Investment Environment November 2014

09.01.15

The world is suffering from inconsistency which is illustrated in the graph.

Post the global financial crisis of 2009, there was a synchronised recovery (as shown above), but then different economies have shown very different outcomes. As we go into 2015 it appears that the US is showing steady growth prospects with controlled consumer inflation, low interest rates, high employment and on the back of Q3 GDP of 3.5% market expectations are for good growth through next year. The unfortunate thing is the United States only represents 22% of the world’s economy, so the question is what about the other 78%?

The two other major economic zones are the Eurozone and China. Europe is threatening to re-enter recession and has no inflation in spite of Draghi’s efforts to embark on their own unconventional measures such as quantitative easing. This should have a positive effect, as already proven in the US, but Germany remains set on an austerity approach. The UK seems to be the only part of Europe that is demonstrating some positive economic numbers. China has shown a preparedness to support domestic demand by cutting its benchmark lending rate. This took markets by surprise and may be an indicator that the Chinese economy is weaker than expected.

If one looks at the South African economic situation it is difficult to be cheerful about future growth prospects. The options left to government and responsible fiscal or monetary policy are very limited. However, if an environment of business confidence is created it could release South African corporate deposits for investment. This is a war chest of close to R650 billion and this would change everything! (As we write this we are experiencing load shedding and have no water supply!)

Such a situation would provide real economic stimulus driven by business but government would have to demonstrate the political will to commit to the private enterprise friendly NDP (National Development Plan) even at a political cost. With the twin deficit structure and the Rand under pressure, which is likely to continue with no rescue from commodity prices, and improved business confidence seems to be the only option going forward.

The JSE indices have largely been driven by the multinationals that have solid international businesses. There remains a lot of value in commodity stocks but this is probably reflective of the lack of world economic growth as illustrated above. Although the extraordinarily low oil price (Brent < $70), which is probably unsustainable, is good for world GDP growth. The US alone cannot support world economic growth and to this end the soft interest rate environment might prevail for longer than expected. This would be positive for risk assets such as equities. 

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