INVESTING IN A TOPSYTURVY WORLD

INVESTING IN A WORLD WHERE ALL BETS ARE OFF

Finweek English Edition - - FRONT PAGE - By Natalie Greve

The global econ­omy ap­pears to have shrugged off 2016's po­lit­i­cal sur­prises, and growth is ex­pected to pick up this year. But what are the un­ex­pected events that in­vestors should look out for in 2017?

if the po­lit­i­cal and eco­nomic dra­mas of 2016 have taught us any­thing, it is to ac­knowl­edge our oc­ca­sional in­ept­ness at ac­cu­rately pre­dict­ing the out­come of seem­ingly pre­dictable global events. As some an­a­lysts, econ­o­mists and ob­servers nurse bruised pro­fes­sional egos fol­low­ing the widely un­pre­dicted elec­tion of US Pres­i­dent Don­ald Trump in Novem­ber and Bri­tain’s de­ci­sion to leave the EU in June, at­ten­tion now turns to the likely im­pact of these, and other, un­fore­seen events on the world mar­kets in 2017.

In this “post-truth” global set­ting, in­ter­na­tional pol­i­tick­ing and po­lit­i­cal ma­noeu­vring will un­doubt­edly con­tinue to sway the global econ­omy in the year ahead, steer­ing in­vest­ment ap­petite and ren­der­ing the im­pli­ca­tions for dif­fer­ent as­set classes un­cer­tain through­out the year.

Fore­most on the risk mon­i­tor for in­vestors and pol­i­cy­mak­ers alike, Mo­men­tum In­vest­ments mar­ket­ing head Steven Schultz cau­tions, is the ev­i­dent mass dis­ap­proval of glob­al­i­sa­tion, which ap­pears to have been por­trayed by in­creas­ingly pop­u­lar right-wing po­lit­i­cal par­ties as a “rigged sys­tem” cre­ated for the ben­e­fit of global elites.

In­creased im­mi­gra­tion and ter­ror­ism con­cerns could see in­ten­si­fied trade pro­tec­tion­ism by states, re­vers­ing gains made dur­ing ear­lier land­mark trade agree­ments that aimed to fur­ther as­sim­i­late the world econ­omy.

A pos­si­ble sec­u­lar trend re­ver­sal in global in­ter­est rate pol­icy and the po­ten­tial end of the era of free move­ment of goods, cap­i­tal and labour, could in­duce fur­ther in­sta­bil­ity in as­set mar­kets in 2017, Mo­men­tum head of as­set al­lo­ca­tion Her­man van Papen­dorp tells fin­week.

While the global econ­omy ap­pears to have shrugged off ear­lier unimag­ined po­lit­i­cal out­comes – most no­tably Brexit in June and Trump’s sur­prise vic­tory in the US pres­i­den­tial elec­tion in Novem­ber – through fur­ther stim­u­lus and a swift re­sponse by cen­tral banks, the world econ­omy is hardly in peak con­di­tion, he adds.

“While less aus­tere bud­gets could tem­po­rar­ily boost growth, an in­crease in bor­row­ing to­day by the pub­lic and pri­vate sec­tors risks nar­row­ing growth prospects in the fu­ture.

“We ex­pect a mod­est growth tra­jec­tory in de­vel­oped economies over the medium term, with the UK and Ja­pan re­main­ing the lag­gards, while im­prov­ing fun­da­men­tals and con­tin­ued pol­icy sup­port should un­der­pin rel­a­tively firmer eco­nomic ac­tiv­ity in the US and eu­ro­zone, re­spec­tively,” Van Papen­dorp ad­vances.

Key risks

Schultz warns in­vestors to watch out for fur­ther signs of the pop­ulist “anger” that has al­ready swept through the West, and which would see ad­di­tional eu­ro­zone states, such as France and

Ger­many, vot­ing to di­vorce their Euro­pean neigh­bours.

“The gen­eral feel­ing of dis­en­fran­chise­ment with cur­rent politi­cians should not be over­looked. A ‘Frexit’ [France ex­it­ing the EU], in an ef­fort to re­tain mon­e­tary, leg­isla­tive, ter­ri­to­rial and bud­get sovereignty, while not the base case, could trig­ger a wide­spread cri­sis,” Old Mu­tual chief in­vest­ment strate­gist Dave Mohr and Old Mu­tual in­vest­ment strate­gist Izak Oden­daal add in a re­cent in­vest­ment note.

In ad­di­tion to pol­i­tics, in­vestors should keep a close eye on the cur­rent bout of list­less global growth. With world out­put ex­pected to come in at around 3%, slug­gish growth ap­pears to be be­com­ing en­trenched as the new nor­mal for the global econ­omy.

Ad­di­tional “known unknown” events that could in­flu­ence in­vest­ment mar­kets in 2017, ac­cord­ing to Van Papen­dorp, in­clude:

Un­cer­tainty about the prob­a­ble dif­fer­ences be­tween pol­icy mea­sures orig­i­nally mooted by Trump while on the cam­paign trail and those even­tu­ally im­ple­mented by him as US pres­i­dent. Among these are the depth and mag­ni­tude of US fis­cal stim­u­lus and the reper­cus­sions of trade pro­tec­tion­ism for in­ter-re­gional trade and its re­sul­tant im­pact on global growth.

The mul­ti­tude of up­com­ing Euro­pean elec­tions in 2017 – in­clud­ing the Dutch, French and Ger­man gen­eral elec­tions – which could ex­tend the global trend of dis­es­tab­lish­men­tar­i­an­ism that started with Bri­tain’s de­ci­sion to leave the EU and the elec­tion of Trump in 2016. These could in­crease the like­li­hood of an even­tual break-up of the eu­ro­zone.

Bri­tain’s ini­ti­a­tion of its Ar­ti­cle 50 di­vorce from the EU, or Brexit, could also cause some mar­ket volatil­ity.

Pol­icy de­ci­sions taken at China’s 19th Com­mu­nist party congress dur­ing SA’s spring this year could im­pact global mar­kets.

There are also unknown unknown events that could sur­prise mar­kets in 2017, Van Papen­dorp says, in­clud­ing:

Geopo­lit­i­cal shocks be­yond the known hotspots of the Mid­dle East that could desta­bilise mar­kets.

Fi­nan­cial crises that could orig­i­nate

With world out­put ex­pected to come in at around 3%, slug­gish growth ap­pears to be be­com­ing en­trenched as the new nor­mal for the global econ­omy.

from an un­ex­pected source be­yond China’s over-in­debt­ed­ness or sys­temic fail­ure of the Euro­pean bank­ing sys­tem.

Trumpo­nomics

As the US en­ters a year with po­lit­i­cal out­sider Trump at the helm, in­vestors are ques­tion­ing whether “Trumpo­nomics” will echo “Reaganomics” – the eco­nomic poli­cies of for­mer US Pres­i­dent Ron­ald Rea­gan in the 1980s, which fo­cused on the re­duc­tion of taxes, in­creased mil­i­tary spend­ing and the dereg­u­la­tion of mar­kets.

MMI econ­o­mist San­isha Packirisamy and Van Papen­dorp be­lieve that Trump is now faced with the chal­lenge of bridg­ing the chasm be­tween the rich and poor at a time when gov­ern­ment’s debt-to-GDP ra­tio is closer to 100%, lim­it­ing fis­cal head­room.

“An­tic­i­pated Trump stim­u­lus could lengthen the cur­rent (al­ready ex­tended) busi­ness cy­cle, re­duc­ing the prob­a­bil­ity of a near-term re­ces­sion. Po­ten­tial tax and reg­u­la­tory changes are likely to boost con­fi­dence and rekin­dle in­vest­ment. There is, how­ever, great un­cer­tainty at­tached to how much of Trump’s agenda will be­come a re­al­ity,” the duo state in a re­cent 2017 eco­nomic out­look.

Should Trump en­ter into ma­jor trade con­flicts with key trad­ing part­ners, the US econ­omy could be faced with oner­ous coun­ter­mea­sures that could weigh neg­a­tively on growth.

“A dis­rup­tion in trade be­tween the US and China, in par­tic­u­lar, could have dire con­se­quences for the rest of the world,” they cau­tion.

Re­cent cal­cu­la­tions by the In­ter­na­tional Mon­e­tary Fund have found that, should the US levy tar­iffs on China and they re­tal­i­ated, growth would be 0.2% lower in the US and both im­ports and ex­ports would drop by 2%. If world­wide tar­iff and non-tar­iff bar­ri­ers in­creased so that im­port prices rose 10% over three years, global growth would plum­met by 2%.

Di­luted Brexit

Cross­ing the pond, an­a­lysts an­tic­i­pate a slow, drawn-out exit from the EU by Bri­tain, with the ex­it­ing sov­er­eign likely to strug­gle with fur­ther rises in do­mes­tic prices and weaker growth.

“Al­though the prospect of Bri­tain leav­ing the Euro­pean Union un­de­ni­ably presents the lat­est in a rolling se­ries of crises in the re­gion, the eco­nomic dam­age will be neg­li­gi­ble for most coun­tries,” says Schultz.

Apart from the need to reach a deal on a fi­nan­cial ser­vices treaty with the EU, Packirisamy and Van Papen­dorp out­line that the UK will need to ne­go­ti­ate treaties with the 52 coun­tries that the EU cur­rently has agree­ments with, which could force a tran­si­tional deal to keep trad­ing terms un­changed for sev­eral years even af­ter a for­mal Brexit in 2019.

The SA sce­nario

Do­mes­ti­cally, growth in South Africa is set to im­prove marginally in 2017.

Agri­cul­tural out­put is es­ti­mated to re­cover ow­ing to higher rain­fall, while ex­ports are likely to pig­gy­back off slightly bet­ter global eco­nomic ac­tiv­ity and a mod­est re­vival in com­mod­ity prices.

“Re­stock­ing in re­sponse to higher growth ex­pec­ta­tions could lift growth to above 1% in 2017,” Packirisamy and Van Papen­dorp sug­gest.

Nonethe­less, the duo cau­tions that growth is likely to re­main slug­gish as a re­sult of po­lit­i­cal un­cer­tainty ahead of the ANC’s Na­tional Ex­ec­u­tive Com­mit­tee (NEC) elec­tive con­fer­ence in De­cem­ber.

“South Africa’s tem­po­rary avoid­ance of a rat­ing down­grade, cou­pled with peace­ful mu­nic­i­pal elec­tions last year and demon­strated re­silience of key in­sti­tu­tions, has made it clear that all is not lost for South Africa just yet.”

The meet­ing is con­sid­ered the next im­por­tant in­di­ca­tor of SA’s po­lit­i­cal di­rec­tion fol­low­ing the ANC Pol­icy and Con­sul­ta­tive Con­fer­ence in June.

“Though lower food in­fla­tion and a prob­a­ble shift to looser mon­e­tary pol­icy in the lat­ter half of 2017 should pro­vide some re­lief to con­sumers, house­holds re­main ex­posed to a bleak jobs out­look, high lev­els of in­debt­ed­ness and the po­ten­tial for higher taxes.

“Based on our fore­casts for head­line in­fla­tion to drop more mean­ing­fully on a two-year out­look, we ex­pect fur­ther in­ter­est rate cuts in 2018 to ben­e­fit con­sump­tion spend fur­ther out.”

Dodg­ing the down­grade

South Africa again en­ters a new year with the lin­ger­ing threat of rat­ing down­grades by the world's ma­jor agen­cies. While the coun­try has – for the time be­ing – dodged the down­grade bul­let by Stan­dard & Poor’s (S&P), Fitch and Moody’s, all three have placed SA on a neg­a­tive out­look, keep­ing the sov­er­eign rat­ing un­changed above non­in­vest­ment grade.

Amid strong fears that S&P would slash the coun­try to junk sta­tus when it pub­lished its re­port on South African debt late last year, the rat­ing agency kept the rat­ing of gov­ern­ment’s for­eign

cur­rency-de­nom­i­nated debt on the low­est in­vest­ment grade notch at BBB-.

How­ever, as ex­pected, S&P down­graded the lo­cal cur­rency rat­ing by one notch to BBB.

A week ear­lier, Fitch an­nounced that it had dropped the out­look at­tached to its BBB- rat­ing of South African debt to neg­a­tive from sta­ble. Moody’s is­sued a re­port on the same date without any changes to the sov­er­eign credit rat­ing at Baa2, two notches above sub-in­vest­ment grade, with a neg­a­tive out­look.

While San­lam Pri­vate Wealth eq­uity an­a­lyst Re­nier de Bruyn be­lieves SA needs to im­ple­ment struc­tural re­forms to im­prove the long-term growth po­ten­tial of the econ­omy, he calls for op­ti­mism fol­low­ing the “en­cour­ag­ing” rat­ings out­come to­wards the end of what had proved to be a tu­mul­tuous year on many fronts.

“Most econ­o­mists polled in the first half of 2016 agreed that a fall to junk sta­tus seemed in­evitable. Given all the po­lit­i­cal tur­moil both lo­cally and abroad, South Africa’s tem­po­rary avoid­ance of a rat­ing down­grade, cou­pled with peace­ful mu­nic­i­pal elec­tions last year and demon­strated re­silience of key in­sti­tu­tions, has made it clear that all is not lost for South Africa just yet,” he as­serts.

De Bruyn cau­tions, how­ever, that the most re­cent spate of de­ci­sions by the rat­ing agen­cies were merely a tem­po­rary stay of ex­e­cu­tion.

To­gether with po­lit­i­cal chal­lenges to do­mes­tic pol­icy im­ple­men­ta­tion, neg­a­tive de­vel­op­ments in US-China trade re­la­tions and its im­pact on com­mod­ity prices act as key down­side risks to SA’s po­ten­tial growth pro­file.

“As such, we see a strong chance of a for­eign rat­ing down­grade by S&P to sub-in­vest­ment grade by June. Dur­ing this time­frame, Fitch is likely to main­tain their neg­a­tive out­look, while there is a high prob­a­bil­ity that Moody’s could down­grade its more op­ti­mistic Baa2 rat­ing by one notch,” Packirisamy and Van Papen­dorp pre­dict.

Her­man van Papen­dorp Head of as­set al­lo­ca­tion at Mo­men­tum

The UK will need to ne­go­ti­ate 52treaties with the coun­tries that the EU cur­rently has agree­ments with, which could force a tran­si­tional deal to keep trad­ing terms un­changed for sev­eral years even af­ter a for­mal Brexit in 2019.

San­isha Packirisamy Econ­o­mist at MMI

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