At Last, Some Upside
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We have attended a number of conferences with asset managers, economists and strategists over the past month or two, and this has helped us to peer through the political haze and confusion that has been clouding the global economy. And there’s some good news. Real green shoots are emerging, with the global economy set to grow by 3.6% this year.
The US now has full employment. People there are starting to build new houses again and corporates are looking to bring back jobs. After a few years of concerns that US stocks had rallied too high, earnings are coming through very strongly to justify their valuations.
Economic growth is coming through in Europe with 2% growth predicted, Japan (1.6%) and emerging markets. These stock markets have largely been neglected in the last few years but they are starting to rally and give good returns.
With growth of 7%, India is doing exceptionally well, a key reason being that the Prime Minister is engaging positively with business.
China’s growth is now back to 6.9%. There are concerns that the debt market needs cooling but the country keeps driving on.
After downgrades in 2015, Russia and Brazil are now bouncing back. Like South Africa they are benefitting from higher commodity prices.
Experts with whom we have engaged believe investors should not allow themselves to be side-tracked by political factors. They should rather focus on company performances.
Back home, South Africa, as we all know, is at a tipping point. Unlike its Indian counterparts, the South African government is not engaging creatively with business, and business confidence is down. Few companies are investing in the future or in new productive capacity. The South African consumer is in real trouble: retail sales are down; motor vehicle sales are down; VAT and general tax collections are down. We’re officially in a recession.
There are a few positives, though they are the result of third parties rather than self-made. Good rains in the central and northern parts of our country are resulting in the best maize harvest ever recorded. The Rand has strengthened and local markets are near all-time highs, though this is due to $60 billion of inflows into the local stock and bond markets.
Sadly, as we know, political events in South Africa cannot be ignored. In addition to the current volatility and uncertainty they create, the African National Congress Elective Conference in December looms large. Will the 3 000 delegates who hold our future in their hands bring us more of the same, or will they usher in new, decisive and responsive leadership? The future of more than 50 million South Africans depends on their decision.
Yes, we do have an economic safety valve: the Rand. It weakens when politicians behave badly and the economy follows suit; it strengthens under conditions of political stability, and so does the economy. In each case, the Rand brings windfalls. When Nhlanhla Nene was axed as finance minister, many of us started running for the hills as the Rand weakened. Others with dollars and euros saw opportunities to buy South African assets at lower prices, while foreign tourists flocked to the country to get great value for their currencies.
There is some other good news. Many South African companies are investing in Africa and further afield, so much so that the JSE is no longer a proxy for South Africa; it is a proxy for emerging markets. The result is that 67% of earnings of the Top 40 stocks comes from offshore – thankfully!