Benchmarks Aug/Sept 2014
If this trend continues, our local currencies will remain under pressure while local interest rates will also be under upward pressure. The 0.25% increase in SARB’s repo rate in the middle of July that followed the first rise for a long time of 0.5% at the end of January has not done much to support our currencies. Further local interest rate increases are inevitable once the Fed announces its first increase.
The SA current account deficit running at 6.2% for the second quarter of 2014, and having been in deficit for the past 10 years as well as a steep decline in the Chinese GDP from a peak of over 9% in 2007 to 7.5% currently, add to the woes of our local economies.
Both consumers and our governments (SA and Namibia) have indulged in debt over the years since the financial crisis – witness all the government sponsored construction happening across Namibia. SA bolstered its total external debt from 30.5% of GDP in 2010 to 48.2% of GDP in 2014, an increase of 60%. Namibia has been a lot more modest in terms of foreign borrowing, increasing its external debt from 21.7% of GDP in 2014 to only 24.1% of GDP in 2014. However total Namibian government debt has increased from N$ 25 billion in the 2012 fiscal year to around N$ 38 billion in fiscal year 2015, an increase of 50%. At this point with government debt and government revenue running on par, every 1% increase in the interest rate will consume 1% of government revenue and will add 0.3% of GDP to a current budget deficit 6.3% of GDP.
Both in SA and Namibia, government will soon have to start raising taxes in an effort to reduce its fiscal deficit and the rate of growth in its debt. This together with the prospect of further interest rate increases does not bode well for the local consumer.
The turning of tides undoubtedly will impact on local and global investment markets. Investors need to be wary as it will not be business as usual as we move into the future! We are now facing headwinds which we will have to weather on our own devices!
The tailwinds have turned into headwinds for our local economies. For the investor this means, in the first instance, to increase global diversification to benefit from the upturn that is starting to manifest in some economies such as the US economy. In these markets, consumer goods and consumer services should benefit most from an improvement in the economy. Locally it means that consumer driven returns are likely to lag and such equities should be underweight, i.e. consumer goods, consumer services. Commodities are likely to linger for longer and commodity driven equities should be held at neutral weighting to under-weight. Rand hedge and exporters should be up-weighted to overweight. Property should be retained at neutral weighting while fixed interest investments should be underweight.
Having said this, however, the investor must be cognisant of the fact that equity values globally have been inflated by the low interest rate environment where money is borrowed cheaply and then invested in any asset that has any prospect of out-performing the cost of borrowing, primarily in equities. Equities are generally expensive. This means that one would have to be very selective about what equities to invest in, to avoid paying too much for the value offered.
An interesting article in Sanlam Personal Portfolios Funds states “the difficulty [is] of investing in an environment where almost everything looks expensive”. It also looks at other ‘less conventional’ assets. Renee Prinsloo suggests the following four strategies for earning decent returns from this point forward: (1) Searching for relative value; (2) Attempt to uncover unique opportunities; (3) Diversify your exposure, and (4) Be more cautiously positioned than one would typically be on average, over the long-term.”