THE STATE OF THE MARKET AND THE GLOBAL ECONOMY: WILL YOU RISE OR FALL?
My apologies for this blog so late in January 2016. To be honest, I have been thrown by the state of the market and the global economy. Little positive has come out of all the news and the negativity has taken on Grim Reaper proportions. Every article seems to be focussed on the negative and bad news aplenty has been there to write about. El Nino and El Nene, the collapse of the oil price, the pressure test of the Oil industry and oil-producing countries, threats of social unrest as the drought intensifies and the oil-based economies suffer, Donald Trump and Hiliary, and the Rand on its way to R20/$. Each and all contributed to a flood of depressing information.
But that said, some sanguine voices have arisen and a semblance of encouraging, well-backed information has begun to emerge. So let’s have a look at a few of the pillars that underpin some good news and find our way into February and beyond. Cliché or not, Henry Ford sounds clear: If you think you can or you think you can’t, you’re right.
Low Oil Prices: I often think Thank Goodness for the lowest oil prices in a decade. For the consumer of oil, that has been a saving grace. Imagine having to buy Oil at R16.50 per Dollar? I guess the price at the pump would be R14+. Macroeconomically, the oil price also contributes positively to Inflation which, as we see later, must be on the rise.
The problem that is being referred to by many writers, however, is the impact of low oil prices on the oil-producing countries. Of the BRICS countries with whom we have close co-operation, Russia and Brazil both have significant economies built on oil. Then there are the Asian countries like Saudi Arabia and closer to home, Nigeria and Angola. If a country endures dramatic, sustained drops in the price of its richest export, what happens to its people? Of course, the worst is feared especially at levels below $30. Today (25 January) it is up to $32.18 from last week’s sub-$30 prices. That could prove to be good news even for own Sasol.
USA interest rates rise: The USA interest rate rise signals the FED’s satisfaction with the US economy. 2% GDP growth is not fantastic but coupled with a 5% Unemployment rate, is cause for a small move. This is the first rate rise in 8 years and sent the currency markets into a flurry. Thanks to our Reserve Bank, we had already begun the process of raising interest rates. This did help cushion the decline of the Rand. The FED has signalled more increases but I suspect these will be 6 monthly and of the order of 0.1 to 0.15% – right now nobody wants to allow the US economy to stumble.
Inflation: The world has experienced extremely low inflation as the interest rates and China have functioned in tandem. Inexpensive production out of China to global markets and very low interest rates have kept Inflation at lows for record periods. But, post the sub-Prime crisis, the printing of money became commonplace and it was just a matter of time before inflationary pressures would reappear. Rather than focus on the rest of the world, South Africa will be hard hit by this issue. A weak Rand, set to weaken much further, and the drought with its Maize imports will hit Inflation hard. A particular make of 4X4 has risen from R713000 in 2012, to R890000 in 2015 to R980000 in 2016. That’s 13.5% per annum or twice the upper range of the SARB’s target. Far more relevant is the current requirement of Maize to be imported at a cost of R20bn; once we’ve paid for it, our producers need to make a profit on sale. The Poor amongst us will bear the brunt of the drought.
My sense is that our Inflation will rise significantly this and next year and exceed the target range of 3-6% even this year.
Interest Rates: In all of this, our interest rate was generally projected to rise by 1.5% from about mid-2015 to end-2016. My sense is that we could see a rise of another 2% this year in order to protect the Rand/$ exchange rate and in an attempt to curtail Inflation. This will result in a corresponding rise in mortgage rates.
What is really positive is that Pravin Gordhan said last week at a Press conference that he would do everything in his power to prevent the Rating Agencies re-rating South Africa to non-investment grade (Junk bond) status. By the way, Brazil and Russia are already there and Saudi Arabia is, like us, on the brink so we are not the only ones in this pickle. The question will be if he has the resources in the budget to do so and a tax hike seems to be on the cards as part of his attempt. Sadly, a downwards rating will weaken the Rand and increase Inflation and interest rates.
China at 6+%: The way many people have been writing, you would think China is in recession. This is not true and that country is currently growing at about 6.8% per annum. Their stock market seems to warn of an underlying crisis but it has 50 million [you read right: Fifty million] personal investors and their layman’s view could be “run to avoid the stampede”. Assuming this is not the problem, the Chinese stock exchange should settle at a new, albeit, lower equilibrium, and stop spooking the other world markets.
Goldman Sachs report: Prime Minister Modi in India is credited with the revival in that country. India is growing at 7.2% and has introduced business friendly policies that have brought about a marked improvement in growth and employment. China’s 6.8% is then ahead of Indonesia at 4.5% and Turkey at 3%. Overall, Goldman’s report puts 2016 global growth at 3.5% (2015: 3,2%), confirming the World bank view of 2016 growth between 3 and 4%.
It would seem therefore that many economies are progressing well even though stock markets worldwide have found themselves in a fear-and-greed state. The consequence of this is volatility and we will need to get used to it for the next quarter or two assuming the oil price retains some stability above $30 and China settles down enough for a recovery in commodity prices. Hold thumbs!
So, as we read about this mixed up world economy, there lies a decision for each of us – Rise or Fall. I understand that it’s “talking psychology” again but I think Henry Ford had a point. Why is it that some businesses will do well despite the headwind and others will crumple into a heap? Surely attitude, determination, a go-through spirit and sound leadership has a massive role to play. Look how India – complex beyond compare – can be turned around by a man and his vision translated into action by his government. Compare that to what we endure despite our blessed resources, sound financial system, great infrastructure and people; really, there is no excuse. On the other hand, we are not immune nor an exception – Australia is suffering the commodity price slump, Europe is struggling to come out of its economic woes, the whole of Southern Africa is in the grip of drought, and the USA and the UK are two of the most indebted countries on earth. But, instead of bemoaning our dear country, stand up and be the difference you want to and need to see.
Homeloan Junction will commit to putting its best foot forward. In doing so, thank you, in anticipation, for the support we will receive from you in 2016.
Yours in Property,
Jack
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