(30.7.04) Alwyn van der Merwe, senior portfolio manager at OMAM says that the boom and bust era is gone, and the country is entering an economic environment which is remarkably similar to the environment in the 1960s.
The similarities include sustainable economic growth, low inflation, low real interest rates and an arguably ‘stable’ currency, which at that time (‘60s) was pegged.
While there were cyclical swings in growth, inflation and interest rates, these are muted, the country is going through the same situation.
The major stumbling block then (1960s) was the current account and the local currency. And while it currently in deficit it wasn’t a serious problem – the currency didn’t collapse, inflation wasn’t a problem, and production starts to turn and capital inflows start to accelerate.
Currently there is a big gap between the inflation rates and the interest rates – there is scope for the finance minister to cut interest rates. Added to which, we have none of the volatility between the two figures that we experienced in the 70s, 80s, and 90s.
Low inflation is here to stay, so the players need to get used to that fact, added to which the currency is not a one-way bet anymore.
The value of the currency is a subject of debate. Currently it is fully valued at the same basis as the early 90s, with a strong commodity boom and a good current account, apparent at the same time.
There will be moderate depreciation in the currency and nothing like we experienced in the past, in what is essentially a structurally changed economy.
He asked whether the equity market and its assets has yet priced this change into their numbers. Van der Merwe maintains that the market hasn’t yet priced in the structural changes.
Equities will benefit from the low inflation, better growth environment, although the strong rand hurt some sectors.
According to their research, OMAM found among their survey sample of stockbrokers and economists that real prime forecasts average between 6% and 8% for next year.
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