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Optimism with a capital “O”

13 March 2012 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

“There has been a fairly substantial shift in investor attitude between 2011 and now,” observed Jeremy Gardiner, director of Investec Asset Management. He said that global economic sentiment had morphed from last year’s “small p” pessimism to “capital O”

There are two main reasons for this optimism. The first is that China has side-stepped the hard landing many economists were fretting over. China’s GDP growth rate looks certain to remain above 7.5% for the foreseeable future. And the second is that fears of a Euro-zone meltdown have been addressed. 2012 is going to be a bumpy year, observed Gardiner, but we’ve progressed from a potential collapse scenario to one in which world economies will muddle through. Equity investors can breathe a collective sigh of relief too, because most of the bad news is already priced into the market. Companies, stock markets and investors have had more than enough time to factor in the economic impact of the worst case “Greek default” scenario.

How the mighty have fallen

The 21st Century will go down in history as the period when global economic power shifted from the West to the East. International Monetary Fund (IMF) statistics confirm that China (with forecast GDP of $11.616 trillion in 2011) is fast catching the US (with $15.064 trillion) as the world’s most productive nation. Each day there is new evidence of this looming role reversal. In Q3 2011, for example, China became the largest Smart Phone market, posting 58% growth over the second quarter versus a mere 7% growth in the US. China’s oil demand has surged from a mere 1.2 million barrels per day in 2001 to 5.2 million barrels per day now. And China’s 400-plus dollar billionaires were enough incentive for Chinese bulldozer manufacture, Shandong Heavy Industry Group Co, to purchase 75% of luxury Italian yacht manufacturer, Ferretti Yachts.

A great way to illustrate the West to East wealth migration is to contrast China’s $3 trillion cash reserve with the United States’ mounting debt. In April 2011 we flirted with a second round of recession as US policymakers struggled with internal debt policy… The crisis was averted at the 11th hour with a decision to hike the country’s debt ceiling, thereby raising US debt to $15.2 trillion by year-end 2011. The US debt to GDP ratio now stands at around 100%, with little chance of easing. America’s 2012 budget deficit of $1.1 trillion will be the fourth consecutive trillion-plus blunder. US President Barack Obama is stuck between the proverbial “rock and a hard place”. He cannot afford to make budget cuts as elections approach – then again – he cannot afford not to! As healthcare gobbles through a third of public sector expenditure the US has slipped to 84th out of 90 nations tracked by the IMF based on its public finances.

It is not all bad news. The West to East trend will be extremely beneficial to South Africa, which saw trade with China surge by 77% last year. Our resource-heavy economy (and stock market) should grow from strength to strength as China expands its activities here and throughout Africa. But we need Europe and the US to play ball for our economy and equity markets to truly take off. Last years’ ongoing sovereign debt concerns led to foreigners selling a net R17 billion of local equities (versus purchases of R36bn in 2010 and 75bn in 2009). We know the US has problems – but can the UK and Euro-zone economies BREAK their shackles and drive growth forward through 2012/12? A lot depends on whether Greece gets hold of the €130 to €145 billion they need to stave off collapse. At this stage they are still haggling with the IMF over conditions attached to the latest funding lifeline…

The trouble with austerity

The will need this bailout because Greece will not be able to get out of trouble by cutting costs and hiking taxes alone. Besides, Gardiner warned that austerity measures had unintended consequences. A number of European countries experienced leadership changes during 2011 as citizens rallied against unpopular spending cuts and tax hikes. Major elections in 2012 could deliver similar results. Greece is already suffering the consequences of taxpayer resistance to punitive tax measures. Some 7, 000 truck drivers, for example, have moved their registered addresses to the friendlier tax dispensation in Bulgaria. Gardiner warns more than half of UK-based millionaires want to move to countries with friendlier tax environments too. The trick is for Euro-zone economies – and any country for that matter – to balance revenue collections and expenditures.

As governments tighten the tax “screw” they end up with more tax evaders, avoiders and defaulters. Recent estimates are that Greece loses €245 billion each year to tax evasion. South Africa has its problem with high earners ducking the tax net too. A recent South African Revenue Services (SARS) announcement pointed to some 9, 300 wealthy individuals who owe around R50 billion in unpaid tax. A survey of owners of expensive motor vehicles (valued at R2 million or more) provided shocking data. Only 16 of these vehicle owners declared “acceptable” incomes to SARS, with 210 declaring low incomes and a staggering 130 no income at all!

A different set of challenges

South Africa emerged from the 2008/9 financial crisis in good nick. National Treasury and SARS have worked together to ensure the country’s finances remain robust. The question is whether they will heed the concerns of ratings agencies that recently downgraded our credit rating. What is the problem? Simply put – we spend too much on consumption (with a heavy emphasis on social grants and public sector wages) – and too little on investment. Aside from reducing dependencies on state welfare and cutting the public sector wage bill, government will have to create a platform for economic growth… This is the only way the country will create much needed jobs and broaden the tax base.

There are fresh storm clouds on the domestic horizon. Gardiner singled out the so-called “Secrecy Bill” as one area of concern. “We no longer live in a world where you can ban information that you don’t want the public to see,” he said. He also reminded the audience of the damage caused by painfully slow policy debate. Issues such as nationalisation cannot be dragged along for periods of two or more years... Economically sensitive policy should be debated and finalised as quickly as possible to give international investors the certainty they require to make investment decisions. “Investors will muddle through 2012 with continued nervousness,” concluded Gardiner. “But a complete financial system collapse looks less likely than before.”

Editor’s thoughts: We agree with Jeremy Gardiner’s view that economies will “muddle through” 2012… Unfortunately South African needs to grow at rates well in excess of the 3% forecast for the current year. Do you think we will ever return to our early 2000 GDP growth rate in excess of 5%? Please add your comment below, or send it to

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