Not too hot, not too cold

Keith Wade, Chief Economist at global asset manager, Schroders.

What does the global economy’s recent shift towards a "Goldilocks” economy mean for SA?

As the global economy enjoys a measure of synchronised recovery, picking up particularly well outside the US – this has resulted in a better outlook for emerging markets. Among these is South Africa which, while having experienced a considerable slowdown in growth and quite a high rate of inflation, could very well be on the cusp of a better phase for economic growth going forward.
This is according to Keith Wade, Chief Economist at global asset manager, Schroders, who describes the current global economic outlook as a "Goldilocks” economy because economic growth is not too hot and not too cold.

“Typically, when growth picks up sharply or is ‘too hot’, economists tend to get quite worried about the impact this will have on inflation; whereas when growth is too weak or ‘too cold’, the worry is about possible deflation. At the moment, the growth exhibited in the global economy seems to be just right, which means investors are able to benefit from earnings growth and profits, without having to worry too much about inflation picking up or interest rates rising too sharply.”

Zoning in on what this means for South Africa, Wade says that while political uncertainty is obviously still a major factor at play, the levels of real interest rates are currently quite attractive for foreign investors. “Looking at South Africa from a global perspective, we see a currency that has fallen quite a long way – perhaps, a little bit too far – and we also see an economy with fairly high real interest rates, but interest rates that are beginning to come down.

“This is something that automatically attracts interest from investors, even though the economy itself may have not yet responded,” he explains.  Wade goes on to say that he sees a similar story playing out in the bond market. “South African bonds are probably going to outperform developed market bonds, due to their higher risk premium.”

While the possibility of further credit downgrades is a valid investment risk, Wade points out that ratings agencies generally tend to be very backwards looking. “Yes, there are some concerns about the fiscal side of things in South Africa, and this is something that needs to be addressed. As such, there is still a risk that South Africa’s sovereign credit rating could be downgraded further; however, we have seen this play out in other markets and investors are always looking to get in right at the beginning of the turning point.

“Furthermore, in terms of the local stock market, it is important to remember that a large portion of earnings is actually taking place elsewhere in the global economy, which could play a key role in turning around the South African stock market’s earnings growth. That being said, it is unlikely that the South African stock market will offer strong returns when compared with offshore investments such as Asian equities, in particular on a seven-year return basis,” he adds.

Wade concludes by saying that when it comes to investing, it is therefore not just about South African GDP, but also about global GDP – which is currently seeing a synchronised upswing. “While we are currently increasing our exposure to South Africa through emerging market debt, as we do view this as quite an attractive opportunity today in real terms, we are also taking all applicable risks into account and diversifying appropriately.”