Good times…
Charles de Kock, head of asset allocation and strategy at OMAM says that there are some structural trends in the country.
These range from the impact of China’s economic growth, the low inflation environment, the growing black middle class and a 1960s type of economic environment that is typically showing muted cycles, with high growth and lower real interest rates.
In essence De Kock says that that there is a structural story in China. China has a big impact on commodity exporting countries – SA included, and this has been one of the reasons for the strength of the rand.
The weakfish USD is good for portions of the local economy, the US Fed is tightening its monetary policy and there have been capital inflows into the country. It will be weaker against the Asian currencies, and not against the euro, he says.
2005 will be much like 2004 was, says De Kock, although he would like to see some weakening in the rand.
There is a definite pattern and there is an increase in fixed investment spending, while economic policy growth is supportive of this.
The demand side of the real economy is a story in its own right. Demand remains in boom category, in terms of consumer credit and car sales, which are flying, having just beaten the last peak which was in 1985.
While the rand remains strong, and hurting the manufacturing sector, the construction sector remains strong. We think this has to do with the strong rand, due to imports, from China among other places.
De Kock maintains that there will be a moderate depreciation in the rand. This will mainly be due to the current account deficit, an expected narrowing of the interest rate gap between SA and main trading partners. Money flows to the higher interest rate countries – SA.
While commodity price support will weaken, as they cant carrying on rising indefinately, and finally there will be some welcome forex deregulation. Budget time could be a time to announce some relaxation, to allow a gap for money to flow out, particularly from the mining sector.
The monetary policy dilemma is that there is strong demand, and production is hurt by the strong rand. We don’t expect the repo rate to change during 2005. We are not calling for an interest rate cut, the economy is overheated enough as it is says De Kock.
But to assist the production side of the economy the rand has to weaken. One other way is to reduce the interest rate. It will be a fine balancing act. It is a nicer problem to have than in the last 20 years, though.
Talking to government officials, De Kock says they realized that they didn’t do enough in terms of job growth. There seems to be a shift now. If the rand weakens we don’t expect the SARB to jump on the brakes – some weakness will be allowed to come through the system.
On to the markets and De Kock says they – the markets - generally look forward. On the asset class side, De Kock doesn’t think that the JSE is the best index to use. The stock market is fairly priced however. On the bond market, he says that it is at 1960s levels. They have correctly anticipated the markets – we are unexcited about this class. Equities are seen as fair value.
On the property side, De Kock says residential housing was a good place to have your money in. The downturn at the end of last year is not surprising. It is running out of steam and will only return about 10% on the residential side.
Predictions for 2005 – they expect that cash at 7% or less, bonds of 8% only, property – quoted property – expecting 10% or more, while equities at 12% on the ALSI are in the ballpark. He wont put his neck out there.
Don’t expect 30% real returns again. This is a low inflation environment.
On the global front, bonds are the lowest performers for the year, with equities at 7%. IF the rand weakens then the rand returns on the global portion should be a up slightly.
