Reframing client cynicism through economic history
Those of you in search of cutting-edge macroeconomic forecasts for 2025 might choose to skip today’s newsletter. If, however, you place more value in lessons from your country’s economic history than the often incorrect forecasts for inflation, interest rates, and market returns you are exactly where you were meant to be.
Lessons from history
PSG Asset Management veered off the traditional path in its Outlook 2025 seminar, held at venues in Johannesburg and Pretoria recently. Instead of leading with a mainstream economist, the asset manager roped in Professor of Economics at Stellenbosch University, Johan Fourie, to talk up the country’s prospects. “The idea is not to teach anything new about history, but to use history as a lens to think about today and perhaps the future,” Fourie explained. Some of the lessons ended up being a trifle unpalatable.
The Professor introduced his 20-minute speech with a chilling reminder of how poorly South Africa has performed over the past two decades. He noted that individuals born in 2006 could be excused for feeling pessimistic about the future. An 18- or 19-year old has no memory of the heydays preceding the 2010 World Cup; instead, their collective memories are blighted by the mire of corruption, loadshedding, and sub-par GDP growth. “South Africa’s 2024 GDP per capita is the same as it was in 2007,” Fourie lamented.
The financial advisers and planners among FAnews’ readership will be familiar with this ‘down in the dumps’ outlook. You will, after all, have spent countless hours in face-to-face interactions with clients in attempts to explain lacklustre domestic financial market returns. Year after year, you and your clients faced the return erosion caused by external markets shocks like the Global Financial Crisis (GFC) to the avoidable drain of poor political decision making and ongoing policy uncertainty.
The perfect foil for short-term market turmoil
Asset allocation and sensible diversification offshore proved the perfect foil for the aforementioned ills; now, if only you there was some salve to address your clients’ cynicism. The trick is to reframe your client’s world views. Fourie suggests zooming out to consider progress on longer time frames. First, ask your clients if they enjoy better lives than their ancestors, and then whether they believe there is room for further improvements. The idea is to deflect from today’s negative market movements or news flows and focus on optimism for the future.
Upon reflection, your writer discovered a unique overlap between assessing a country’s economic prospects and financial planning. In either case, you must consider how things will unpack over decades, not months or years. Yes, financial plans are dynamic. And yes, you can make short-term adjustments to your client’s asset allocations and financial instruments; but in total, the financial plan involves a needs- and risk-appropriate journey that plays out over decades. As Fourie observed, two seemingly opposite positions can both be true: cynicism about the present day outlook and optimism for the future.
The long-run growth and mortality statistics paint a pretty picture. In this instance, the Professor offered up reconstructed GDP per capita data going back to the 1900s to illustrate the upward trend. “We are seeing consistent, sustainable increases in GDP per capita over the long run,” he said. As for mortality, South Africa’s under-5 infant death rate has improved from an estimated one in five in the early 1900s to one in 30 today, a six-fold improvement, but still far behind the world leaders, Japan, with a rate of 1 in 200. The data supports ongoing progress over time, with huge potential for a country like ours to strive for Japanese excellence.
The rich versus poor debate
In a second thought experiment, the audience was asked to reflect on two versions of the same question: why are we so poor versus why are we so rich? Fourie, who has workshopped this phrasing on countless platforms over the years, marvelled at how different the answers are. He prefers the ‘why are we rich’ framing, noting common traits such as education; innovation; science; sound leadership; technology; and work ethic. On the flipside, he offered “the natural state is poverty” as the answer to why are we poor: “Before the 1900s we were all living just above subsistence.”
The presenter offered two reasons for the wealth generation that took place during the Industrial Revolution and subsequent years. First, we utilised our knowledge of nature and science, and invested in innovation, to improve productivity. And second, we ensured broad, public access to the ensuing benefits or surpluses. To illustrate the second point, the presenter contrasted the dissemination of clock technology in China and Europe. In the former case, he suggests the technology may have been expropriated and kept under wraps for the Emperor’s use, whereas in Europe, clocks were made publicly available, becoming central features of town squares.
Things seldom play out this smoothly in real life. Fourie commented that the construction of a railway link between Cape Town and Kimberley in 1885 offered positives in that it supported around a quarter of the country’s economic growth at the time. On the negative side, it diverted trade away from local agriculture producers, and left government with a significant debt burden. “These railways created a lot of economic growth; but the surpluses that they generated were often very concentrated,” Fourie noted.
The 5% GEAR victory
In another example, the presenter commended government’s then Growth, Employment, and Redistribution Programme (GEAR) programme for generating around 5% per annum GDP growth from 1996 to 2006. “There were improvements in the macro economy after 1994, but there were also transfers,” Fourie said. In fact, a multi-dimensional indicator of poverty showed an improvement from 38% in 1993 to around 8% by 2010. Alas, from that point on, government diverted from ‘investing in productivity’ towards a State-led development model.
As 2025 gets underway, many asset managers and economists are banking on South Africa exceeding 2% per annum GDP growth. PSG Asset Management seemed upbeat; but your writer falls into the cynical camp. How, he wonders, do you attract foreign direct investment in the context of the 23 January 2025 assent of the country’s new Expropriation Act, and the ongoing weaponisation of codes and targets under the Employment Equity and Broad-Based Economic Empowerment (B-BBEE) laws. In recent months, Elon Musk has cited B-BBEE ownership requirements as a stumbling block for bringing Starlink to South Africa. And there’s more…
A top law firm is challenging the constitutionality of government’s sectoral targets, labelling them unreasonable, impractical and unrealistic. This danger is not lost on PSG Asset Management. It his financial markets and funds outlook presentation, CIO, John Gilchrist said, “Headlines around Bella or NHI or expropriation without compensation raise questions around the stability of the Government of National Unity (GNU) and South Africa’s ability to grow from here.”
Four global trends to invest by
As political challenges mount, South African investors will turn to four global trends to inject the needed growth serum These include artificial intelligence (AI) and its relevance to the semi-skilled workforce; energy, and the ongoing transformation from coal-fired to solar electricity; bio-technology, through improved treatment of disease and illness such as TB and Malaria; and the space industry.
Under AI, Fourie forecast “large potential gains for companies that employ AI technology to benefit low income and developing countries.” He also predicted the space industry was primed for exponential growth; good news for the 20-plus Stellenbosch-based firms that are working on producing components for satellites and micro satellites. In closing, the Professor warned against basing your world view on online news; rather focus on the technology improvements being driven by the United States, and being made available globally.
Innovating for Africa
What shapes [economic growth] trajectories over the long run is innovation and the willingness of governments to allow that innovation to come to fruition; [freeing up the private sector] to commercialise the science,” Fourie concluded. To next level our GDP growth, we must identify and implement the technologies that make the most sense for Africa.
Writer’s thoughts:
History reminds us that even in the face of short-term economic setbacks, innovation and broad access to opportunity drive long-term prosperity. How do you steer your clients past the market noise towards their sensible, long-term financial plans? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
