Angst while we sit on our hands and wait

Local financial markets are off to a slow start. The rand is trading within a range established late last year, the JSE all share index is down — but not really — and bond yields are flat.

January was like watching paint dry — and for those employed to make sense of markets, the lack of direction and narratives has been hard.

Volatility is at historical lows across multiple assets globally. Even the notoriously volatile bitcoin has gone nowhere. Either everyone is positioned according to a view and now they’re sitting on their hands, or no-one knows what to think and they’re sitting on their hands. I guess most are in the latter group.

Under all this stillness lies a great deal of angst and uncertainty about where we are going next. There is no growth, and it looks like none is coming.

The IMF forecasts that global growth in 2024 will match that of 2023 at a miserable 3.1% and remain at around these levels. This is at least better than the World Bank’s prediction of 2.7%, but barely. China, which got the globe out of the ruts of 2009 and 2015, remains hamstrung. Global trade is moribund, and SA is along for the ride to nowhere.

Previously this is where rate cuts would come into the picture, but the outlook here is also not great. Inflation decelerated in most countries in 2023, but will slow down a lot less in 2024. Inflation is forecast to remain above target for most countries, including SA, at the end of this year, and the IMF estimates it will be 0.6 of a percentage point above the target for the median inflation targeting economy in the last quarter of the year. This inflation path creates problems for central banks, which might want to cut but cannot for fear of losing credibility.

The US economy is also playing a nasty game with the rest of the world. US growth is proving stronger than expected, which suggests the Federal Reserve has less scope for cutting. The IMF showed that financial conditions, a measure of the ability of economic actors to access capital, are as easy in the US as they were in 2021 and 2022 when rates were in the trough.

Moreover, wage inflation remains high, propped up by the excess of jobs over workers. This suggests the inflation war might not yet be won in that economy, and the Fed will be deeply aware of that risk. It might cut, but not by much.

Most central banks, afraid of having rates too low relative to the Fed, will also be constrained. Some central banks, especially those that hiked early and by large magnitudes, have started easing. Even then, no-one thinks they can push these cuts very far.

Fiscal policy is even more constrained. Debt levels went through the roof as countries responded to the Covid crisis in 2020 and 2021. For the US the spending spree went into 2022. Now debt levels are of great concern globally. The cost of carrying debt is at a record high because of higher interest rates. This leaves most countries in no position to stimulate.

SA is squarely in this cohort. The country experienced the highest growth of debt of the larger emerging markets in the past decade, and debt service costs are the fastest growing line item in government expenditure. Though some may believe otherwise, there is zero policy space to expand spending and support the economy in the fiscal envelope.

That leaves markets with very little to go on. There are no new narratives to rest an investment case on. There is consensus across asset managers that SA assets are cheap. The rand is cheap, local bonds are cheap and local equities are cheap. However, there is no catalyst for prices to rerate and SA is stuck in a value trap. Even so, I am grateful there are no reasons for prices to fall even more.

THERE IS ZERO POLICY SPACE TO EXPAND SPENDING AND SUPPORT THE ECONOMY