posted on August 25, 2020 10:06
Is the smoke clearing?
Last week I was chatting to one of my friends in the asset management business and found myself using the term “feeling like the smoke is starting to clear”. I thought this was quite refreshing and a relief after 5 months of lockdown and general uncertainty. For sure spring is in the air, a not-discountable factor in my mood, but it’s more than that.
A positive way of looking at the world’s economy is that perhaps the Covid recession is bottoming or may already have done so. This only means that, for the meanwhile, the bleeding has stopped. The patient is still very much in ICU, but hopefully the worst is past. The current earnings reporting period on Wall St. is surprising on the upside by beating expectations, but in most cases postings are still way behind 2019 results.
The exceptions are a handful of tech heavyweights whose earnings have benefitted from the acceleration of internet-based life, particularly retail and entertainment. As the world recovers post-lockdowns it remains to be seen what will emerge. Using tourism and holidaymakers’ behaviour during the Northern summer as an indicator, life as we know it is trying to get back to normal. Retail sales numbers are still under pressure, but continue to recover slowly. Interestingly, household savings rates are up in the Northern hemisphere, one of the reasons why sales are down. Covid seems to have made people more cautious in more ways than one. Saving makes space for future spending if one chooses. We shall see.
Manufacturing and related industries are also recovering and forward-looking indicators are ticking up. No great shakes, but better than continuing to go down as they drastically did in the second quarter 2020. All this means that things are improving, but some basic realities are also in place.
Low growth, low rates
World inflation is stubbornly low in the low-growth environment and looks set to continue. Interest rates will remain low (almost no matter what) as governments try to stimulate economic activity. There is no doubt that the best cure for the current situation is economic growth and this is not lost on the world’s smartest central bankers. World recovery is therefore on the cards, but may be a longer and tougher battle than many would like.
Back home, things are looking up from the perspective that the rate of Covid infections as a nation may have peaked for now, with some regions better off than others. Certainly one feels that most everyone, while still cautious, wants to move around again. From what people tell me, flights are basically full and not all business travelers either. We’ll see the uptake for restaurants and retailers now that restrictions are lighter.
Government finances are a major concern and a central focus for every fund manager we talk to is to watch economic policy implementation in the immediate future. Government needs to urgently arrest corruption and introduce growth strategies, or we face falling into a debt trap from which it is difficult to emerge.
One is not cynical about RSA, but the risks are there for everyone to see. ANC infighting is a major issue and has the potential to be fatal if the current lack of certainty continues. Persistent inaction will take all of us down with them. Each important local money manager stresses that their best way of adding value to our wealth exists offshore and urges us to directly invest there. Naturally this is only an extension of what we have all heard for a long time and we’ll continue with this strategy.
There are opportunities locally
For now, I would be very pleased to see us take advantage of some of the positives that are around locally. As a commodity exporter, with demand picking up internationally, unit prices at decade highs and the rand weak making our product cheap in hard currency, we need to ship as much as possible as fast as we can. This earns foreign currency and helps to maintain the current account surpluses we have recently started achieving. It means load shedding needs to stop and the ports must quickly be restored to full operational capacity. I believe government knows this and some of the right things may be starting to happen in that regard.
Thanks to last summer’s rainfall we have the best maize crop in years, sufficient for a return to being the net exporter we became known for in the past. The citrus industry is also in the same position, with orders for large tonnage to the US, among others. We have the opportunity to capitalize on these gifts from Mother Nature and cannot afford to fail.
For many years we have benefitted from the “carry trade”. This is where investors have access to capital at low rates in their own country and invest it at much higher rates in another country, banking the profits for themselves. With money printed at a never-seen-before pace in developed economies, we became a favorite destination for this with our high interest rates and open economy. The portfolio investment flows we earned helped the rand stay stronger than it may otherwise have been for years.
After our final downgrade to full junk status and the damaging effect Covid has had on the government’s balance sheet and income statement, our economy has become structurally weak and foreigners are reticent to invest here for now. Actually, they have been net sellers for months. Tito Mboweni is fully aware of this and has tried to bring it home to his fellow cabinet ministers for some time, under threat of his job it is said.
If we could fix these simple things, the positive spinoffs would make us feel like we were living in a different country. I hope the government does the right things now for all our sakes.
More next time