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What impact could these drivers have on the investment markets – South African and international?
Michael Power, strategist at INVESTEC ASSET MANAGEMENT
says with its traditional orientation towards the West in matters commercial, South Africa at the official level will be slow to grasp the significance of the shift of the centre of economic gravity to the East: it will continue to look to the Atlantic when it should be looking more to the Indian Ocean.
Ironically its perspective will be changed because its African neighbourhood, which until recently it ignored, or at the very least dismissed with a “What do they know?” harrumph – will not make the same mistake. Indeed, much of Africa is already turning to the East even as South Africa continues to remain transfixed on the West.
“This means much of the rest of sub-Saharan Africa will steal the march on South Africa. East Africa’s industrial infrastructure could well surpass South Africa’s in the next two decades; Nigeria’s economic size will surpass South Africa’s in half that time. Ironically, South Africa’s investment outlook will eventually be dragged into the New World via the pioneering activities of its leading multinationals north of the Limpopo; against received wisdom, it is South Africa and not China that is now Africa’s leading emerging market investor.
“Investment markets internationally will follow the same pattern, only they will reach the conclusion that the economic sun is rising fast in the East much more quickly than South Africa will. Global franchise companies like Nestle and Unilever, Pfizer and LVMH have already come to this conclusion and redirected their new investment towards Asia especially.
“In the next decade, the investment mantra in the West will be less and less about investing in countries and more and more about investing in companies, with the important proviso that those companies elect to invest in the right countries on behalf of investors.”
Herman van Papendorp, head of macro research at MOMENTUM ASSET MANAGEMENT
says the United Nations predicts that over 60% of the world’s population will be urbanised in 25 years’ time as economic opportunities drive rural populations to settle in cities.
Rapid urbanisation in emerging markets and continued urbanisation trends in developed ones will underpin infrastructure spend over this time horizon.
“Resultant city overcrowding is likely to have a positive knock-on effect for base metal prices as more transport, communication and utility needs arise. The balance of power will continue to shift away from today’s developed regions as emerging markets industrialise further.
“Continued expansion in emerging markets is likely to see a growing middle class population, globally. As purchasing power increases on a global scale, discretionary spend is expected to pick up further, with sectors such as consumer goods, entertainment, housing and travel benefiting the most.
“As life expectancy rates improve and birth rates decline, the global population is expected to age. While population ageing is most widespread in developed markets, some emerging markets are undergoing a more rapid change.
“This ageing trend is likely to lead to an increased reliance on the healthcare sector as the 60 years+ population grows. Higher dependency ratios are likely to have an adverse impact on fiscal budgets and government debt ratios as public healthcare spend balloons.”
Van Papendorp says with many global pension funds underfunded and developed market asset returns expected to be low in coming years, pension funds will increasingly be forced to look towards generating higher returns by investing in alternative asset classes and non-developed market regions.
This will inflate asset prices in both non-standard asset classes like private equity, infrastructure, commodities and hedge funds, as well as in emerging and frontier markets.
He predicts that as many parts of the world go ex-growth in coming decades, Africa is likely to take over the globe’s growth baton due to its positive structural demographic dividend, rapid urbanisation, improving political stability, commodity wealth, the broadening of its economies beyond commodities, improving regional integration and positive macroeconomic settings.
“These are fundamental reasons to invest in Africa’s equity and debt markets. In addition, the diversification benefits of Africa’s relatively low (and often negative) correlation with developed and emerging markets, the attractive relative valuations of African equities and debt and the relatively poor risk-return opportunities available in developed markets are additional rationales for investing in Africa’s financial markets.” Peter Brooke, head of the MacroSolutions boutique at OLD MUTUAL INVESTMENT GROUP says there are a number of mediumterm themes that will have a profound effect on markets.
These include the “slow rotation”, which refers to the expected steady rise in the global cost of capital as the 30-year bull market in fixed income reverses.
This will provide a powerful headwind to fixed income assets and will ensure a “low return world”. Limited real returns on savings will force money into alternative areas and will create an enormous focus on costs.
“For local investors long-term thematic analysis paints a much riskier world for South Africa. Many of the big secular themes of the last 20 to 30 years are potentially reversing.
“These include global rates rising instead of falling, commodity prices being under pressure, China transitioning, the US dollar no longer losing value, and more differentiation in emerging markets. South Africa has been a big beneficiary of these themes and, unless we pull together as a country, “South Africa suffers” may well be a new theme.” Roland Grabe at SYm|mETRY cautions against thinking of the South African investment landscape as separate or wholly different from international markets.
Our stock market and bond market is highly integrated with global markets. The larger stocks on our stock exchange tend to be global businesses and in many cases they generate the majority of their income glob- ally.
For this reason we see South Africa as part of the global landscape but with some unique characteristics.
Resources, education, labour, politics, monetary policy, demographics and even geographic location shape the unique position of South Africa in a global context.
“Global competition will ultimately separate the winners from the losers. Being globally competitive can bring an increase in wealth for a country’s population by increasing economic opportunities to its citizens.
“One area where South Africa may be able to gain an advantage is in natural resources and specifically energy. The combination of large reserves of shale gas and unique gas to liquid technology developed by SASOL may see South Africa emerge as a pioneer in energy which could lead to immense benefits for the country.” Sandy McGregor, portfolio manager, ALLAN GRAYsays in the year 2013 the size of the economies of the developing countries overtook that of developed world where the majority of the worlds’ savings are still located. The shifting focus of the global economy is likely to have an important impact on where retirement sav- ings are invested in the future.
The current slowdown in emerging markets is part of a process where the focus of growth is changing from capital spending to consumption.
“The great commodity boom of the past decade is coming to an end. South Africa’s recent prosperity has been entirely driven by rising commodity prices.
“Declining export prices are likely to have profoundly adverse consequences for South Africa. An inflexible economy and poor education system will make it difficult for South Africa to handle this challenge.” Daniel Malan, CIO at RE:CM says change is always guaranteed. Winning companies will be ones that can adapt quickly to change, which is very different from predicting change.
This has been the case for hundreds of years and the future will hold more of the same. We do not have an opinion about the influence of these effects on ‘markets’ though. David Knee, head of fixed income and asset allocation at PRUDENTIAL PORTFOLIO MANAGERS says it is virtually impossible to determine which companies or markets will benefit most from developments.
Some may conclude that in the next 25 years the US will not be able to compete against emerging markets in many fields where they now excel – yet one cannot underestimate their productivity and creativity, which could underpin US equities in many sectors.
New fields will also emerge where they could have competitive advantage. Meanwhile, India’s progress – a seeming certainty - could possibly be slowed by an unstable Pakistan as government resources are diverted to military uses.
“Twenty-five years ago we also knew that new technologies would create disruptive events and allow huge leaps in progress across entire industries, and one could even predict the new technologies.
“Yet few had heard of Apple 25 years ago – investors would have bet on the large companies of the day like IBM and Sony.” Mohamed Mayet, MD at SENTIO CAPITAL MANAGEMENTsays rising income divides and the social unease that results is likely to lead to pressure to increase taxes globally.
This is especially exacerbated by the fact that many countries are likely to still be reeling from the psychological effects of the excesses of the past decade and the resulting poor view of income distribution (as evidenced by the Occupy Wall street movement).
He says the sheer size of the “lower-end” is likely to make it a necessity to increase taxes to support social nets in many countries.
The impact in international markets is that companies’ tax rates are likely to rise and costs are likely to put pressure on margins as mass market products grow faster than “middle-income premium products”.
Mayet says a narrower world implies that both internationally and in South Africa, companies and policymakers need to think more flexibly within markets, as traditional segmentation gives way to dynamic shifts in the way profits are earned.
It also means that companies and nations are no longer limited to their borders but rather to their skill sets and therefore to survive and be competitive the benchmark will have to be global as your competitors will be global.
He says this is not as obvious as it sounds, since traditionally companies that strayed borders were seen as “losing focus” while this might mean that it becomes a necessity to “stray” as your competition will be straying and your market will not be homogenous anyway.
“Technologies that recycle or filter water will take centre stage and could spur new industries. The importance of water from an ESG perspective must also not be underestimated as the costs of wastage and recycling in-