Economic & Market Overview – August 2018
The pace of global growth is still encouraging after a disappointing first quarter in which several prominent developed economies slowed. The United States, buoyed by sizeable tax cuts and a considerable increase in government spending, was the obvious outlier when it registered above-trend growth in the first quarter, while some of its developed market peers, notably Japan and the Eurozone, struggled to muster productivity gains.
During his 2016 election campaign, Donald Trump promised voters a return to economic growth of 4% ahead of US inflation, and it seems that the world’s largest economy is on track to deliver economic expansion of an estimated 4% year on year. This will provide a stimulus to global growth, keeping it a little above the trend of 3.8% despite an escalation in trade tensions.
Speaking of which – in recent weeks there has been a de-escalation of tariff tantrums after months of verbal exchanges and the implementation of some tariffs between the US and their trading partners. These tit-for-tat salvos showed no signs of abating until Trump met with European Commission President Jean-Claude Juncker and struck an agreement to suspend the raising of US tariffs on EU cars and auto parts in return for an EU vow to buy more US soybeans and liquefied natural gas. Moreover, the two leaders pledged to work on a wide-ranging free trade agreement between these two major economic regions.
Emerging markets have been under severe strain in recent months, and a strong US dollar coupled with fears (even if unfounded) for an escalating trade war will be prohibitive for a strong comeback. This is in contrast to the United Kingdom where the Bank of England’s governors voted for a 0.25% increase in their interest rate to 0.75% – the highest level in nine years. The Bank sees modest economic growth of 1.4% this year and an increase to 1.8% next year, with unemployment coming down and inflation under control.
The current global economic backdrop is still supportive of developed market equity investments over bonds, but investors should buckle up for a bumpy ride.
Locally “Ramaphoria” has changed into “Ramapause” as South Africa’s fundamental economic and political challenges started to overshadow the optimism of a miracle turnaround in our growth prospects. Against a backdrop of continued pedestrian economic growth, the Monetary Policy Committee (MPC) of the South African Reserve Bank decided to leave the prime rate unchanged at 10% (and the repo rate at 6.5%). The bank continues to assess the risk to South African inflation to be to the upside. These upward risks emanate from both the global environment (strong US dollar, elevated oil prices, trade tensions, geopolitical developments, global monetary policy settings, and investor sentiment towards emerging markets) as well as domestically (electricity prices and wage settlements).
The Ramaphosa administration is faced with a number of significant challenges. A bloated civil service wage bill (that needs to be reduced, even if in real terms initially), maladministration of state owned enterprises and high unemployment all provide headwinds to a resurging economy. The recent BRICS conference in Sandton brought some good news in the form of loans from the Chinese government. Financial assistance from the Chinese will come at a price (ask Pakistan and Sri Lanka), but will at least address some of the short-term funding that is required by Eskom. Even though the South African economy and growth prospects pale in comparison to the other BRICS countries, our mere association will, at the very least, place some focus on our strategic importance as a gateway into Africa.
The global equity market delivered positive returns in the second quarter of the year, even with trade tariff threats on the horizon between the West and the East. Global bond yields continued their upward trend as US yields rose from 2.85% to nearly 3% in July. Emerging markets saw some relief in July (after a major sell-off in the first half the year).
Locally, the rand strengthened against the greenback which in turn resulted in a relatively flat local equity market, with more than half of the revenue of South African listed companies earned in global currencies. The financial sector was the only positive performing local sector as property, resources and industrials had slightly negative months. Bonds had a positive month on the back of the MPC rate decision, a strengthening rand and inflation surprising to the downside. The listed property market continued its negative trend for the sixth consecutive month and has underperformed all local asset classes for the past 12 months.
This land is your land, (this land is my land) …
When American folk singer Woody Guthrie penned the words to this famous song in 1940, he may well have had some insight into South Africa’s present land issues. Two of the original verses have since been dropped from popular recordings, but nearly 80 years on, they ring as true as ever:
There was a big high wall there that tried to stop me;
Sign was painted, it said private property;
But on the back side it didn’t say nothing;
This land was made for you and me
In the squares of the city, In the shadow of a steeple;
By the relief office, I’d seen my people.
As they stood there hungry, I stood there asking,
Is this land made for you and me?
During a recent panel discussion hosted by STANLIB, a number of experts debated land reform. According to them, the ANC can manage an orderly process of land reform without a sweeping seizure of private property. More damaging for the economy in the short term is the heat and uncertainty around the issue, according to NOAH political analyst Melanie Verwoerd and STANLIB’s chief economist, Kevin Lings.
Lings said ANC thinking on this issue was innovative, practical, and progressive, but the debate was likely to become more intense ahead of next year’s election. Verwoerd said the ANC’s internal document on the issue was “sensible and sensitive”. Expropriation without compensation would be limited to specific circumstances: urban and peri-urban property where there are absentee landlords or property that is derelict and unused. It also recommends giving title deeds to people living in former township areas.
Wandile Sihlobo, agricultural economist at the Agricultural Business Chamber, said the debate was largely focusing on agricultural land although the real issue is the demand for land in urban areas. He added that the land restitution process so far has not been satisfactory. Land acquired for distribution has not been distributed, so land expropriation will not take the process forward. Other constructive models are being proposed.
Members of the audience questioned the panel on issues such as reform of communal land ownership and how land reform would address the needs of a rapidly urbanising population. Dr Anthea Jeffrey, a constitutional expert at the Institute of Race Relations, said it was very important to give individuals title to make communal land productive, but traditional leaders needed to agree to it. No-one would invest in land that belonged to everyone. She further commented that the focus should move away from how many hectares are being transferred towards providing education, jobs, and houses in the cities, since that is what most people want.
From the recent round of public hearings on land reform hosted by the South African Parliament’s Constitutional Review Committee, it is clear that this remains a very emotive issue. The crux is that most people want access to the opportunity to uplift themselves, but that does not reach headlines. It’s the sensationalist views that sells newspapers (and attracts people to news websites) that will likely dominate public opinion on the matter.
The panel agreed that the contentious issues around land reform won’t be settled before the 2019 election, and that it will most likely play a pivotal role in all parties’ campaigns. As an investor, you can therefore expect a lot of noise and little clarity around land reform in the next months. Given President Ramaphosa’s campaign to attract USD 100 billion in foreign direct investment, he’ll do well to balance the protection of property rights with the needs of the multitude of South Africans whose property rights were violated in the first place.
Source – APS Monthly Economic Commentary