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Around the global economy in eight minutes

24 November 2021 Gareth Stokes

The US debt and inflation outlook and China’s ongoing policy interventions in its business and financial markets will have a significant impact on global asset class returns in 2022 and beyond. There are, for example, growing concerns that higher inflation in the US will put a damper on equity performances, while China’s recent struggles have led to an 18% decline in China-listed equities over quarter three, 2021. Those tasked with deciding on asset allocations for clients will have to keep a close watch on both local and offshore macroeconomic indicators to structure the optimal investment portfolio.

Fine-tuning asset allocations for local / offshore

For South Africa-based financial advisers the challenge is twofold. Step one is to determine how much of your clients’ discretionary assets should be invested locally versus offshore. And step two is to decide on the exact mix of bonds, cash, equities and property in each geographic region. The good news is that Momentum Investments has published a concise global macroeconomic overview in their October 2021 Economies at a glance report. Over the following paragraphs we summarise the outlook for China, the US and other major offshore economies, plus South Africa of course, in eight minutes or less. 

Starting with the US, the focus remains on debt. The report noted that the country’s national debt ceiling continues to rise regardless of whether Democrats or Republicans are in power. In fact, the US Congress has acted 78 times to permanently raise, temporarily extend or revise its debt limit since 1960. In keeping with the trend, Congress recently voted on [yet another] short-term fix, extending the debt ceiling limit by US$480 billion to meet obligations through to 3 December. One of the concerns about the US debt overhang is its influence on policymaking, aptly illustrated by the Federal Reserve’s reluctance to hike interest rates despite inflationary pressures. The US economy is forecast to grow at 5.7% in 2021, moderating to 4.2% in the following year. 

China’s regulatory crackdown to continue

China has made headlines in recent months for government’s interference at financial services and technology firms. These measures are apparently in response to wealth becoming too concentrated among a small sub-set of the population. “With inequality posing a risk to social stability, we are likely to see more redistributive policies [out of China] in the coming years,” said Sanisha Packirisamy, economist at Momentum. Growth in China stumbled to 4.9% in the third quarter of 2021 as soaring energy prices, shipping delays and the Evergrande crisis took hold. Analysts also expect energy intensive cement and steel sectors to take strain as China seeks ways to reduce carbon emissions as it heads to the United Nations Climate Change Conference (COP26). China will grow at 8.2% this year, slowing to just 5.5% in 2022. 

Investors are closely watching news flows from the UK to determine the combined impact of Covid-19 and its recently-finalised Brexit deals on its economic performance. There are already signs of stress, with a sharp upward move in inflation in September 2021. “This has prompted hawkish comments from select members of the Bank of England’s (BoE) Monetary Policy Council,” writes Packirisamy. “And financial markets have translated BoE Governor Andrew Bailey’s comments as an indication that the next interest rate tightening cycle will commence before the end of the year”. Despite inflation and interest rate concerns, the UK is forecast to grow by 7% in 2021 and 5.2% the year after. Inflation is top of mind among European Central Bank (ECB) participants too, thought it appears to be controlled. “Supply bottlenecks and soaring energy prices have led inflation to its highest level in a decade,” said Packirisamy. But the ECB expects inflation to fall from an average of 2.2% in 2021, to 1.7% in 2022 and 1.5% in 2023. GDP growth is pencilled in for 5% this year, and 4.5% in 2022. 

Meanwhile, in Japan

Japan is the latest country market toying with a shift from wealth-focused policies towards policies that promote growth and redistribution “The new Prime Minister has proposed tax incentives for firms to encourage the redistribution of wealth to workers, although this was previously attempted with little success under former Prime Minister, Shinzo Abe,” said Packirisamy. To succeed on this new path, Japan will have to reduce bureaucracy; cut inefficiencies; and increase female and senior participation in the labour market to boost productivity. Japan had the poorest economic growth outlook among the countries considered in the report, at just 2.3% in 2021 and 2.6% a year later. 

South Africa might be looking rosy insofar its GDP growth outlook; but inflation is far from benign. Momentum Investments expects the domestic economy to grow by 4.9% this year, dropping to a mere 2% in 2022. Sadly, inflation is likely to come in at 4.5% or worse in both years. “The recovery has been supported by stronger global growth, due to expansionary policies and widespread vaccination rollout, and low interest rates, fiscal support measures and fewer Covid-19 lockdown restrictions, locally,” said Packirisamy. Agriculture and mining have featured as the strongest sectors through 2021 year-to-date, with construction, transport and trade performing poorly. Banks and retailers, the so-called South Africa Inc shares, have also had a strong showing. 

Grants, wages and wealth versus rising unemployment

There is an ongoing tug-of-war over consumer spending, with growth in net wealth, low borrowing costs, rapid recovery in wages and increased social grants facing off against rising unemployment. All-in-all, Momentum Investments predicts lacklustre household spending growth for South Africa going into 2022. 

“While higher commodity exports may entice further investment in the mining sector and associated industries, constrained electricity supply and dented investor confidence will prevent a sharper rebound in fixed investment, which has lagged overall growth even prior to the pandemic,” concluded Herman van Papendorp, Head of Investment Research and Asset Allocation at Momentum Investments. He added that supply side shocks could drive near term inflation higher; but modest medium-term projections should allow the Reserve Bank to defer interest rate hikes to early 2022. 

Writer’s thoughts:
Financial advisers may do well to shelve concerns over rampant US inflation, and focus on inflationary pressures back at home. Diesel and petrol prices reached record levels in November and will undoubtedly fuel price hikes in multiple sectors going forward. Unfortunately, higher inflation results in lower real GDP growth and lower real investment returns. What steps are you taking to protect your client’s investment portfolios against the ravages of inflation? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected]

Quick Polls

QUESTION

The second draft amendments to Regulation 28 will allow retirement funds to allocate up to 45% of their assets to SA infrastructure, with a further 10% for rest of Africa; but the equity & offshore caps remain unchanged. What are your thoughts on the proposal?

ANSWER

Infrastructure? You mean cash returns with higher risk!?!
Infrastructure cap is way too high
Offshore limit still needs to be raised
Who cares… Reg 28 does not apply to discretionary savings
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