Red flags and flagging economies mean time to spread investment risks

The winds of change - from the growth in anti-establishment movements to ageing populations - are causing red flags to flutter and require investors to diversify their approach, according to former head of the Anglo American Chairman’s Fund and renowned scenario planner Clem Sunter.

“South Africa has dropped from the 30s to the 50s in the World Competitiveness Report and has slipped to the third largest economy in Africa,” Sunter declared, “There is no doubt that South Africa has descended. It can rally and move to the ‘premier league’ or drop into the ‘second division’, where there is no interest in investing in the country.”

At the moment, Sunter believed it could go either way, but there is also a smaller risk of ‘a failed state’ scenario.

Sunter said growing confrontation between major religions and the increasing sophistication of various movements is the number one flag. Investment in industries vulnerable to this flag, such as tourism, could carry an increasingly higher risk.

Sunter said his clients continue to raise the red flag around Russian leader Vladimir Putin, and an indication of the change that is taking place in Russia is evidenced by talk of Russia becoming a member of the EU being replaced with talk of sanctions. While Russia’s issues have not really impacted on the global economy, China’s effect on it places it on the other side of this red flag.

What is affecting global economy the most, however, is the grey flag that represents the ageing of the world’s population. Sunter quoted a statistic, published in the Washington Post, that two thirds of all the people who have ever lived beyond the age of 65 are alive today. In 1900, the average lifespan of an American was 47 and at the end of century it was 83 for men, 86 for women. “This has enormous consequences for the economy. If nothing is done to change, looking after the elderly will consume 40% of the US budget by 2040,” Sunter shared.

“Far more important is what the grey flag is doing to the Japanese economy, which will probably never grow again,” Sunter said. It has the oldest population in the world, set to decline, and the country has essentially gone ex-growth. Europe is moving in exactly the same direction.

“On the other hand, America still has a young population and economic growth rate of 2% to 3%, so there is a huge difference between it, Japan and Europe so this should play into investment strategies,” he said, speaking last week in Cape Town at an event hosted by financial advisory firm deVere Acuma.

DeVere Acuma wealth manager Robert Wantenaar said the macro level uncertainty raised by Sunter highlighted the need to protect against the unknown with careful strategic planning.

Wantenaar said the UK vote to leave the EU, ongoing fears of a China hard landing, the possibility that a Donald Trump presidency will turn America away from supporting free trade, and a suspicion amongst some economists that negative central bank interest rate policies in Japan and much of Europe may be contributing to weak growth and low inflation “lead us to worry about how markets will react.

“It is universally recognised that history teaches us, the best way to guard against uncertainty is through diversification of assets,” said Wantenaar. “It is a myth that investing internationally is riskier. Indeed, the greater diversification that is secured by going global, the greater the reduction of overall portfolio risk.”

He said there has never been a better time to diversify assets and build an offshore portfolio. The relaxation of the exchange control regulation, the current rand strength and the growth available after our most recent market hiccup have created an opportunity that should not be missed.

China with its fastest ageing population due to its one child policy, which is today reflected in a “middle-age bulge”, is affecting its economy, which Sunter said could even slow to between 0% and 3%.

The world has returned to low economic growth, and could be reignited by a new technology - like smart energy for example.

The anti-establishment flag is gaining increasing attention, and Sunter warned about “the fury the middle class has for the super-rich”. He said the poor have always been angry but when the middle class gets angry, things change. This explains the focus on rooting out tax havens and tax avoidance.

Climate change, including increasing global temperature , rising sea levels and the frequency of extreme weather events, continues to be a red flag.

Against the backdrop of all of these global flags, South Africa has a few red flags of its own, including:

• Corruption, the results of which can be seen in other countries like Venezuela and Brazil, whose economies have been “thudded”. In this regard, there are some green flags for South Africa including the role of media, Public Protector and independent courts.
• The quality of infrastructure, where a lot has to be done to turn the flag green.
• Inclusive leadership, which Nelson Mandela’s two successors “have not come close to. Sunter suggested that it is the next generation that may provide the next inclusive leader rather than the generation of leaders who have come out of the struggle.
• South Africa’s green flag, according to Sunter, is its pockets of excellence.
• For Sunter, the most important issue is South Africa’s future attitude to entrepreneurs and small business. In order to create 5million jobs, the government needs to help create the necessary capital and supply chain structures to open 1million businesses.