Investment Environment February 2015

16.03.15

Global

A great deal has happened early in 2015, some of the key events are summarised below:

  • The oil price (Brent Crude) declined below USD50. While this level was regarded as unsustainable and there was an expectation of a normalisation of the oil price to the current ± USD60/BBL. Oil is a major input cost for all economies and therefore should stimulate economic growth.
  • The European Central Bank announced a quantitative easing (“QE”) program to purchase assets of EUR60 billion per month. This has proved positive for riskier assets such as equities as the US QE historically demonstrated. QE should also inflate and cause some growth in the European economy.
  • Greece has again threatened European harmony and has benefitted as Germany has favoured an extension of the bailout provided. This is likely to be positive for markets as the chaos of an EU departure is unprecedented.
  • The expectation that interest rates are increasing has moderated.  Some countries, such as Canada, are cutting rates, and Germany has issued a 5 year bond with a negative yield! The global perception is that interest rates will remain stable or even decline in an effort to avoid a slowdown in economic growth. In some economies, such a Europe, deflation seems to be the greatest threat. The wild card is the US where Janet Yellen has indicated that the strong economy might necessitate interest rate hikes. However, this will probably be delayed into 2H2015 to allow the rest of the world to catch up.
  • In 2014 China’s economic growth slowed to its lowest level in 24 years. Investors judge this negatively, however it is important to understand that the 2014 GDP growth was 7.4% which equates to USD700 billion of new growth off a higher base. Sometimes actual numbers are more meaningful than percentages. The world also benefits from Chinese growth, being synchronised with US growth (forecast at GDP 2015 ~ 3%). This is significant for risk assets, particularly if the EU drag is avoided.

The convergence of these and other events is helping riskier assets reach new highs.

 

South Africa

The end of February marks the time of the South African National Budget presented by the new Minister of Finance, Nhlanhla Nene. While the budget was not contentious or eventful in any way, Nene did what he could to bridge the fiscal gap, was mildly redistributive to previously disadvantaged tax payers and hopefully will curtail Government expenditure to the extent of R25 billion. This fiscal balancing act will only be commended if it generates economic development and more importantly a business confidence which is the only way of creating economic growth going forward. A few key issues addressed in the budget were:

  • Eskom will be financially supported but hopefully this will also lead to a more disciplined organisation. This is vital for economic growth and some interesting facts are shown below.
  • The Rand in the current circumstances of interest rates around the world being very low might benefit from the carry trade. Unfortunately the widening trade deficit, reversing a December surplus of R6.7 billion to an unbelievable January deficit of R24.4 billion, will be a serious headwind for the Rand.
  • The SA economy has suffered from 2009, with limited fixed investment spending. Nene, while curtailing the budget, will hopefully target the spending more appropriately to benefit parastatals like Eskom.
  • South African residents’ foreign investment allowance will increase from R4 million to R10 million per calendar year, or R20 million per family unit. This is a significant liberalisation and clients are encouraged to take advantage of this allowance to diversity their investments internationally. *

The conclusion is the Fiscus has done a good job, but the budget spend must be effective in encouraging business to participate in economic growth going forward. The environment, like the rest of the world, remains one of slow economic growth but the lower oil price and easier monetary policy will encourage Investors to seek returns from riskier assets such as equities. The ability to invest more funds outside the Rand should also be favourable for Rand returns.

*  Douglas Investments has an arrangement with SwissQuote enabling management of a directly invested USD (or any forex denomination) based portfolio.

 

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