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Questions On Trumponomics

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.

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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.

Related: Trump Win Highlights New, Populist-led Era Says Old Mutual Investment Group

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 1: Trade-weighted US dollar index

Chart 2: Global 10-year government bond yields, %

chart-2-global-10-year-government-bond-yields

Chart 3: South African retail sales growth, %

chart-3-if-there-is-space-south-african-retail-sales-growth

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Uber-like Insurance Platform Is Revolutionising The World Of Insurance Claims

the 4-Sure platform, which was launched two short years ago by actuary Shalen Moodley and a collective of seasoned tech gurus, is to provide value-added services that benefit the financial services industry. All partners had substantial success across Africa introducing loan origination platforms for leading banks before deciding to tackle the problems existing in the insurance claims fulfilment process.

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A multi-sided, digitally-driven business platform that has been wholly-developed and launched in South Africa is ‘uberising’ the local short-term insurance industry by transforming the traditional claim fulfilment landscape.

Developed locally by Insuretech sensation 4-Sure and headed up by actuary-turned-entrepreneur Shalen Moodley, the 4-Sure platform seamlessly connects the claims ecosystem consisting of the customer, broker, insurer, service providers and suppliers and manages all complex interactions and sequencing required to deliver superb customer experience, optimal claim cost and fast turnaround times. 

“The new system, which eliminates virtually all the manual processes and “waste work” involved in dealing with a claim, also provides enhanced opportunities for small businesses to compete for insurance claim work traditionally only available to a select few. Simultaneously, it reduces the fraud risks associated with the manual allocation of claims, and reduces costs across the board”, says Moodley.

“There are several weaknesses inherent in the appointment of the traditional insurance panels, “says Moodley. Relationships between the insurer’s agent and supplier base can result in some contractors being favoured above others. The payment of “incentives” by service providers as a reward for getting work can also skew the allocation process and drive massive cost inflations. Furthermore, costs can vary for similar jobs and the use of assessors for approval of routine jobs results in time delays and increased administration costs.”

“Most seriously for most insurers, is that contact with the customer is lost during the claim fulfilment process – they are disintermediated. Often, the result is dissatisfaction on the part of the customer, disrupted processes, unnecessary delays and often the possibility of an unhappy customer withdrawing their insurance and other investments with the associated brands of the insurer.

After extensive discussions with the industry regarding problems faced with settling claims, 4-Sure concluded that reformation of the system should be based on shorter, effective communication structures, the ‘democratisation’ of the panel system and the strategic use of technology to improve customer delivery and satisfaction levels.

Related: Why Start-ups Like Uber Stumble When They Scale

The answer was the building of an entire ecosystem based on the use of sophisticated regressive algorithms that made the ‘Circle of Service’ between insurer and claimant transparent and frictionless. Creating an extensive database, making software available to service providers and connecting suppliers of raw materials as well as early payment mechanisms completed the service circle. As well as speeding up claim response times, the process was also efficient and fundamentally more effective.

Taking inspiration from the concept launched by the Uber transport system, the insurance platform includes a vastly increased list of qualified and rated service providers. As in the ride-sharing service, becoming listed requires that several stringent criteria are met by service providers. When a claim is registered – including the time when the customer requires assistance – it drops into the platform. Appropriate service providers listed can then respond and confirm their availability. They are then required to be on site at the time stipulated by the customer, undertake the work and then complete a Mobile App-driven reporting process for the insurer’s records (including before and after photographs, assessments and costings).

To participate in the platform a service provider must have a smartphone and the software, provided free by 4-Sure. Part of the package includes a service provider ‘scheduler’s’ desktop package that enables job scheduling, field technician allocation and all the information relating to the job to be collated and electronically submitted for payment to the insurer.

“For a sole trader or SME, one of the greatest challenges to building a sustainable business is controlling cash flow. Service providers on 4-Sure do not have to carry an extensive array of raw materials to fulfil allocated insurance claims work. Once they are on site, have assessed the repair work and had it approved within minutes, the service provider is able to visit a 4-Sure approved partner supplier (Builder’s Warehouse, Penny Pinchers, Buco, Plumblink and others) and pick up the required stock.

“They are then using their 4-Sure Mobile App to get the necessary materials and the outlet then bills the insurance company concerned directly through the 4-Sure software for the expenditure. Because of the volumes involved, we have been able to negotiate favourable prices for these services which are now on offer at more than 400 service points across the country.  The service provider bills only for the time and labour spent on the job at the agreed rates. Their bills are then submitted using the 4-Sure software, go directly to the insurer and are generally settled within 24-48 hours.”

“As smaller operators are no longer waiting between 30 and 60 days for their money, they are happy to complete routine jobs for a set fee.  Depending on the service they deliver and the ratings they receive, they are in control of just how much work comes their way.  As a job is loaded on the system and service providers then bid for the work, competition is assured and opportunities for work are equal across the spectrum of service providers – a new paradigm which rewards performance with more work and manages the non-performers off the platform.”

Further value is added to service providers by free access to geo-positioning systems, which not only plots their way to their closest parts supplier but also to the customer’s property.  Jobs that appear on their systems also cover the areas in which they choose to operate. As is the case with their Uber driver colleagues, those closest to the customer can make their presence known and compete for the work. Those who feel the costs of reaching the site do not make a job worthwhile simply do not respond to the job alert,” says Moodley.

For insurers, who can track the response times of service providers in real-time and contact them electronically if they are late on site, the major benefit is that the loss of customer contact at the point of handing over a claim to an incident manager no longer exists.

Related: How Uber Grew To A Billion Dollar Business (And How You Can Make Money With It)

The typical flow of a job is made easier by:

  • Insurers were able to use a sophisticated eco-system that is a centralised platform connecting all players in the supply chain, facilitating a seamless claims fulfilment process.
  • Customer contacts their insurer via their contact centre, their website, or a digital self-service channel and this claim, is electronically dropped into the 4-Sure to facilitate the claim process automatically.
  • A claim’s details being logged directly on the 4-Sure platform instead of being referred to an incident manager. The message enables specific skills, customer location, a time required for service and other factors to be selected so that it can be responded to by competing service providers.

Explains Moodley, co-founder of 4-Sure and one of the innovators behind the home-grown platform that caters specifically for local needs and is believed to be the leading services of its type anywhere in the world:

“4-Sure has succeeded in becoming the first, fully-digital insurance claims platform to provide a truly customer-centric experience. The system is flexible and although the present focus is on non-motor claims, other avenues, including motor insurance and non-insurance opportunities are being investigated and developed,” says Moodley.

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Win A Seat At 10X-e’s 10X-ECUTION Bootcamp (Valued At R5900)

Automatically receive 20% off the Bootcamp just by entering!

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Transform chaos into systematically achieving business goals, at scale. Hosted by founder, Jason Goldberg

Enter by emailing your company name, your name and your designation to Monique: mchaitezvi@edgegrowth.com

About 10X-e:

Scaling – the Bermuda Triangle of growth – is hard, and fraught with failure. Very few of even the top 1% of ventures succeed at scaling, mostly due to poor execution, due to lack of experience scaling businesses. The 10X Program brings the ‘Science of Scale’ and seasoned Scale Up Leaders to help founders navigate the Bermuda Triangle of growth

Our team has helped some of the Continent’s most exciting high growth businesses scale up through the most treacherous parts of the journey. We tailor make multiple workshops to the specific needs of you, your team, and your business. Our workshops serve to address the most pressing challenges that your business faces, helping remove the hurdles towards 10X growth.

For more information on 10X-e, visit: https://10xe.co.za/ 

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Off The Beaten Track

What Tourism Month means in South Africa and how Mango Airlines is focusing on local opportunities.

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This September, being Tourism Month, we have so much to talk about in South Africa, and so many people to engage with, both domestically and abroad. We are privileged to be able to leverage a broad range of destinations – arguably world-class in nature, and they expand way beyond a beautiful mountain, and an ecosystem of game.

The vast majority of leisure tourists, however, remain attracted to the Mother City and various Safari destination, while business tourists tend to stick to hub cities for short durations of time before departing again.

“There is a golden opportunity to expand on the same offerings – while not detracting from them in any way. Our responsibility is to drive tourism into new areas, really emphasising the differentiators that are incredibly attractive to local and international tourists,” said Benediction Zubane, Head of Marketing at Mango Airlines.

“Often tourists visit one of the more well-known sites in an area, and are completely unaware of the other features and destinations close by. We’re seeing a lot of success in township tourism which goes to show how diversifying can really drive new tourism opportunities,” explained Zubane.

Related: Travel Tour Agency Sample Business Plan

According to Statistics South Africa survey on Tourism and Migration, nearly 3.5 million international travellers visited South Africa in August 2017. Top numbers were tourists from USA, UK, Germany, France and The Netherlands, with African visitors primarily coming from SADC countries. Zubane added, “This means there is vast opportunity to begin engaging with travellers in new countries across the globe. We need to become our own best ambassador, talking-up our famous and lesser known destinations, proudly showcases our uniqueness. We should also be tourists in our own country and start exploring the wonders of the Rainbow Nation.”

Mango is passionate about helping its SMEs and entrepreneurial community to successfully overcome the unique challenges facing the tourism industry: “There has never been a more opportune time for small businesses and entrepreneurs to benefit positively from tourism in South Africa, and we hope to celebrate alongside our SME community as they fly high – both literally and figuratively,” he concludes.

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