trend, targeting a break below R11.00/$ over coming months.

• The US dollar index has tried but failed to break through a major 30-year resistance line suggesting the three-year bull run in the dollar may be over.  

• The British pound has broken above key resistance at £1.35/$ promoting further near-term currency gains to a target range of £1.40-1.50/$.

• The JPMorgan global bond index is testing the support line from the bull market stemming back to 1989, which if broken will project further sharp increases in bond yields.

• The US 10-year Treasury yield has broken decisively above key resistance at 2.5%, targeting the next key resistance level at 3.0%. A break above long-term resistance at 3.6% would indicate an end to the multi-decade bull market in bonds.

• The benchmark R186 2025 SA Gilt yield has broken below key resistance at 8.6% indicating a new target trading range of 8.0-8.5%.

• Key US equity indices, including the S&P 500, Dow Jones Industrial, Dow Jones Transport, Nasdaq and Russell 2000, have simultaneously set new record highs, confirming a bullish outlook for US equity markets.  

• The Brent oil price has broken above key resistance at $70 and likely to remain in a trading range of $65 to $75 over the foreseeable future. Base metal prices are in a bull trend confirmed by copper’s increase above key resistance at $7 000 per ton.

• Gold has developed an inverse “head and shoulders” pattern, which indicates further upward momentum and a test of the $1 400 target level.

• The break in the JSE All Share index above key resistance levels at 56 000 and 60 000 signals the early stages of a new bull market.

Bottom line

• Anxiety over the issue of land expropriation is overblown. The idea of expropriating productive farms is completely inconsistent with the new government’s clearly stated objective of lifting investor confidence.

• In its final set of resolutions on land expropriation the ANC stated that land expropriation must not “undermine future investment in the economy, or damage agricultural production and food security” and in addition “must not cause harm to other sectors of the economy”.

• Furthermore, the ANC resolution emphasised the need to focus on the “redistribution of vacant, unused and under-utilised state land”, the better utilisation of “government-owned land”, and the need to “democratise control and administration of areas under communal land tenure”. The resolution emphasised the need to accelerate the rollout of title deeds to “black South Africans in order to guarantee their security of tenure and to provide them with instruments of financial collateral”.

• The deepest poverty is concentrated in the former homelands, where people have no recorded rights to their land, making them vulnerable to eviction and exploitation, and incapable of joining the formal economy. They rely on intermediaries to provide proof of address when they apply for social grants.

• The Peruvian economist, Hernando de Soto, winner of the Washington-based Competitive Enterprise Institution’s coveted Julian Simon Memorial Award, provides valuable insights into South Africa’s land question based on his experience in Peru.

He said that in Peru the poor were locked out of the formal economy: “They have houses but not titles, crops but not deeds, businesses but not statutes of incorporation.”A lack of title means the poor cannot sell their assets, borrow money or trade in the formal economy and are often subjected to the whims of corrupt bureaucracy. De Soto persuaded Peru’s government to provide title deeds to millions, unlocking billions in “dead capital”.

• Deputy executive director of Agri SA, Christo van der Rheede, echoes the views of De Soto. He stresses the ownership of land as a critical success factor in agricultural productivity. The lack of land title is the biggest constraint for black and coloured farmers as the land on which they farm cannot be used as security to raise loans.

• The most likely target for land expropriation will be the former homelands and government-owned land. These areas comprise around 30% of South Africa’s land and are home to an estimated 17 million people. Offering these people land title and ownership will unlock capital, reduce poverty, raise agricultural productivity, and create tax revenue for infrastructure development.

• The result will be a massive boost to the country’s GDP. Far from being a threat to the country’s economy, the land expropriation that is envisaged will provide the catalyst that lifts South Africa’ growth rate to the 5-6% level targeted in the National Development Plan.

For the full report, including a look at international markets, click here.

* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.

Disclaimer: Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report. 

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