Finweek English Edition - - FRONT PAGE - By Ciaran Ryan

in De­cem­ber last year, af­ter its first in­ter­est rate hike in a decade, the Fed­eral Open Mar­ket Com­mit­tee in­di­cated there likely will be four in­ter­est rate hikes in 2016. Such was the op­ti­mism over the US re­cov­ery. Then came the Jan­uary crash in eq­ui­ties as in­vestors di­gested the ex­tent of China’s flag­ging growth. Talk of fur­ther rate hikes un­der th­ese cir­cum­stances seemed sui­ci­dal. Now it looks as if any in­crease in rates will have to wait till later in the year, or even 2017. Dovish com­ments by US Fed­eral Re­serve

chair Janet Yellen and some of her col­leagues on the out­look for US in­ter­est rates have con­trib­uted to a flow of funds to emerg­ing­mar­ket cur­ren­cies and as­sets in re­cent weeks, boost­ing cur­ren­cies like the rand and the FTSE/ JSE All Share In­dex.

Yellen has ex­pressed con­cern over weak­erthan-ex­pected global growth and un­cer­tainty over the out­look for US in­fla­tion, China and global oil mar­kets, in­di­cat­ing that US in­ter­est rates will stay lower for longer. Ear­lier this month, the In­ter­na­tional Mon­e­tary Fund (IMF) down­graded the growth out­look for all ma­jor ad­vanced economies, in­clud­ing the US, Canada, Ja­pan and the eu­ro­zone. The US is now ex­pected to grow by 2.4% this year, lower than the 2.6% fore­cast by the IMF in Jan­uary. The US grew 2.1% in 2015 and 2.4% in 2014.

The out­look for global growth was cut to 3.2%, from a Jan­uary fore­cast of 3.4%. On the plus side, the out­look for China, the world’s sec­ond-largest econ­omy, was in­creased by 0.2 per­cent­age points to 6.5%.

De­spite the IMF’s cut in the US growth out­look, judg­ing on the eco­nomic statis­tics from a range of govern­ment bu­reaus, the US econ­omy looks perky. The un­em­ploy­ment rate now stands at about 5%, the stan­dard bench­mark

for full em­ploy­ment. The US Bureau of La­bor Statis­tics re­ported that there were 215 000 new jobs in March, con­tin­u­ing a trend that be­gan in 2010. In­clud­ing part-time and dis­cour­aged job seek­ers the US un­em­ploy­ment rate rises to 9.7%.

Mar­kets re­bound

The re­cent surge in US stock prices – de­spite ex­pec­ta­tions of lower first-quar­ter profit fig­ures – has been a tonic for world mar­kets. On 18 April, the S&P 500 closed at its high­est level since the start of De­cem­ber, and only 2% be­low its record high of May 2015, ac­cord­ing to data.

In Jan­uary the Dow Jones In­dus­trial Av­er­age plunged more than 10% in 10 days, and then promptly re­cov­ered all th­ese losses. The FTSE 100 fell 10% in Jan­uary but has since re­cov­ered 14%, break­ing new highs for the year. Ja­panese stocks lost more than 20% of their value in Jan­uary, re­cov­er­ing 13% since then. The Shang­hai Com­pos­ite In­dex was butchered 27% over the same pe­riod, re­bound­ing 16% by 15 April.

Th­ese were fright­en­ing days for in­vestors. Oil bot­tomed at about $26/bar­rel in Jan­uary be­fore surg­ing to $44 on 12 April. The re­bound in as­set and com­mod­ity prices in the first three months of the year has been fed by a steady diet of pos­i­tive eco­nomic news. The sup­posed melt­down in China has not ma­te­ri­alised, as demon­strated by news that the econ­omy grew 6.7% in the first quar­ter of 2016.

The Long-Term US Trea­sury Bond ex­change­traded fund (ETF) is up 9% since the start of the year, while ETFs com­pris­ing cor­po­rate bonds have gained roughly 7%, not count­ing the yield of 4.4%, cour­tesy of sig­nals from the Fed that the days of easy money and low in­ter­est rates will con­tinue. Re­turns from cor­po­rate bonds are primed to beat eq­ui­ties in 2016, as they have done in 14 of the last 19 years, ac­cord­ing to Eddy Elfen­bein, ed­i­tor of the blog Cross­ing Wall Street.

In Jan­uary Mor­gan Stan­ley put out a re­port that the US econ­omy could con­tinue grow­ing un­til 2020, which would make this the long­est US ex­pan­sion since World War II. It based this anal­y­sis on job growth of about 200 000 a month in 2015, a trend that has con­tin­ued into 2016, which in turn has fat­tened the wal­lets of con­sumers.

The Univer­sity of Michi­gan’s Consumer Sen­ti­ment In­dex av­er­aged 92.9 last year, the high­est since 2004. Though the in­dex has dipped in each of the last four months, the Univer­sity of Michi­gan ex­pects in­fla­tion­ad­justed per­sonal con­sump­tion ex­pen­di­tures will grow by 2.5% in 2016.

Lower debt lev­els

An­other cause for cheer is the fact that Amer­i­cans are less in­debted than they were in 2008. Mor­gan Stan­ley re­ported ear­lier this year that per­sonal debt to dis­pos­able in­come is down to 106% from 135% in 2008. Delin­quent debts – those more than 90 days over­due – have fallen to 4% from 9% in 2008. Cor­po­rate Amer­ica is sit­ting on a cash moun­tain of close to $2tr, swamp­ing the $400m in cor­po­rate loans that fall due in the next two years. The prob­lem is that lit­tle of this cash is be­ing in­vested in new pro­duc­tive ca­pac­ity. Ex­clud­ing en­ergy and util­i­ties, Mor­gan Stan­ley ex­pects the ra­tio of cap­i­tal ex­pen­di­ture-to-sales to drop to 4.6% later this year, roughly half that prior to the last re­ces­sion.

Most of this $2tr cash moun­tain is held by

The HSBC an­a­lysts are con­cerned that medium-term earn­ings in the US will dis­ap­point due to higher wage de­mands and ris­ing fi­nance costs which leaves less room for share buy­backs.

the 50 largest cor­po­ra­tions and, ac­cord­ing to Moody’s, about two-thirds of it is held abroad – be­yond the reach of the US In­ter­nal Rev­enue Ser­vice. US pres­i­den­tial can­di­date Don­ald Trump says if he gets the nod from vot­ers later this year, he wants much of this money repa­tri­ated at ben­e­fi­cial tax rates and in­vested in the lo­cal econ­omy.

“We’ll likely com­plete the labour mar­ket re­cov­ery, get back to full em­ploy­ment and get the nor­mal­iza­tion process for mon­e­tary pol­icy

un­der­way,” Jan Hatz­ius, chief econ­o­mist and head of Global Eco­nom­ics and Mar­kets

Re­search at Gold­man Sachs, says in a re­port pub­lished by the bank. He ex­pects the econ­omy to per­form slightly slower in 2016 than the pre­vi­ous year, with lower oil prices help­ing to boost consumer spend­ing, re­sult­ing in GDP growth of 2.25% this year.

Gold­man Sachs says the US econ­omy is ben­e­fit­ting from lower com­mod­ity prices such as that of oil, and a glut of cor­po­rate sav­ings that will even­tu­ally force a rise in in­ter­est rates. This in turn means US dol­lar strength is here to stay, as money moves away from “emerg­ing­mar­ket fragility to de­vel­oped mar­ket sta­bil­ity”. In this en­vi­ron­ment, cur­rency wars are a real pos­si­bil­ity: emerg­ing-mar­ket economies are likely to steal com­pet­i­tive ad­van­tage by al­low­ing their cur­ren­cies to weaken against the dol­lar and euro.

“We’re at an im­por­tant in­flec­tion point in his­tory as far as the growth dy­nam­ics of the emerg­ing mar­kets ver­sus de­vel­oped mar­kets,” says Char­lie Him­mel­berg, co-head of Global Mar­kets Re­search at Gold­man Sachs, in an April re­port to clients.

“The world is at an in­flec­tion point – we have had 15 years of strong emerg­ing-mar­ket growth and this boosted com­mod­ity prices. Now sup­ply has caught up to de­mand and prices have ad­justed ac­cord­ingly.”

Con­tra­dic­tory ev­i­dence

Be­fore the stock mar­ket crash at the start of 2016, Cit­i­group warned there was a 65% chance of a US re­ces­sion in 2016. And just last week the US Na­tional Fed­er­a­tion of In­de­pen­dent Busi­ness re­ported that small­busi­ness sen­ti­ment had dipped to a two-year low. HSBC’s global equity team shaved its S&P 500 tar­get for 2016 to 2 050 from 2 100. “The mar­ket re­mains bound by an un­com­fort­able mix of fac­tors, in­clud­ing peak earn­ings and mar­gins, above-av­er­age val­u­a­tions and an ap­pre­ci­ated US dol­lar. In ad­di­tion, it’s the best-owned mar­ket glob­ally,” says HSBC’s Ben Lai­dler and Daniel Grosvenor in a note to clients.

The HSBC an­a­lysts are con­cerned that medi­umterm earn­ings in the US will dis­ap­point due to higher wage de­mands and ris­ing fi­nance costs, which leaves less room for share buy­backs. The bank­ing sec­tor has been par­tic­u­larly hard hit in re­cent months. The top five US banks lost 20% of their mar­ket cap­i­tal­i­sa­tions, or $120bn, be­tween Novem­ber last year and Fe­bru­ary this year. Roughly 70% per­cent of US banks with a sig­nif­i­cant global pres­ence were trad­ing be­low their tan­gi­ble book val­ues, or what they would be worth if liq­ui­dated. Many banks are en­gaged in a bru­tal cost-cut­ting cam­paign, in­clud­ing staff lay-offs, to un­lock value. Muted de­mand for credit, low in­ter­est rates and higher com­pli­ance costs are blamed for the slump in bank­ing eq­ui­ties, which are trad­ing at roughly half their val­ues prior to the 2008 fi­nan­cial mar­ket crash.

Per­haps the one sig­nal that all is not well in the global econ­omy is gold’s run from $1 053 to a high of $1 284.64 an ounce on 11 March, the high­est in more than a year, ac­cord­ing to Bloomberg data. Bul­lion has had the best quar­ter in nearly 30 years in the three months to end March. Though most ma­jor in­vest­ment banks re­main bear­ish on gold, at some point the bears are go­ing to have to exit their los­ing trades.

The out­look for SA

The grow­ing US econ­omy, cou­pled with pos­i­tive sig­nals from China, should help sup­port the South African econ­omy, which is ex­pected to grow by only 0.6% this year and 1.2% in 2017. Both coun­tries are ma­jor trad­ing part­ners, and a re­cov­ery in China in par­tic­u­lar should boost lo­cal com­mod­ity ex­porters.

The IMF blamed SA’s low growth on weaker ex­port growth, higher in­ter­est rates and pol­icy un­cer­tainty. Other econ­o­mists are less bullish, with Cap­i­tal Eco­nom­ics warn­ing that the country will strug­gle to post any growth at all this year. The dovish views from the US Fed on in­ter­est rates have con­trib­uted to the rand strength­en­ing 17% against the US dol­lar from its Jan­uary low of R16.80. It was trad­ing at R14.30 against the dol­lar at the time of writ­ing. This should help to con­tain in­fla­tion, which breached the Re­serve Bank’s up­per tar­get of 6% again in March.

Econometrix econ­o­mist Azar Jam­mine says he is less pes­simistic about the SA econ­omy than he was a year ago. “I see the country pulling to­gether in var­i­ous ways. One event that may turn out to be a land­mark for the country is the Con­sti­tu­tional Court de­ci­sion com­pelling Pres­i­dent Zuma to re­pay part of the money spent on his Nkandla res­i­dence. And just as we un­der­es­ti­mated the ex­tent of the drought a few months ago, I think we are also un­der­es­ti­mat­ing the re­cov­ery from the drought. An­other fac­tor that gives me cause for op­ti­mism is the fact that there are quite a few in­di­ca­tors com­ing out sug­gest­ing things are not as bad as we sup­posed – for ex­am­ple, busi­ness and consumer con­fi­dence.”

The South African Cham­ber of Com­merce and In­dus­try’s Busi­ness Con­fi­dence In­dex rose to 81.2 in March from 80.1 in Fe­bru­ary, but is still nearly eight points be­low where it was a year ago. Pri­vate sec­tor bor­row­ing also shows signs of growth in the first quar­ter. Two ar­eas of con­cern are in­fla­tion and bor­row­ing costs, which ac­count for the ex­pec­ta­tions of lit­tle to no growth over the course of the year. South Africans will have to wait un­til 2017 be­fore any real growth.

One event that may turn out to be a land­mark for the country is the Con­sti­tu­tional Court de­ci­sion com­pelling Pres­i­dent Zuma to re­pay part of the money spent on his Nkandla res­i­dence.

Jan Hatz­ius Chief econ­o­mist and head of Global Eco­nom­ics and Mar­kets Re­search at Gold­man Sachs

Janet Yellen Chair of the US Fed­eral Re­serve

Don­ald Trump US pres­i­den­tial can­di­date

Char­lie Him­mel­berg Co-head of Global Mar­kets Re­search at Gold­man Sachs

Azar Jam­mine Econ­o­mist at Econometrix

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