The Global Economy Is Vulnerable
Over the first half of the year, the slowdown in global economic growth expectations for 2019 has been remarkable. This slowdown has been extraordinarily synchronised around the world and yet, the outperformance of riskier asset classes during the second quarter of 2019 (and year-to-date) has been a prominent theme. Riskier asset classes (equities) have generally benefited from improved sentiment, and equity markets have regained their footing after the sharp sell-off at the end of 2018. A shift toward more accommodative monetary policy stances by major central banks has supported a rebound in sentiment. In South Africa, the first half of the year was characterised by severe electricity-supply disruptions and continued weak business confidence. However, riskier assets (equities) have outperformed despite the release of negative economic data. It is pleasing to note that the Lima Mbeu funds have outperformed their respective benchmarks since inception.
In the multi-asset fund, we maintained a neutral position on all asset classes relative to the composite benchmark. Our ‘quant-amental’ research approach informed this decision. We blend investment insight with the discipline and transparency of a quantitative framework to determine tactical asset allocation positions over the medium term. Despite the positive sentiment towards riskier assets as a result of policymakers adopting a more accommodative monetary policy stance, we are yet to see this translate into tangible economic benefits. Our view is that riskier assets struggle to deliver superior returns in weak and stagnant environments.
Expectations are for South Africa’s weak growth environment to remain relatively unchanged over the next 12 months. Despite the moderate improvement expected in economic growth between 2019 and 2020, we think that the economy is still vulnerable. We believe that sustained economic growth comes from only two things: how many people are working and how productive they are. The increase in the number of unemployed people lifted the official unemployment rate to 27.6% in the first quarter of 2019, while data from the SARB indicates that there is no improvement in labour productivity. SA’s economic growth expectations for 2019 have already been revised down by 60bps since the beginning of the year, and at this rate, things could get worse in the 2nd half of the year. The national government’s gross loan debt as a percentage of gross domestic product (GDP) is at an all-time high. The sustainability thereof will require increased economic activity. Therefore, the ability to use fiscal policy to stimulate economic growth is limited, and any improvement in the short-term is highly dependent on global factors.
As South Africans, we tend to slit our wrists when we digest the structural inefficiencies that plague our economy. However, things are not much better globally, and economic vulnerabilities continue to build despite the accommodative monetary policies.
- US: Despite its currently high economic growth rate, some investors worry that the economy will eventually enter into recession after the stimulus package unwinds in 2020. Two indicators often serve as precursors to an economic downturn or a financial crisis — the inverting yield curve and the corporate debt-to-GDP ratio that is currently at historically high levels.
- Euro area: Government debt remains elevated and is still growing in some countries such as Italy. During the 2011-12 euro area crisis, the decline in creditworthiness of some governments led to higher sovereign yields and rising bank funding costs that were passed onto the consumer through interest rates. It subsequently led to weaker economic growth.
- China: The extremely high leverage in the non-financial sector remains a concern. Authorities have tried to resolve this, but the response to the US trade tariffs through a fiscal stimulus package has constrained their efforts.
There is, however, some positive news amongst all the negativity. Consumer price inflation in South Africa, and for the rest of the world, remained broadly below central bank targets. There is an expectation that the US monetary policy authorities will cut interest rates over the next six months, which will provide flexibility for the SARB also to lower rates. It would give some respite to the SA consumer. An interest rate cut will not be enough to offset the significant structural issues in the economy that are constraining business confidence and subsequently, growth in corporate profits. We have chosen to adopt a cautious stance in our multi-asset fund, by holding a neutral tactical asset allocation position relative to the benchmark. There is a risk that persistently weak economic data, pointing to a protracted global growth slowdown, could lead to a sharp reversal of sentiment. Despite this, we will continue to manage our portfolios in a risk-controlled manner to ensure that the investment returns are not adversely affected by the significant macro risks that remain prevalent.
Ndina Rabali, Teboho Tsotetsi and Bhekinkosi Khuzwayo.
Lima Mbeu Investment Managers (Pty) Ltd is an authorised financial services provider in terms of section 8 of the Financial Advisory and Intermediary Act, 2002, FSP number 49018, Registration No 2017/399814/07. This document is for information purposes only. Past performance is not indicative of future performance. The information contained herein is derived from sources which are believed to be reliable. Any opinion expressed herein is based on the presenter’s current analysis and is subject to change. This presentation does not constitute an offer to sell or a solicitation to buy any security. Lima Mbeu has a conflict of interest policy which outlines how conflicts of interest are managed. This policy, as well as additional information about Lima Mbeu’s products is readily available upon request or on our website: www.limambeu.co.za
For more information, contact Ndina Rabali: Email: email@example.com
Tel: 010 023 0113; Address: Fredman Towers, 13 Fredman Drive, Sandton, 2196