Good grief, has nobody got anything nice to say about SA?

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INVESTMENT ANALYSIS

Good grief, has nobody got anything nice to say about SA?

Four prominent local economists reckon there’s not a whole lot to look forward to for us

Chris Gilmour


Economics was referred to by the Scottish writer Thomas Carlyle as “the dismal science”, so inspired by the view of Malthus who predicted gloomily that population growth would always outstrip food supply.
At a recent Leaderex Money Summit panel discussion, I listened to four of the country’s foremost economists –Dawie Roodt of the Efficient Group, Mike Schussler of Economists.co.za, Annabel Bishop of Investec, and Adrian Saville of Cannon Asset Managers.
They discussed the economic situation in SA and what private investors should be doing. And it was truly a dismal outlook. With perfect timing, this discussion took place a few hours before the release of second-quarter GDP figures that indicated we are in the grip of recession.
Saville made the point that, according to the Economist Intelligence Unit, the world economy is growing at 3.7% a year. SA is well below this and, although Cyril Ramaphosa predicted that 2018 growth would be close to 3%, it looks like it’s coming in at around 1%. Saville also highlighted that over a five-year period local equity performance is astonishingly behind that of inflation.
Bishop said the current administration’s attempts to repair the economic effect of the awful Zuma years will take a long time, but we are probably reaching the low point of the cycle. She commended Thabo Mbeki for including and incorporating the private sector very successfully, with Ramaphosa trying to do the same thing. She reckoned SA will probably require five years of fiscal repair, coupled with sustained private sector investment, before the economy comes right.
Roodt applauded Ramaphosa for changing the Eskom board very quickly after taking office. However, he cautioned that much of this good work has now evaporated because Public Enterprises Minister Pravin Gordhan has been allowed to intervene in the Eskom wage dispute and permit the bankrupt power utility to grant above-inflation salary increases.
Roodt said things will deteriorate even further before the low point is reached and that fiscal repair won’t happen in the medium term. He saw little if anything on the horizon to change his view that government spending and public debt are still rising, and the deficit is likely to keep on increasing.
“State-owned enterprises are NOT companies, even though they think they are”, said Roodt. “They are civil servants and should be paid like civil servants”.
He noted that total government debt to GDP, including SOE debt, is around 70% and still moving up unsustainably. “We must cut expenditure on people, no matter how politically unacceptable it may be.”
Schussler spotlighted our horrific unemployment rate. SA’s broadly defined number of unemployed people is 9.6 million. The US has an 8 million unemployed equivalent, but that jurisdiction is 49 times the size of SA. Going further and combining Germany and the US, SA still has slightly more unemployed people than these two industrial giants which are 60 times our size. He underlined the clear observation that SA has the highest persistent rate of unemployment in the world.
There was also consensus that the rand is fundamentally undervalued. Roodt was concerned that the rand could weaken suddenly if it becomes the focus of attention for whatever reasons, specifically if a government official happens to make a politically inept remark that could be seized upon by currency speculators.
Schussler noted that a strong US dollar is never good news for commodity-based currencies such as the rand. Bishop reckoned it could strengthen slightly in the fourth quarter of 2018, as historical seasonal factors are usually supportive of emerging market currencies in the last part of the year.
With this dismal outlook, they all agreed that South African investors should push the absolute maximum into offshore investments. Roodt favours Japan and India, Schussler likes offshore money market type instruments, and Bishop is keen on commodity currency assets such as those denominated in Canadian dollars.
Chris Gilmour is an investment analyst.

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