ECONOMIC AND MARKET OVERVIEW
Global
Global economic activity continues its steady recovery from the Covid-19 economic shock, although the upswing will be low by historical standards due to the persistent risk of further rounds of infection.
In a recent report from RMB Global Markets they note that, as the virus plays out differently in different economies, some can continue to gradually reopen while others are expected to implement further social distancing and lockdown measures. This staggered recovery process will prevent a significant pickup in global demand and limit the extent of global inflation pressures. Weakness in global economic demand, against an already low global inflation backdrop, continues to provide governments and central banks with space to provide further support to their economies. This is expected to help stabilise global financial conditions and provide an important support to the global recovery. While this environment provides relatively favourable conditions for ongoing fiscal and monetary policy support, the economic risks necessitating this will continue to provide support to safe-haven assets. The primary risk to global growth remains to the downside as various themes continue to circle overhead: Covid-19 infection waves, rising global indebtedness, oil market volatility, trade wars, nationalistic politics and policies and anti-globalisation sentiment.
In an environment where low inflation and low-to-negative interest rates are likely to persist for a few more years, the search for positive investment returns has seen investors rush into selected equities. The dominant global theme is leadership of new economy stocks, ranging from technology and healthcare to the green economy. As long the FAANGMs1 continue their relentless rise, US equities will retain their attraction. Attention is shifting, albeit slowly, to the fundamentals – cash flow generation, increasing return on capital and strong balance sheets. Persistent central bank intervention in asset markets, however, distorts the importance of fundamentals in determining the asset prices. Under these circumstances index tracking may remain an appropriate strategy to equity investing, but the early signs of a tilt to active investment strategies are becoming visible.
The November 3rd Presidential election in the United States will continue to make headlines, albeit for all the wrong reasons. As was the case in 2016, it’s extremely difficult to predict the outcome with any degree of certainty. Even if investors could do so, it would prove no less challenging to figure out how investment portfolios should be positioned for any particular result. Markets appear to be considering a more tactical approach with the US elections and
year-end looming, particularly given the growing risk that investors will need to wait beyond election day for a result. In the case of a Biden win, while expectations for more regulation and higher taxes might initially hurt the performance of risk assets, a return to multilateralism and a rule-based approach would be good news for emerging markets over time. Markets might view a Biden presidency as less antagonistic on trade with the rest of the world.
Given the wide range and accompanying uncertainty of outcomes related to the Covid-19 pandemic and the resulting policy response, as well as the US elections and other global political developments, it may be best to trust the benefits of well diversified investment portfolios and not tinker with them too much as we approach the end of what will turn out to be a year that few of us will ever forget.
South Africa
The South African Reserve Bank’s Monetary Policy Committee (MPC) decided to leave the repurchase rate unchanged, keeping it at 3.5% and the prime lending rate to 7%.
Three of the MPC members voted to keep the rate unchanged, with two members favouring a reduction of 0.25%. In his statement, the governor of the Reserve Bank, Lesetja Kganyago noted that the Bank now forecasts an economic contraction of over 8% in South Africa in 2020. He did, however, comment that the further easing of the national lockdown has supported economic growth. Getting back to pre-pandemic output levels will take time, however. Even with expected growth levels of nearly 4% in 2021 and a little over 2.5% in 2022 the economy won’t return to it’s 2019 output much before 2023.
One glimmer of hope is that South Africa’s terms of trade remains robust. As a nation we’re typically an exporter of industrial and precious metals, and a net importer of energy (represented by oil). High commodity prices (earnings from exports) and generally low oil prices (cost of imports) continue to boost our terms of trade and could, over time, be supportive of the rand (all else being equal, which of course it won’t be.) Another silver lining is the favourable inflation outlook. The overall risks to the outlook at this time appear to be balanced. Global producer price and food inflation have bottomed out. Oil prices remain low. Local food price inflation is expected to remain
contained. Risks to inflation from currency depreciation are expected to stay muted.
This is very good news for the already embattled local consumers. South Africa’s challenges are plentiful and well known. Most state owned enterprises require additional funding, civil servants are demanding salary increases and the
majority of municipalities are functioning way below par. All of this puts an additional burden on the continuously shrinking tax-payer pool. The sharp rise in South Africa’s public financing needs arising from falling tax revenue and higher spending has been financed by higher private sector savings and borrowing from international financial institutions. Alongside SARB liquidity-management operations, resident investors, including banks, have increased purchases of sovereign bonds, helping to ease yields (and therefore the cost of government borrowing) in recent weeks.
The governor concluded his statement by saying that monetary policy, however, cannot improve the potential growth rate of the economy or reduce fiscal risks on its own. These should be addressed by implementing prudent macroeconomic policies and structural reforms that lower costs, increase investment opportunities and potential growth, and bolster job creation. Such steps will enhance the effectiveness of monetary policy and its transmission to the broader economy.
