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South Africa tentatively rebalances as global economy faces recovery

Johann Els, Senior Economist at Old Mutual Investment Group; Hywel George, Director of Investments at Old Mutual Investment Group; Peter Brooke, Head of the Investment Group’s MacroSolutions boutique. Johann Els, Senior Economist at Old Mutual Investment Group; Hywel George, Director of Investments at Old Mutual Investment Group; Peter Brooke, Head of the Investment Group’s MacroSolutions boutique.

A better global growth environment – combined with some current account improvement and better policy implementation – might lead to an improved outlook for the South African economy in the year ahead, especially compared to last year.

This was the overall message at Old Mutual Investment Group’s quarterly investment briefing today.

However, this improvement remains tentative based on the threat of existing risks being intensified by factors such as policy inaction, inflation and rate hikes. According to Johann Els, Senior Economist at Old Mutual Investment Group, the developed market is currently experiencing the most synchronised growth recovery since before the start of the 2008 Global Financial Crisis.

“Economic indicators have recently been stronger than expected,” explains Els. “This includes manufacturing production and employment numbers, as well as business and consumer confidence. And, as growth in the USA, Japan and the Eurozone picks up, it bodes well for China and emerging markets as a whole, as stronger demand from developed economies will lift exports and thus growth.”

Peter Brooke, Head of the Investment Group’s MacroSolutions boutique, has high hopes for his investment driver’s three themes for the year ahead.

“We maintain our themes of ‘slow rotation’, ‘low-return world’ and ‘a rebalancing SA’ for 2014, which is a more positive take on last year’s theme of ‘SA suffers’,” says Brooke.

Also speaking at the briefing, Hywel George, Director of Investments at Old Mutual Investment Group, said that this synchronised global growth recovery meant that the current market environment was seeing increased global risk appetite, with a preference for equities within the global investment industry.

“An improved global economic outlook has compounded our confidence in our Pan-African offering to the developed markets, while we continue to offer world-class products to the local market. We are particularly well-placed to offer a range of Pan-African products to the global market, from equities to debt, to agriculture, private equity and infrastructure. There is currently enormous demand globally for investment in Africa and Old Mutual Investment Group is a natural access point to the continent,” said George about the business’s outlook.

Els believes that while the outlook may have improved from last year, policymakers will likely have a delayed response to this improvement and he is not expecting any tightening (rate hikes) to take place soon.

“This is due to ongoing concerns about employment and deflation overshadowing any perceived inflationary pressures.  Core inflation numbers are still extremely low globally, with the US sitting at 1% and the Eurozone at 0.7% - both well off their 2% targets.”

Adding to this point, Brooke said that in connection with their ‘slow rotation’ theme, they continue to expect a grind higher in global bond yields as growth comes through, and the US Federal Reserve Board starts to narrow its monetary expansion.

“With unattractive bond returns and a better global economy driving earnings growth, we maintain our preference for global equity over bonds, despite equities rerating. An important component of our view is that we see no inflationary pressure due to ample surplus capacity and the potential for lower commodity prices, especially oil.”

Brooke also outlined the thinking behind their second key theme of ‘low return world’, explaining that this is an even stronger theme than before, following the rerating of equity markets.

“Earnings growth is required to drive markets higher; therefore we do not expect the same outsized equity returns. This, coupled with our weak outlook for global fixed income, will make it hard to generate real returns.”

George believes that the low-return-world we are moving into is likely to give rise to a shift in the balance between listed and unlisted assets. “We expect to see asset managers re-focus their energy on realising value in multi-asset portfolios with a focus on asset allocation, as well as real assets such as private equity, infrastructure, agriculture and real estate; and moving away from more traditional stock-picking in developed markets,” he said.

According to Els, while the local SA economy is suffering, the global growth story and the weak rand will benefit SA’s export economy. “Generally speaking, we believe that all the bad news is already on the table, and we may even see policy progress following the elections. Growth will be muted at around 3% or lower for the year, and the rand may stabilise somewhat over the short term but, in the medium to long term, it is likely to continue its downward trend.”

In line with this currency move and his third key theme driver, ‘a rebalancing SA’, Brooke believes the rand will benefit exporters, domestic manufacturers and tourism companies; while consumer companies will struggle to pass on their higher import costs. “GDP will improve through a narrowing current account deficit, and the economy will be less reliant on consumption. Consequently, we remain very underweight in SA consumer stocks and we have maintained our international diversification as we prefer the relative equity valuation over the expected rand weakness.”

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