Economic trends to watch
INVESTORS: THE VOLATILE RAND REMAINS SOUTH AFRICA’S TOP PRIORITY
In last couple of years, SA acquired more net foreign assets than liabilities.
Daily economic data can send confusing signals to investors. However, long-term investors focused on fundamentals need only watch a handful of economic trends.
Why are interest rates important?
Essentially, interest rates are used in all asset valuations. Global interest rates are currently very low; SA benchmarks off them.
The biggest interest rates driver is having a large part of the population entering working age.
The time to save is when you’re of working age. Globally we’ve been through a period of higher savings due to demographics – putting significant downward pressure on real interest rates.
But things are changing. Looking at forecasts to 2050, Japan and Germany’s labour forces are seen falling by about 30% and in China by 10%.
The longer-term savings trend in these economies is therefore likely to decline, putting significant upward pressure on future interest rates – especially if governments are looking to invest more in infrastructure spending.
Inflation is the hook to hang returns on
The other important economic trend is expected inflation: our job as asset managers is to beat inflation long term. Asset managers need long-term rates and to know what the average rate of inflation over 10 years will be.
SA’s No 1 concern
Currently, the house view on the rand is positive – provided the SA Reserve Bank (Sarb) keeps inflation low. The rand now trades two standard deviations away from its purchasing power parity exchange rate (ie. it’s oversold and undervalued).
In the last couple of years, SA acquired more net foreign assets than net foreign liabilities – so if Sarb can anchor inflation at low levels, long term we could get to a point where we don’t have to worry about the currency.
Fixing SA’s economy
To make SA more attractive to investors, it’s most important to fix fiscal consolidation.
A successful consolidation is where you cut expenditure relative to GDP, particularly consumption. You check the state’s balance sheet and ensure you’re acquiring assets. And align your tax structure with growth.
We’ve cut spending, but we’ve also cut capex.
Walls and trade wars
Upward-ticking global interest rates, local inflation anchored around 5.25%, and the rand weakening gradually along with the inflation differential of its trading partners, are all trends that will play out over the long term, but in the short term, other things are happening. The US is starting to put up barriers.
Secondly, there’s starting to be changes in trade. If the world is moving towards protectionism, it will end up with lower growth and higher inflation.
The US has entered a policy gamble. President Donald Trump has started a very large fiscal expansion. The US midterm elections in November will be significant for investors worldwide.
Arthur Kamp is Sanlam Investments’ chief economist
There’s starting to be changes in trade