KEEPING BUOYANT
However, in order to feel better, we need a calm, growing and gradually healing world. Looking around the world, this eventuality is indeed achievable; however this depends on removing some obstacles currently threatening global economic peace. A slowing Europe and China have significantly curbed US growth for 2015/16. Forecasts have been reduced from 3.5% for 2015 to current levels of around 2%. Whilst stable, this is certainly far less exuberant than initial forecasts and Janet Yellen’s challenge in deciding when to raise rates is based on trying to ascertain just how much slower the US can still go, as well as concerns around the global economy. Fortunately for the US, oil neutrality remains a reality. Despite a collapse in the oil price, the shale drilling industry has managed to cut costs, reducing their breakeven oil price to around $50 per barrel. So although the number of rigs has fallen, production has remained constant. Although oil prices will eventually rise, a combination of shale drilling, plus Iraq, Iranian and Libyan oil coming onto the market in increasing numbers, should see lower oil prices with us for some time to come. Goldman Sachs are predicting $20 per barrel. In the meantime, the Middle East – destabilised as a result of a decade of war – has seen a mass exodus of refugees seeking exile in Europe, the biggest movement of people since WWII. While the numbers look enormous on television, they are still relatively small compared to the number that Lebanon, Turkey and African states, (including ourselves) have taken. It could all work out well. Europe has been facing a demographic time bomb for some time with the elderly living potentially 20 years longer than their money and an instant gratification generation of youth who think that ‘having kids looks like quite a lot of hard work’ and are not producing the requisite number of taxpayers to help government look after impoverished pensioners. If they can successfully
incorporate the refugees into society and get them to work, it would go a long way toward solving their problems. If they don’t, they face a welfare nightmare, a whole host of social ills including a rise in crime and the resultant xenophobia. Economically in Europe, the latest bailout has seen Greek fears subside for the moment. They will most certainly rise again, but not for a while. Vladimir Putin remains defiant, but not outrageously so, as he struggles to contain a collapsed Russian economy and currency. A big concern at the moment is the happenings in China. A rollercoaster stock market was not a surprise. Up 100% in 12 months and down 30% in two weeks should come as no surprise to anyone. The Chinese government (fearing social unrest as a result of losses) is spending billions of state pension fund dollars in an attempt to keep markets high, but this is unsustainable and unfair to the pensioners whose pension fund money was used. Arresting market traders is also not cool. All markets want is honesty on the Chinese GDP growth numbers. It is widely believed that they will massage the official numbers to somewhere between 6.5 and 7%. However, analysts say that looking at all the underlying data available, the real numbers are nowhere near that level. So what is it? Anywhere between 6 to 7%, markets can digest. Any less will be a problem. The emerging market (EM) storm continues unabated and this is expected to continue, at least in the short term. Fears around US federal rate hikes and Chinese growth (or lack therefore), have neatly usurped the position of fear held previously by Greece and President Putin’s escapades in the Crimea. This negative sentiment has seen over a $1-trillion flow out of emerging markets over the past year and to put that into perspective, it’s roughly double the amount that existed in 2008 during the financial crisis.
ARTICLE
So collapsing currencies, slowing growth, recessions and rating downgrades are all de rigeur of emerging market life at the moment and SA is no exception. Our currency has been hammered to 15year lows, along with the rest. However, while we are slowing, we are at least still growing. Unlike Brazil, our debt is still investment grade and pretty safe for the next 18 months, provided Minister Nene can keep government expenditure under control. To ensure we are completely safe however, we need to get growth going. Part of that will happen naturally (assuming we don’t see a Chinese growth collapse), but leadership from government would help a lot e.g. Removing the visa regulations and promoting tourism, particularly to the Chinese, would be a good place to start. Post the EM exodus in 2008, approximately $2-trillion flowed back into emerging markets over the next four years. Granted, much of that was the result of QE, the quantum of which will be less this time. Just getting some of the $1-trillion that has left in the past year would make things feel a lot better. And they need to come; the gap between what western pension funds have in their funds and what they owe their pensioners who are living 20 years longer than expected is growing substantially and pension deficits are not going to be reduced earning less than 1% on German debt. Emerging market yields will help a lot. Essentially though, for that to happen we need a boring, bland world. No more Greece, no more Putinesque aggression, an end to Fed tightening, (or the threat thereof), and clarity/honesty on the Chinese growth numbers. A world without drama would see confidence return followed by a risk-on environment, which would see gentle flows resuming, gradually healing currencies, economic growth and a host of other ills.
T O P 5 0 0 / 7 th E D I T I O N
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