Questions on Trumponomics by Dave Mohr, Chief Investment Strategist, and Izak Odendaal, Investment Strategist at Old Mutual Multi Managers (OMMM).
Are we on the verge of a shift in the global macroeconomic environment? That seems to be the overarching question as investors still try to come to terms with the Donald Trump presidency. Since the global financial crisis, the world has been stuck in a steady growth, low inflation rut, punctuated by the odd crisis.
The US is a case in point: Between 1950 and 2008, US real economic growth averaged 3.4% and inflation 3.8%, but from 2010 onwards, the averages are 2% and 1.6% respectively. Interest rates have been close to zero over the latter period as a result.
For some, Trump’s election promises to yank the US (and by implication the world) out of this sluggish trend with tax cuts, deregulation and deficit spending, heralding a potential return of boom-bust cycles. For sure, part of the reason behind the tepid growth and low inflation has been psychological, the absence of what the great British economist John Keynes referred to as “animal spirits”, the appetite to take risks and reap rewards.
A shift in confidence can result in an increased willingness to spend and invest, creating a feedback loop of higher growth, leading to more spending. However, the big structural factors that have dampened global growth remain: China’s rebalancing, slower population growth in the developed countries, technological progress weighing on production prices, a vast global labour force putting pressure on wages in the West, a debt overhang from the pre-2008 boom years, a savings glut and persistent current account surpluses in China, Germany and the oil producers.
Related: Coming To Terms With Trump
For instance, Abenomics, the attempt by Japanese Prime Minister Abe to shock the economy out of its deflationary rut, has largely failed, despite much initial excitement.
Trumponomics or Reaganomics?
Some commentators are also referring to the return of “Reaganomics”. However, the starting conditions are very different. President Reagan slashed taxes and ramped up defence spending, but probably the most important contributor to the Reagan boom was that the Fed’s interest rate was 19% in 1981 at the start of his first term and the US in a deep recession.
As inflation declined, rates halved over the next four years and the US economy took off. US equities and bonds entered a multi-year bull market. By contrast, Trump will start his term with ultra-low rates and low unemployment, and with the current bull market already eight years old.
The Reagan era’s combination of high interest rates and loose fiscal policy resulted in a very strong dollar. South Africans paid 70 cents for a dollar at the start of Reagan’s first term in 1981 but R2 by the time his second term began in 1985. It is not a given that the dollar will surge though: A strong deficit-funded US economy under George W. Bush resulted in a weak dollar, even as the Fed steadily hiked rates.
The rise of the dollar (to a 13-year high on a trade-weighted basis) and the strength of US equities (the S&P 500 hit a new record high last week) suggest investors are betting on a Reaganesque outcome. This might be premature, especially if Trump follows through on some of his anti-trade promises.
At the same time, there has been a massive sell-off of global bonds in anticipation of higher inflation and interest rates. However, developed market bonds have been weakening since the middle of the year as investors questioned the commitment of the Japanese and European central banks to expanding monetary stimulus.
The rise in market-based inflation expectations since the election does indeed make the expansion of these central banks’ quantitative easing programmes less likely. We have held no global bonds in our portfolios for a long time.
Fed still on course
With recent US economic data being fairly solid, the Federal Reserve is likely to hike by 0.25% next month, with Chair Janet Yellen confirming this view in testimony to Congress.
The stronger US dollar is one reason why the Fed did not increase rates by more than the single December 2015 hike over the past two years. A strong dollar dampens US inflation and hurts the earnings of exporters. A leading Fed official argued that one further hike would leave US interest rates at a neutral level, in other words where it is neither too hot nor too cold.
Rate hikes beyond December will then most likely depend on how actual inflation behaves. In the shorter term, the decline in the oil price over the past month also puts a lid on inflationary pressures.
Closer to home
The short to medium term impact of all this on South Africa lies in the exchange rate. While all emerging market currencies sold off after the US election, the rand has held up relatively well.
The Mexican peso was hardest hit, while the Turkish lira fell to a record low on domestic political concerns. The Russian rouble also wobbled further after the dismissal of the economy minister. The rand has traded in a broad range of around R13.50 to R14.50 to the dollar since July. This range is weak enough to continue supporting exports and tourism, but still stronger than the average exchange rate over the preceding period, supporting the view that inflation and interest rates have peaked.
Given the renewed uncertainty, interest rate cuts are off the table for now. While the rand has gained around 8% against the US dollar since the start of the year, it has appreciated by 14% against the Chinese yuan, which is helpful given how much of our goods imports come from China.
The outlook for inflation and interest rates in turn are important for consumer spending. Consumption in its various forms (groceries, clothing, transport, housing, medical treatment, education, leisure) accounts for two thirds of the local economy.
If inflation declines next year, it should take pressure off households that are currently clearly facing the squeeze. As a result of rising interest rates over the past two years, the cost of servicing debt has eroded an additional 1% of household disposable income. Since consumer debt is growing by less than income, interest rates are the key variable that could ease or worsen the pressure on households.
The squeeze is on
If households are under pressure, so are retailers. New StatsSA data shows that real retail sales grew by 1.4% year-on-year in September, while declining marginally in the third quarter (putting a damper on the expected third quarter GDP growth rate).
Nominal retail sales grew by 8.1% year-on-year. This implies retail inflation of almost 7%, up from 4% (overall consumer inflation includes services and fuel, where prices have risen much more slowly). The growth rate of nominal spending has remained in the 7-8% range for some time. In other words, the amount that consumers are spending at retailers has grown steadily, but what consumers get for their money has been growing much more slowly.
The rise in inflation is also eating into listed retailers’ margins (since they are not able to fully pass on higher merchandise costs).The latest round of results and trading updates from local listed retailers has largely been disappointing, especially from clothing retailers.
Local retailers are also increasingly facing competition from foreign entrants whose sales will show up in the official StatsSA numbers. The JSE’s general retail index (which includes clothing retailers) is down 20% since the start of the year and decreased by 30% since the recent peak in August. The JSE’s food and drug retailers index (containing the likes of Shoprite and Pick n Pay) is down 10% over the past four months.
While consumers will be hoping for a stronger rand as the year draws to a close, investors should remain appropriately diversified. Although the weaker rand would hurt the local bond market, it would boost offshore investments and JSE-listed rand hedges. A stronger rand will benefit interest rate-sensitive assets.
Our Strategies remain diversified for each targeted outcome, with overweight allocations to global equities and local fixed income, and underweight allocations to local equities with zero global bonds.
Chart 1: Trade-weighted US dollar index
Chart 2: Global 10-year government bond yields, %
Chart 3: South African retail sales growth, %
The Start-up Hatchery And Greater Tygerberg Partnership Launch Innovative Pitch Competition For Bellville Solutions
Entrants are required to submit their ideas in a 30-second WhatsApp video to 082 936 7544 before 24 May 2018.
The Greater Tygerberg Partnership (GTP) and start-up incubator The Startup Hatchery are launching a pitching competition to surface innovative ideas that, when implemented, could lead to the improvement of Bellville in Cape Town’s northern suburbs. The winning idea will receive a package of business incubation, mentorship, business development support, marketing and branding collateral, legal and intellectual property advice and other prizes, including R5 000 cash.
Launching on 14 May 2018, Innovate Bellville 2.0 is open to new businesses that have been operating for six months or less, who are developing new innovative ideas that could improve public transport, create jobs, create inclusive public spaces, address homelessness, improve health and wellbeing, manage waste, facilitate mobility, attract and retain investment and regenerate the Bellville urban centre.
Innovate Bellville 2.0 forms part of the GTP’s living lab approach to the regeneration of the Bellville CBD, says Warren Hewitt, CEO of the GTP: “We want Bellville to be a test-bed for new ideas that can help us to build a vibrant, prosperous, inclusive city region. Innovate Bellville 2.0 falls directly into that approach. We’re looking forward to seeing the ideas that emerge, and seeing the winning idea implemented in a part of our city that stands on the edge of an exciting future.”
“Innovation starts anywhere,” says Tania Cunningham, Chief Digital and Marketing Officer for The Startup Hatchery, “but we were very excited at the prospect of focusing on finding innovative ideas that could bring about real change to a defined geographical area. Innovate Bellville 2.0 will offer the winning business a solid start in life, with a chance to see their idea become a reality in Bellville.”
Entrants are required to submit their ideas in a 30-second WhatsApp video to 082 936 7544 before 24 May 2018. Twenty semi-finalists will be selected from the WhatsApp pitches, who will each receive training and a pitch deck. From that group, a group of eight finalists will then be selected and invited to pitch their ideas to judges during a pitch event on 7 June.
For more information, contact email@example.com
Silulo Business Incubation Is Changing The Future Of Entrepreneurs
Silulo Business Incubation is a unique incubation aimed at empowering and assisting upcoming entrepreneurs.
Launched in April 2018, the Silulo Business Incubation is a unique incubation aimed at empowering and assisting upcoming entrepreneurs to grow not only their businesses but also their confidence in the business space. The Incubation offers office space, boardrooms, training and conference rooms as well as eighteen shared office space for entrepreneurs in and around Cape Town.
Founder and Director, Mr Luvuyo Rani says: “We have always had a vision for this type of centre – a one-stop-shop where all entrepreneurial needs are catered for but our problem was always funding. With hard-work and dedication, we were able to make our vision a reality, which is exactly what we want to teach and instil for our entrepreneurs.”
The incubation will also offer networking sessions for aspiring entrepreneurs twice a month for two hours. This idea is to offer business insights as well as networking opportunities for entrepreneurs in and around Cape Town. Entrepreneurs will have the option to become members of the SBI Network where they are able to attend networking sessions of their choice. All networking sessions will cover different topics and training manuals will be offered after each session.
“The main challenge when it comes to this type of business is infrastructure and funding. Silulo is a pioneer and it can go anywhere, there are no boundaries in business. This is a flagship store. We want to replicate this in every province. Silulo’s success lies in partnerships and our business has a passion for empowering.”
Rani, a former teacher, together with his brother Lonwabo Rani started selling computers from the boot of a car more than ten years ago. Silulo Technologies now has 42 branches in three provinces: the Western Cape, Eastern Cape and Kwa-Zulu Natal and 22 franchise stores, some of which are owned by former Silulo employees.
Director and Co-founder, Lonwabo Rani says: “My brother always tells us to think about the bigger picture. It was that bigger picture that kept us going. Back in 2006, what you see today is exactly how it was when we envisioned it.”
In 2017 Silulo reached a total of 35 000 students trained since inception. It trained 65 students through MIC SETA in both the Eastern and Western Cape.
Rani and his two directors remodelled the business in 2017 by offering a walk in cellphone repair service (including the service of leading brands such as Apple, Samsung and Huawei) at one of the Silulo branches in Khayelitsha.
Rani, who was part of the Team South Africa to attend the World Economic Forum in Davos Switzerland in 2018, has received numerous accolades for his social impact business.
He was also awarded a Schwab Foundation Social Entrepreneur of the Year award in 2016 among his many accolades.
DJ Sbu Opens Academy To Develop Hustlers
DJ Sbu also known as Sbusiso Leope has partnered with the 3Sixty Financial Services Group (360 FSG) to positively impact thousands of young lives and families in South Africa with his own school, a learning academy. Aptly titled The Hustlers Academy.
DJ Sbu also known as Sbusiso Leope has partnered with the 3Sixty Financial Services Group (360 FSG) to positively impact thousands of young lives and families in South Africa with his own school, a learning academy. Aptly titled The Hustlers Academy. Leope intends to develop the minds and the ability of thousands of young hustlers in the country and change lives.
The Hustlers Academy is an independent privately funded economic empowerment project spearheaded by Leope to address the overwhelming lack of jobs and incumbent graduates into the system on an annual basis. The 360 FSG is a well-established financial services company with a disruptive strategy that offers clients more benefits for their rand. The partnership represents a meeting of the minds and the hearts for the development of opportunities for young South Africans.
“We will train and educate young hustlers to either be entrepreneurs or corporate hustlers. Our training programme and academy curriculum will produce the best sales force this country has seen and develop the minds of Hustlers to understand how the world works and how to stand out. In partnership with 360 FSG we will develop entrepreneurs who start businesses and employ teams of hustlers within an 18-month period. ‘The Hustlers Academy’ will take in Hustlers for training nationally in multiple provinces providing a practical and theoretical intervention in the lives of those who are skilled and restless.” Said Leope.
Group CEO and Chairman of 360 FSG, Mr. Khandani Msibi is confident that ‘The Hustlers Academy’ will play a game-changing role in developing and changing the way corporates are structured in providing a ceiling for employees as far as earnings are concerned.
“Our approach to empowerment is based on sustainability for the Hustlers who make it through the academy. We will develop people mentally as well as financially and make a serious change in their socio economic position. DJ Sbu has the potential to influence a generation and he shows this on a daily basis with his determination to succeed. We are matching his determination and passion for economic empowerment with our backing of the ‘The Hustlers Academy’project. We look forward to changing thousands of lives with a long term impact.” Said Mr. Msibi
‘The Hustlers Academy’ is active and running a pilot group of Hustlers through its programme in Johannesburg. The academy welcomes registrations on its webapp www.hustlersacademy.co.za. Starting from 1st June 2018 The Hustlers Academy will be taking in 50 – 100 hustlers per month.
Leope goes on to say. “In 2013 we started an educational company called Leadership 2020 which was designed to develop Africa’s richest asset – its people. I’m excited that we are able to realise our vision before the year 2020 with the launch of this initiative. ‘The Hustlers Academy’ will grow to add multiple courses, mentorship, and accreditations and even lead people to formal education if they so wish. This academy will make a tangible socio – economic difference in young South African lives. ‘The Hustlers Academy’ has no registration fees and requires no learning fees. It requires you, your time, your commitment and there’s #NOVILAPHING – Lazy people will not make it.”
Registrations are online at: www.hustlersacademy.co.za
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