Outlook 2019 | Masterclass Part 1

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  • 19 mins 47 secs

We limped out of 2018 with expected growth lower than 1% and there is a lot of headwinds with the coming elections, but what does 2019 hold for South Africa? In this first part of the Masterclass, a panel of experts discuss their outlook for the year ahead.

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On the panel are:

  • Rob Johnson, Head of Investments, Nedgroup Investments
  • Mohammed Nalla, Head of Economic Research, Public Investment Corporation
  • Arno Lawrenz, Global Investment Strategist, Ashburton Investments
  • Johann Els, Chief Economist, Old Mutual Investment Group
  • Hosted by Candice Paine, Strategist and Consultant


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PRESENTER: In today’s Masterclass we’re going to be talking about the outlook for 2019. On the panel with me, we have Rob Johnson from Nedgroup Investments, he is Head of Investments; Mohammed Nalla, Head of Economic Research from the PIC; Arno Lawrenz from Ashburton Global Investment Strategist; and finally Johann Els from Old Mutual Investment Group, who is Chief Economist.

So we limped out of 2018 with expected growth lower than 1%. We’re hanging onto an investment grade rating from one of the agencies. We have a lot of headwinds in elections coming up, the ESKOM issue, we don’t have policy certainty, I can carry on and on, but what does 2019 hold for South Africa? Johann, can we start with you?

JOHANN ELS: You said start with South Africa, but I actually want to start with the world, because the global backdrop is important. And yes we’ve got a slowing global economy, and markets are worried about recession risk and all that, but I think a slower US and a better balanced overall economy, in other words outlook where the US is slowing a little bit, somewhat weaker dollar, more balanced emerging markets, and South Africa within that category of emerging markets, so a more balanced growth outlook for the global economy, even though that is at the slower growth pace, will be better for us, for South Africa, than 2018 was when it was very unbalanced global growth: strong US and weak elsewhere.

So I think the global backdrop might actually be better for South Africa. That will help the currency. And then if we look into the local economy, I think this is cyclical recovery coming. Yes we’ve got the headwinds, yes we’ve got ESKOM, the uncertainty around the elections, policy issues etc., but I think we have to look forward and try to look through the negatives. And if we call the theme winds of change, that has started, and I think that will accelerate going forward. And I strongly believe that the ANC government under Cyril Ramaphosa will be good in terms of policy for South Africa. So if we get confidence going I think we can make some inroads into getting that cyclical recovery stronger into the latter half of this year. So I do expect stronger growth this year. I do expect things to improve this year.

PRESENTER: So there’s a lot of good news in what you’ve said. That’s not always what we hear from other companies. I’m wondering Arno what do you see as bigger risks than Johann is seeing?

ARNO LAWRENZ: Well I’d probably want to take a step back in fact in the way that Johann has portrayed it, because looking at the global and then transplanting it back into the South African context. Because if we look back over the last couple of years with the global recovery, and despite the global recovery that you’ve seen particularly led by the US, South Africa has struggled. So what it points to in my mind is the fact that the South African idiosyncratic risks have in fact dominated the global ones. So I’ll sort of almost disagree with Johann’s positioning of the globe is looking better and it’s supportive of South Africa. It is to a certain degree, but I think we’re almost shooting ourselves in the foot so many times, and that’s where the risks do lie. Is that there are some many of these idiosyncratic risks that we could potentially short change ourselves in my mind.

So from my perspective I think that we are definitely faced with too many issues that have to be resolved, at the same time that we see a significant shift in the short term over the course of this coming year in my mind anyway. So I think it’s very much a muddle through type of environment at best for South Africa.

JOHANN ELS: Arno, I’ve just seen in the past that once things start to get going it can change so rapidly, unexpectedly. If we see an environment where the rand is actually stronger, and we can go into that later on, confidence starts building. And yeah I agree there’s lots of risks and in the global recovery we didn’t benefit. But if we look forward into a South Africa that after the elections we can get policy going, and we can get confidence going, and we get the president’s investment plan off the ground finally, that type of global environment will actually be slightly more conducive. And I don’t think it’s going to be a rapid growth towards 3, 4, 5% next year; no, it’s going to be slow. But I agree there’s lots of risks.

PRESENTER: So Johann what you said is that you want more balanced kind of slower growth globally, but that may not what we’re seeing with some of the things going on globally at the moment. I wonder Mohammed if you can comment on where you think global growth is going to?

MOHAMMED NALLA: So I think if we have a look at the global backdrop, in fact one of the defining characteristics of last year was that we started off the year with pretty synchronised global growth and that became increasingly desynchronised as the year progressed. And quite frankly I think we’ve got, we often speak about policy risk in South Africa, but globally you’ve had a lot of policy risk. You’ve had these trade wars between the United States and China. You’ve got the risks of the Brexit in the UK. You’ve got political risks in the EU. And so as a result I think that that has led to this increasingly desynchronised global growth picture, which arguably could remain the status quo as we head into the 2019. If anything I agree with Arno in that South Africa is looking at this pro-reform agenda against a backdrop of a global cycle that’s looking increasingly mature. At the same time you’ve got China that’s re-orientating its economic mix, and so in doing so will have severe ramifications for emerging markets and commodity exporter economies like South Africa.

So your view is that South Africa is going to continue to struggle through 2019 from a growth perspective.

MOHAMMED NALLA: I think that last year set the base so low that inevitably we’re likely to improve on last year. But that happens against a slightly more testing global backdrop, which will constrain our ability to rapidly accelerate back towards our potential growth levels.

PRESENTER: So how do investors deal with inflection points Rob? So we’re at a point where global growth is slowing, but we also have this interesting mix of huge political uncertainty across the globe, which is going to amplify that in some way and investors need to start structuring portfolios in that mix. What do you see happening there?

ROB JOHNSON: That’s a great question actually. And I think if we look at 2018 and we think 2019 is going to be any different, I think people are in for a bit of a shock. Because I think actually we’ll see more surprises, more volatility, more uncertainty going into this year, especially given all of the political events around the world and some of the movements in the central banks, and particularly I think be effects are going to be from Europe and from the China/US trade war. So what do investors do? I think what we saw at the beginning of last year, I don’t think there would have been many investors running balanced portfolios that would have significantly over-weighted local bonds, local prefs and global bonds, which actually based on the US rates actually gave you a decent return relative to other asset classes.

So if you then take a look at that year, what do we do in the year ahead with all this uncertainty out there? Well let’s again diversify the risk, build a good balanced portfolio and not place too many bets on one asset class or another. Because at the end of the day it’s very uncertain which way the Fed is going to go in terms of rates. It’s very uncertain in terms of all the economic indicators that are coming out where we might be, whether it’ll be good or poor, whether that’s global or local here in South Africa. So investors really do need to make sure that they’re not placing all their eggs in one basket.

PRESENTER: So let’s talk about the US interest rate that seems to drive everything around the world. We heard at the end of December that Jerome Powell was going to not just raise rates indiscriminately, Arno, where do you think they’re going?

ARNO LAWRENZ: Well I think if one goes back to that statement in December, it was quite a disappointment for the market in the sense of everybody knew they were going to be raising rates, but they also at the same time expected that they would soften the tone. And I think that was one of the disappointments in December was that they didn’t soften the tone to the extent that they said that they would still see gradual increases into 2019. Market consensus of course is that there’s probably going to be at least another two hikes coming during the course of 2019, and I think that’s pretty much a standard conviction. Of course how they then change the language is the critical element.

It’s not the actual rate hikes themselves in my mind that worry the market; it’s the language in terms of saying well how hawkish are they going to be? They have been focusing on some of the positive developments in the economy in terms of the labour markets in particular. That’s all good and well, the problem is the dark clouds are starting to gather on the horizon, and they haven’t even referenced any of that yet in terms of saying well we’ll adjust accordingly. So I think that’s the key issue for the market at this stage. And there are a lot of knock-on impacts in terms of how they actually tighten and normalise their interest rates in terms of the global liquidity situation, which is of course a big risk for global markets.

ROB JOHNSON: Actually what we’ve seen after January, or with recent events, we’ve seen the futures market indicating that by the December meeting there’s an 80% chance of being where we are or lower. And then if you look at all the meetings through the year, it’s around an 80% chance of staying where we are. So I think the view may be shifting there, and I think actually the shutdown in the US as well is having an impact. And broadly I think central banks get a really bad wrap. I think they don’t get enough credit for the work they’re doing. I mean Trump’s a prime example of that, right, the slack stick that he’s given Jerome Powell recently in the media is horrendous I think when they act on what’s in front of them. And they will be using, their decisions I think will be data driven as we go through the year.

So I’ll be surprised if we get any rate rises in the next 12 months, perhaps one is the growth does come through, wages increase, if we do see a bit more inflation coming through into the system, then perhaps we’ll see one in the middle of the year.

ARNO LAWRENZ: I think perhaps just one development that has happened over the past couple of months, which in fact also supports that, has been the dramatic fall in the oil price over the past couple of months. So from an inflationary perspective certainly the dynamics have changed completely, so certainly they.

JOHANN ELS: And sorry, the dollar was strong, so that will help with oil price in keeping US inflation in check. But yes, even if there is another one or two interest rate hikes, the market has now got visibility in terms of the end of that cycle. And that will be a big impact in terms of the dollar going forward. And the dollar is important in terms of emerging markets and us. I think the dollar is going to weaken quite substantially during the course of this year, and that will be a big impact. But the Fed’s decision clearly is taking a lot of the risk that the market has priced in over the last month or so in terms of US recession, and it’s taken a lot of that risk out, because the Fed clearly doesn’t want the recession, and the reaction is starting to work in that favour.

PRESENTER: So Johann, Rob’s view is very supportive of your view. You’re saying the rand gets strong going throughout the year, which obviously means that we’re also not importing inflation if the dollar weakens. What do you think the risks are to that?

JOHANN ELS: Lots. Currency is the most risky thing to try and forecast. But in a scenario where the dollar weakens, that is already good for all emerging market currencies, including the rand. The rand is the most highly traded emerging market currency out there. So the rand will certainly benefit from that. And then the other things that will benefit through inflation that I expect to stay very low this year, confidence improving later on this year, keeping our investment grade rating from Moody’s at least, the others remaining at stable. You don’t need a lot of hugely positive things, you just need lots of stability in and around the elections, and then slow increases in terms of visibility where policy in South Africa is going. The rand can easily strengthen quite a bit during this year, but of course we know that’s a short-term event. The rand will always weaken over the longer term, and we invest for the longer term. But in that short term a stronger currency can impact heavily on, positively on sentiment, on confidence.

PRESENTER: So let’s talk a little bit about these trade wars. They’ve been going on for a long time. There seems to be no resolution. Many, Europe, the UK, China, all going to be impacted by it, and us at the bottom of Africa. Mohammed, what are your views on it?

MOHAMMED NALLA: So first and foremost on the US/China trade wars there’s a deadline, and that’s around March of this year. When that resolves we need to see how severe the impact actually is. I mean if you just stress US growth rate and the Chinese growth rate, well actually you could impact global growth quite materially this year. And that would play into the scenarios painted by Rob in terms of the Fed potentially going a lot slower and maybe monetary policy staying a little bit easier for a longer period of time. Something interesting though is that the US has also been considering potential tariffs on other industries, specifically automotives. And that would shift the focus away from China, and potential, maybe keep it on China but potentially shift it to the likes of Japan, the likes of the eurozone.

So I unfortunately don’t think that some of those trade headwinds emanating from the US necessarily dissipate. I think the focus just shifts a little bit, which for me would keep the pressure on US growth rates. Over and above that, if we look at the United States, growth will be impacted by the fact that the fiscal stimulus measures will start to be eroded or disappear as we head through in this year. And so all that’s done is it’s shifted your Fed pause, if you want to call it that, forward, rather than fundamentally changing the trajectory of what I think expectations would have been. The consequence of that is that if the cost of money remains relatively cheap, if monetary policy remains fairly accommodative globally, not just from the US but from the eurozone and so forth, that could extend this late part of the global cycle that we were discussing earlier. It’s a mature cycle, but it’s probably been one of the longest investment cycles that we’ve ever experienced. And this aberration of easy monetary policy and quite frankly erratic policy from other policymakers is likely to extend this investment cycle even a little further.

PRESENTER: So let’s talk a little bit about Europe, Rob, because we know that the ECB is wanting to pull back on that funding this year, even as they still hold interest rates negative. On the back of what Mohammed said, how do you see that playing out if they are also in the sights for some sort of trade embargo?

ROB JOHNSON: Yes, again I think they’ll be more careful about it. I know they’ve announced that they do want to do that, but we’ve just seen the growth in Germany slow as well. We’ve got the situation in Italy raising its ugly head on particularly every other month. So that situation doesn’t really lend itself well for the banks in Europe to be able to not have that ECB buying of their debt. I think Brexit’s going to have a bigger impact unless we abandon the boat, the vote, or take it back to the public, and I think the public will then with more information in their hands, I think that vote will be overturned. I think that will be extremely positive for European markets. The pound in particular would do very well, and the knock-on impact of the businesses in the UK. But we’ve already seen that trading relationship stretch and businesses in the UK that trade heavily with Europe have already started to look at putting some of their offices in Europe. And they won’t backtrack on that because they’ve already started on the work looking into, or they’ve spent the money and spent the time looking into whether that’s a better option. And when you start down that route, if it is a better option then you follow it through.

So I think there’s a lot of disruption there. I think we could see much more disruption from Southern Europe, and also particularly internal angst within France. We’ve seen recently within Germany’s growing as well, and with Merkel leaving the scene as well politically, economically we’re going to see disruption there.

PRESENTER: So we’re not seeing much good news globally or locally. Does anyone want to venture into what is going right for South Africa or the globe at the moment that supports growth; that can support a smooth transition through the cycle? Johann?

JOHANN ELS: I still maintain that a better balanced global growth situation; in other words the US not as strong as it was last year, and emerging markets a little bit better. So from unbalanced growth last year, albeit at a slightly higher growth level, to more balanced at a slower growth rate, that is good. It’s not great, it’s better than last year. A weaker dollar, a Fed that’s standing on the side lines, all of those is creating in my mind more stability in terms of the global SA situation. And yes, even as Arno said earlier, it’s not great out there. Growth last year was weak. This year as US Walsh said growth will need to be better this year. That’s just natural, because it was so weak last year. Things are going to start to build. I think we have to take a view in terms of where is the SA economy headed after the elections? And we know that the ANC under our new president will want to improve policy. And yes, it might not be easy and overnight, but these things will start building. And I’ll come back to the point that I made earlier. That will build confidence. That confidence is the big driver in terms of getting growth going from very weak growth to better growth.

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