Fac­ing up to fixed in­come volatil­ity

Finweek English Edition - - FUND FOCUS - BY LEON KOK

Try­ing to make sense of what’s cur­rently go­ing on in the wider f ixed in­come en­vi­ron­ment is not easy, but Investec As­set Man­age­ment por t f ol i o man­agers Mal­colm Charles and Peter Kent, and economist and strate­gist Nazmeera Moola made an ex­cel­lent job of it at a re­cent brief­ing in Johannesburg.

Kent re­it­er­ated the widely held view that the do­mes­tic econ­omy is in a tough spot, but said that 3% growth in South Africa wouldn’t be im­pos­si­ble against the ex­ter­nal en­vi­ron­ment, were it not for the many un­nec­es­sary hand­brakes.

He was re­fer­ring to a host of is­sues such as high lev­els of pol­icy un­cer­tainty, t win def ic­its, elec­tric­ity con­straints, labour-re­lated pro­duc­tion dis­rup­tions, struc­tural prob­lems in key sec­tors and the ero­sion of com­pet­i­tive­ness.

Charles con­curred: “We could make our­selves a lot more in­su­lated to ex­ter­nal shocks i f we could elim­i­nate these hand­brakes. That’s what’s frus­trat­ing. With good sense we could make it a lot eas­ier for our­selves.”

Moola pointed out that the Re­serve Bank’s eco­nomic growth fore­casts for 2015 had de­clined from 3.8% in May 2013 to 1.8% in July 2015, and are cur­rently ex­pected to be slightly above 2% for 2016 and 2.8% in 2017.

“Sig­nif­i­cant has been the i mpact of this down­ward struc­tural shift in growth po­ten­tial on do­mes­tic de­mand (such as weak con­sumer spend­ing and lower ve­hi­cle sales), and it’s not sur­pris­ing that inf la­tion is ac­tu­ally on the down­side,” she said.

Charles added: “The Re­serve Bank is in a com­fort­able po­si­tion and is un­likely to in­crease in­ter­est rates sig­nif­i­cantly in the fore­see­able fu­ture. Given that there is not much pres­sure on the de­mand side, it can af­ford to sit on its hands for some time. In fact, the hike that we had in July could easily have been post­poned. You can say that the Re­serve Bank is con­fi­dently ahead of the yield curve.”

He ob­served that among the eight or nine do­mes­tic in­fla­tion driv­ers, al­most all with the ex­cep­tion of food are down. In Eskom’s case, in which price is reg­u­lated, there isn’t much that the public can do, be­cause they don’t have the pric­ing power. And in the case of oil, which is in a down­ward tra­jec­tory, there’s not much that they can do ei­ther.

“Back in Tito Mboweni’s time a 10% cur­rency de­pre­ci­a­tion led to a 2% in­crease in inf la­tion. It then fell to 1% and it’s now 0.8%. That, for in­stance, al­lows re­tail­ers to put enor­mous pres­sure on sup­pli­ers, who, in turn, are forced to cut costs to main­tain mar­gins. Signs of global de­fla­tion are also creep­ing through,” he ex­plained. “Our view is that the US econ­omy has made con­sid­er­able progress – though not per­fect – and the Fed could hike in­ter­est rates next month. US inf la­tion is not go­ing to be as bad as has been feared; and if you add the Chi­nese com­po­nent, it adds to the story,” he said. Be­lieve it or not, sev­eral lead­ing emerg­ing mar­kets are far­ing worse than SA, from a pol­icy per­spec­tive, added Charles. “Tur­key has been ver y ex­per­i­men­tal and has lost quite a bit of cred­i­bil­ity. Sim­i­larly with Brazil . In­vest­ment bank JP Mor­gan says that its cen­tral bank will be forced to hike rates to such an ex­tent that it will put its econ­omy into re­ces­sion this year and that it will have to cut rates next year merely to re­gain cred­i­bil­ity.

“The South African Re­serve Bank, in con­trast, has done ev­ery­thing spot on. It is one of the most cred­i­ble in the emerg­ing mar­kets sta­ble and is even bet­ter than some of its de­vel­oped mar­ket coun­ter­parts,” said Charles.

Investec In­come Team port­fo­lio man­agers (left to right): Peter Kent, Nazmeera Moola and Mal­colm Charles

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.