He says that, in contrast to South Africa’s current low-growth economy, world economic growth is at its best level in several years. “We’re forecasting world GDP growth to be at 3.5% in 2018, which will be the best year since 2011. However, compared with 2006 and 2007, when growth was at 5%, you can make a case that the world’s been a bit disappointing and nowhere near as strong as it used to be.”
According to Zangana, the very strong global growth experienced prior to the 2007/8 financial crisis was partially driven by excessive consumption and borrowing. “If you look at the situation today, there’s an element of leverage, of course, but you can’t really conclude that there’s excess leverage or borrowing going on, so I’d argue that today’s a more healthy and sustainable environment.”
Educating clients
However, he believes there is a need to educate global clients that the returns they used to receive on asset classes prior to the financial crisis, especially fixed income and bonds, are now well and truly a thing of the past.
“It’s going to be difficult to achieve those returns again, for a number of reasons. World interest rates are very low at the moment. They’re beginning to rise, but they’re unlikely to return to the levels we saw prior to the financial crisis. If your focus is on equities, then the leverage is no longer there, so we’re unlikely to see it inflate asset prices the way it used to.”
In South Africa, there is also a need to educate clients and manage expectations, albeit for different reasons. Benn says the past 10 years have been a wonderful bull market for equities, but that bull market is now very much in the late stages of the cycle. “While equity markets have delivered exceptional returns over the past decade, we see a very low return environment over the next five years. The highest probability for equity market growth is 5-7% per annum, which is extremely low compared with the double digits of the preceding years.”
According to Benn, investment professionals have already spent the better part of 18 months telling investors that the party is coming to an end and they should expect lower returns until such time as the market corrects and provides the opportunity to buy good assets at a much better price in order to set themselves up for the next set of good returns.
“Ultimately, the success of the NDP over the next 10 years will depend on the extent to which corruption can be rooted out and policies can be executed.”
The South African economy
Looking at the South African economy in general, Benn says Jacob Zuma’s years in office highlighted a number of long-standing structural growth impediments. Among the most prominent are high unemployment and poorly skilled labour, which comes in at a higher unit cost than is achieved by competitors such as China, Thailand, Vietnam and India.
“Those countries out-compete us both on low labour cost and on education or skills,” he observes. “That’s the first point. The second is that agriculture, which is a large user of unskilled labour, has been quite severely hamstrung by the drought. The third point is that the mining industry’s no longer the massive employer it once was. Because our mines are getting deeper and older, they’re more expensive and dangerous, and there’s greater incentive to mechanise.”
He believes that while clearing up issues regarding the Mining Charter could provide a one-off boost in production, the structural challenges in the industry will remain.
According to Benn, the final impediment is that South Africa is a small, open economy and the globe has been growing at sub-optimal rates for the past decade. However, in the past year, the world economy has again grown in a synchronised manner and created more demand. “This situation did create a headwind, but we’re close to normal growth in the world again, so that impediment’s been removed.”
Has the latest National Budget given us reason to be positive about South Africa’s future? Benn believes that, while better than expected, it continues with the same unsustainable theme, whereby a small pool of taxpayers is funding 57 million people.
“I think free higher education is a very good initiative in the longer term,” he says, “because it’s a way of upskilling young people without
impoverishing them from the start. So the youth get a better chance to create a middle-class life for themselves, as they aren’t overwhelmed by debt. But it’s a long-term initiative that will play out over the next five to 10 years as a structural driver.”
The global economy
Looking at the global economy, Zangana says one of the most important tailwinds is likely to be the big tax cuts and spending increases announced for the American economy.
“This is going to generate a lot more demand not only in the United States, but also in the rest of the world. Another tailwind is that in Europe, we’re seeing a recovery in domestic demand and financial conditions. You also have world trade re-accelerating faster than global GDP growth, so the old integrated supply chain is starting to work again and this higher world trade growth means that big exporting economies – such as countries in Asia, as well as South Africa – should benefit more from the world trade cycle.”
He believes one of the key headwinds is rising interest rates. Because the world is now in the expansion phase of the economic cycle, inflation is starting to pick up. As a result, interest rates are rising in order to prevent economies from overheating.
Global protectionism is also a potential future headwind. “Tariffs on steel and aluminium are examples of the United States having imposed trade barriers in an effort to either safeguard its own industry or make an adjustment to a market that it doesn’t believe is working very well,” notes Zanvana. “Our concern is that this is beginning to spread. Europe, Canada and others may retaliate and the situation could escalate. It’s certainly a global risk at the moment.
“Another risk we’re concerned about is potentially higher inflation. For now, inflation’s remained under control, despite the low unemployment rates we’re seeing in many parts of the world. That could change very quickly and wages could start to rise.”
58 An Absa Investment publication
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