Global search for yield means parts of the econ­omy are counter-in­tu­itively do­ing well

CityPress - - Business - DEWALD VAN RENS­BURG dewald.vrens­burg@city­

The bil­lions of dol­lars flood­ing into emerg­ing mar­kets are prop­ping up fi­nan­cial mar­kets, but this dis­guises the un­der­ly­ing crises in South Africa’s real econ­omy. Econ­o­mists for ma­jor banks and as­set man­agers this week warned that both growth and tax rev­enues were likely to fall be­low the ex­pec­ta­tions of Na­tional Trea­sury this year.

At the same time, fi­nan­cial yard­sticks such as the ex­change rate and yields on govern­ment bonds are all counter-in­tu­itively do­ing well, thanks to a global “search for yield” mov­ing cap­i­tal from de­vel­oped to so-called emerg­ing mar­kets.

“In this en­vi­ron­ment, the lo­cal is­sues all get dis­guised,” said Nazmeera Moola, econ­o­mist for In­vestec As­set Man­agers.

Ac­tual in­vest­ment in pro­duc­tion by pri­vate com­pa­nies is in the mid­dle of an un­prece­dented pe­riod of de­cline where there is no ex­ter­nal cri­sis to blame, she said.

Indi­ca­tors, like ar­rears on rent and the cash­ing out of pen­sions, show that peo­ple are strug­gling to pay their way, added Et­ti­enne le Roux, chief econ­o­mist of Rand Mer­chant Bank.

They were part of a panel dis­cus­sion at the Dis­cov­ery Fi­nan­cial Plan­ning Sum­mit this week. Moola pre­dicts eco­nomic growth will be less than 1% for 2017 and Le Roux like­wise sees it com­ing in at be­tween 0.5% and 1%. Trea­sury fore­cast 1.2% growth this year. Le Roux said that his bank’s growth fore­cast, if it came to pass, could re­sult in a govern­ment tax short­fall of R45 bil­lion in one year.

Dooms­day pre­dic­tions about the rand and govern­ment debt be­fore the Cab­i­net reshuf­fle and the down­grade that fol­lowed have nev­er­the­less not ma­te­ri­alised at all.

The rea­son is the in­flows into emerg­ing mar­kets, said Moola.

“Since the start of 2017, about $64 bil­lion has flown into emerg­ing mar­ket debt and eq­uity funds. It was $31 bil­lion into eq­uity and $33 bil­lion into debt.”

“If you are a debt mar­ket strate­gist ... South Africa, Turkey and Brazil are all 10% of your in­dex.”

This might change if South Africa gets its rand­de­nom­i­nated debt down­graded to “junk” sta­tus by Moody’s, which would mean drop­ping out of the very in­flu­en­tial Citibank World Govern­ment Bond In­dex. This would trig­ger au­to­matic sales of be­tween $7 bil­lion and $10 bil­lion in govern­ment bonds, ac­cord­ing to Colin Cole­man, head of Gold­man Sachs’ South African of­fice.

“We are tap-danc­ing around struc­tural re­forms,” he said.

“Do we re­ally need to own 100% of Medupi? What if we sold 45% to the Chi­nese, that is al­ready $5 bil­lion right there,” he told the au­di­ence.

“There is no rea­son not to do that. You still have a con­trol­ling stake, you still op­er­ate and set the terms of the sale of power out­put.”

Cole­man later told City Press he does not pro­pose whole­sale pri­vati­sa­tion, but ef­fi­cient use of as­sets to help re­solve the cur­rent cri­sis in state-owned en­ter­prises (SOEs) which are debt-rid­den and pose the most ob­vi­ous risk to the state’s fi­nances dur­ing this pe­riod of low eco­nomic growth.

“I said that in the con­text of ad­dress­ing the bud­get deficit and im­prov­ing the bal­ance sheet of the SOEs.”

Apart from Eskom, Transnet and other large SOEs have enor­mous as­sets as well as sig­nif­i­cant debt and state guar­an­tees. State cap­ture was, how­ever, hold­ing the coun­try to ran­som and in­hibit­ing these kinds of larger struc­tural re­forms, Cole­man said. “We can­not em­bark on whole­sale struc­tural re­form while reg­u­la­tory pol­icy and state in­ter­ven­tions are driven by per­sonal, and some­times corrupt, in­ter­ests.” “The only way we are go­ing to get growth is by putting the eight mil­lion un­em­ployed to work. The only way to do that is busi­ness con­fi­dence. Govern­ment must cre­ate an en­vi­ron­ment of good gov­er­nance and peace.” “Once we clean out the gov­er­nance is­sues and have a sin­gle-minded fo­cus on job cre­ation – then we can get labour re­forms, SOE re­forms, co­op­er­a­tion on work­place train­ing. You would have a much bet­ter ba­sis for for­eign and lo­cal in­vest­ment in the coun­try.” “South Africa is a small econ­omy de­spite be­ing very liq­uid. Over the past two years for­eign port­fo­lio flows into the stock ex­change and bond mar­ket con­tin­ued be­cause they can get in and out eas­ily. We have a very con­ducive global en­vi­ron­ment with mas­sive funds look­ing for yield.” Port­fo­lio flows can quickly be re­versed and are not long-term di­rect in­vest­ment, he said. Cole­man says there is a “dam wall” of de­ferred in­vest­ment de­ci­sions build­ing up. “No one, do­mes­ti­cally or glob­ally, will make big in­vest­ment de­ci­sions when one does not know if the rules will change.” He said the ANC elec­tive con­fer­ence in De­cem­ber will be a wa­ter­shed – ei­ther sad­dling South Africa with a 10-year con­tin­u­a­tion of cor­ro­sive pa­tron­age net­works or a re­turn to more “Man­dela-es­que” poli­cies. “The can­di­dates are not for­malised yet, but the con­sti­tu­tion­al­ists and mod­ernisers will take South Africa in the right di­rec­tion,” Cole­man said.

“If you did not have those in­dex flows you would have more of a re­ac­tion to idio­syn­cratic de­vel­op­ments such as we have seen here re­cently,” said Is­abelle Ma­teos y Lago, a strate­gist for Black­rock, the world’s largest as­set man­ager with about $5.4 tril­lion in man­aged as­sets.

“South Africa is part of a lot of in­dexes, so you’d need some­thing re­ally dra­matic to have a lot of move­ment,” she said.

Her pre­sen­ta­tion at the sum­mit made the case for in­vest­ing in emerg­ing mar­ket eq­ui­ties.

How­ever, in­vest­ing in the stock ex­change of an “emerg­ing mar­ket” does not nec­es­sar­ily mean in­vest­ing in that coun­try.

“One of the rea­sons we are so bullish on emerg­ing mar­kets is be­cause the main com­pa­nies are global com­pa­nies. It is not your lo­cal com­pa­nies ser­vic­ing your do­mes­tic mar­ket,” Ma­teos y Lago told City Press.

“It is a nu­anced mes­sage, when you say buy emerg­ing mar­ket eq­ui­ties, it re­ally means buy global cor­po­rates that are geared to ben­e­fit from a global growth story.”

“It is a dif­fer­ent mes­sage from say­ing we love South African fun­da­men­tals right now. We don’t.”

Ma­teos y Lago said the con­di­tions that un­der­pin the so-called carry trade – cap­i­tal from low-in­ter­est de­vel­oped mar­kets “seek­ing yield” in emerg­ing mar­kets – were likely to per­sist for the next decade.

“We think emerg­ing mar­ket debt is a pretty good in­vest­ment from a medium- to long-term per­spec­tive.”

This is rel­a­tive to the bonds of de­vel­oped coun­tries “which yield very lit­tle if any­thing and have quite a bit of volatil­ity and es­sen­tially no in­come”. Work­ing age pop la­tion Unem­ployeO anO OisMo rageO Em­ployeO Not look­ing for work

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