South Africa has benefited greatly from global bond allocations, with more than R60-billion in foreign buying flowing into the domestic bond market so far this year. But the rand did not strengthen during the period, which raised a risk warning, private client wealth management company Citadel investment strategist George Herman said Thursday.
He told a media briefing in Johannesburg that, against a backdrop of concerns, a global flight to safety had unleashed a search for yield that has driven safe-haven treasury yields to historic lows. “In doing so, bubbles are developing in other fixed-income markets, most notably emerging market bonds.”
Herman added global growth prospects have been marked down, owing to, among others, uncertainties surrounding the resolution and timing of the European debt problems.
Concern also existed about a more severe cool-down of the Chinese economy, as well as lower growth in the US, should the so-called fiscal cliff not be avoided.
Further, Herman maintained that, although many referred to the current state of the global economy as the ‘new normal’, many of the variables were temporary in nature.
“This might just be the ‘old abnormal’, a sluggish economy struggling to generate jobs are old problems that we have seen before and that can be solved,” he said.
Meanwhile, Citadel Capital chief investment strategist Dave Mohr stated that unless the world economy deteriorated significantly, South Africa would probably escape an economic recession.
“An economic recession should be avoided, provided that the eurozone crisis does not lead to a Lehman-type global economic collapse,” he said.
Mohr indicated that local economic growth slowed significantly during the first half of 2012, adding that that the country’s economic growth this year would probably not exceed 2%, while growth next year was likely to be significantly lower than what the Central Bank, the National Treasury and most private -sector economists expected.
The World Bank this week lowered South Africa’s growth outlook to 2.5%, from its 3.1% forecast in November.
Despite already historically low interest rates, a further cut in interest rates seemed to be the only available policy option.
“Given the uncertainties internationally, we will not be surprised to see another interest rate cut later this year,” Mohr noted.
Last week, the South African Reserve Bank lowered the repo rate by 50 basis points to 5%, with governor Gill Marcus saying that the cut could help alleviate the pressures faced by some sectors in the economy.
Weaker global growth, particularly impacted by the recession in the eurozone, has resulted in a distinct slowdown in export growth in South Africa. Expressed in US dollars, domestic exports contracted over the past 12 months, with exports to Europe also declining in rand terms in the first half of 2012, compared to 2011.
Export growth to the rest of the world also receded, while weaker commodity prices, brought on by the global slowdown, further negatively affected export revenues.
Domestic demand growth has also lost momentum following strong recovery in the first two years after the recession. Consumers’ real spending power was curbed by a rise in inflation combined with lower wage bill growth.
Looking at the second half of the year, Herman said South Africa’s economic growth would continue to lag, but would remain positive.
Meanwhile, equities were expected to face headwinds as a result of the global slowdown, but would enjoy the support of reasonable valuations. Equities were also anticipated to remain the preferred asset class, despite slowdown risks.
Herman added that the rand would continue to be at the mercy of global risk appetite, but would be fairly valued, despite being fragile.
He stated that the major factors to keep an eye for the rest of the year were the US ‘fiscal cliff’ and the Chinese slowdown.
Herman said China was taking steps to counter its economic slowdown and that economic growth in the country in the range of 7%, would be considered a ‘soft landing’.