In the absence of a material recovery in business, investor and consumer confidence, South Africa is at risk of getting trapped in a protracted period of weak economic growth and further social and fiscal pressures. This is according to Old Mutual Investment Group Economic Strategist, Rian Le Roux, who points to the IMF’s recent call for government to, as a short term priority, reassure businesspeople and consumers over the future direction of policies.
Le Roux says that with the economy already in recession, concerns over the direction of economic policy, little scope for support from monetary or fiscal policy and global conditions set to become more difficult as global central banks start to roll back policy support, a broad-based revival in deeply depressed confidence is essentially the only source of lasting improvement.
Presenting at Old Mutual Investment Group’s Quarterly investment briefing on Wednesday, Le Roux said: “Our GDP forecast has been cut to a sickly 0.8 percent for the year, which is far below what is required and presents yet another year of disappointment,” he explained. “As such, the economy is at risk of an extended period of sub-potential growth, with slow growth in recent years already to blame for rising macro-economic vulnerabilities and ratings downgrades. Our fiscal consolidation path faces significant risk should the economy indeed fail to recover materially over the next few years and, added to this, is the risk of losing our investment grade on local bonds, which could cause a sharp weakening of the rand and force interest rates higher.”
Nevertheless, it is not all bad news as improvements are under way in a few areas. Le Roux highlights that the current account deficit has narrowed more than was generally expected and is likely to remain relatively small this year, while inflation continues to surprise on the downside, with the year-end figure expected at around five percent, provided we don’t see the rand weakening significantly further from current levels. “An interest rate cut before year-end is also still possible, again provided that the rand doesn’t slump significantly before then,” he said. “Lower inflation and moderate interest rate relief will lend some welcome support to financially constrained consumers. In addition, high frequency data on the real economy suggests that the economy has already returned to positive growth in the second quarter.”
The global environment has been broadly supportive of SA’s economy over the past year through firmer commodity prices and fairly strong inflows into the local bond market, until recently. “These have been instrumental in the unexpected firmness of the rand, although recent more hawkish comments by a number of global central banks have negatively affected a number of emerging market currencies, prime of which was the rand,” he explained.
“Looking forward, the intended global liquidity reduction by a number of central banks, primarily the US Fed, could reduce flows to Emerging Markets, so creating more challenging conditions. Renewed commodity price weakness would pose a further potential risk. The global economy remains on solid footing for now, but the risks associated with the coming stimulus roll-back remain considerable.”
Le Roux stressed that with global support likely to fade compared to the past year or so, the urgency to rebuild confidence in the South African economy to foster faster economic growth, investment and critical job creation, has become all the more urgent.
Also presenting at the briefing, Grant Watson, Joint Head of Old Mutual Investment Group’s Customised Solutions boutique, added that against this global and local economic backdrop, the emergence of a low return world continues to challenge investors in their search for yield. Within a local context, he says that growth assets in particular are struggling.
This environment is shaping the rise of a number of industry disruptors within the asset managers, which is forcing the industry to rethink its investment approach and product offerings. Watson believes that this disruption presents an opportunity for more forward thinking investors to adapt their investment approach to enable them to capitalise on the changing landscape. One such disruptor is the progressive use of data analysis as a factor-based investment tool.
“Given the deluge of data that today’s investors are faced with, there is an increasing need for filtering tools. This is essentially what machine-readable news – a quantitative tool developed and used in one of our Funds – was designed for,” he explained. “The world is moving into a hugely tech-driven age, but in an era of information overload, the combination of technology with human judgement will prove to be the most powerful investment tool of the future.”
He added that that while the world is moving at a rapid technological pace, the investment industry has, to some extent, lagged behind. The rise of ‘fake news, for example, has started to influence the markets. “In the realm of investing, however, whether information is based on fact or fiction is less of a concern, as the real value exists in an investor’s ability to objectively read the market sentiment that an incessant ream of information is inciting,” he said.
The model enables the analysis of large amounts of data, offering insight into market sentiment to anticipate the behaviour of the ‘herd’. “By blending human analysis with mechanical objectivity, the model enables us to assess how any behavioural biases can be exploited,” added Watson.
He also pointed to the rise of responsible investment as an industry disruptor in the current investment world. “The launch of CRISA and revisions to Regulation 28 of the Pensions Fund Act, mean that responsible investing is no longer just a ‘nice-to-have’. Investors are also increasingly realising that, through their investment choices, they can materially affect company behaviour. This has led to increased demand for investment approaches that incorporate environmental, social and governance (ESG) factors,” he said.