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The glimmer of light at the end of the tunnel

23 June 2016 Jonathan Faurie
Jonathan Faurie, FAnews Journalist

Jonathan Faurie, FAnews Journalist

When one looks at the state of South Africa, observers would not be remiss to believe that the country is on a slippery slope with little hope of returning to a state of normality. We are currently in the midst of a tough economic climate, and the poverty that the public is experiencing is slowly boiling over in a number of ways around the country in the form of service delivery protests.

However, all is not lost. Addressing the recently held SAIFM Investment Summit, which was hosted by the South African Institute of Financial Markets, some glimmer of hope was provided.

Understand the cycle

While it is undeniable that drastic measures need to be put in place to overcome the position we are in, George Glynos (Founder of ETM Analytics), said that understanding the economic cycle is more important than understanding the environment that we face.

He added that South Africa may be heading into a recession because of the current lack of growth in the country’s economy which is a situation that retail therapy cannot save us from this time as it did many times in the past.

However, for a change there is a measure of happiness that comes with this measure of pain. Glynos believes that the stage is being set for a recovery of the Rand, which bodes well for the consumer.

“There is a glimmer of hope for the local currency. There are signs that government is hard at work to decrease the country’s current account deficit. Because of this, external debt will also decrease. We cannot afford importing goods  at the levels that we were used to, so import cover will decrease. So the fundamentals of a recovery are definitely moving in the right direction,” said Glynos.

El toro de carga

El toro de carga (the charging bull) are indicators that a market is setting itself up for a significant recovery. While we have provided reasons why the South African economy may recover in 2017, the key indicator to look at is interest rates.

“When interest rates are high, government puts a hold on infrastructure development. It just becomes too expensive for them to import the materials and the necessary skills to effectively execute an infrastructure development programme. Interest rates also put the consumer under pressure by forcing them to scale back on unnecessary spending. There is a definite correlation between interest rates and the movement of the Rand,” said Glynos.

Interest rates have been increasing relentlessly since the beginning of last year. While many people are saying their nightly prayers that we will not be in for another increase, Glynos felt confident that interest rates have peaked out and that they will stay stable in the months to come.

The brave matador

Only the bravest of men stepped into the ring to face an angered bull. This is relatable to economics as only the bravest of people (and companies) take the necessary risks in a bear market to take advantage of the upswing associated with a bull market.

“Things cannot go bad forever,” said Glynos, “eventually we will need to get to a stage where we sit and assess the dynamics that are driving the cycle that we are in. We will then have a blueprint on how to take advantage of positivity.”

While each individual, or company, will have their own blueprint on how to take advantage of this positivity, there is a common thread. Glynos pointed out that it is no use building a cash base in a bear market to take significant (perhaps unnecessary) risks in a bull market.

“If we look at a recovery from an institutional point of view, companies need to look for peers that have attractive balance sheets. They then need to make a significant move to acquire those companies. Acquisitions during this time are key because they diversify your revenue stream,”

“From a private investment point of view, investors (and fund managers) should start to ignore developed market bonds in favour of emerging market bonds. There are significant trip wires in developed economies like the US and the UK while there is significant growth in emerging markets such as India.”

Editor’s Thoughts:
Investing is only for the brave, which is why fund managers and financial planners play an important role in the industry. However, technology is having a significant impact on the industry and the public has access to robo-advice and platforms where they can become self-investors. Everybody must be able to notice the signs of an economic cycle in order to position themselves for future growth. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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