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, %
Celebrating The Best Of The Best In Black Business
The 2019 Black Business Quarterly (BBQ) Awards, held at Emperor’s Palace on Friday, 15 March 2019, celebrated the champions of transformation of the South African economy.
Established in 2002, the BBQ Awards 2019 honoured the best of the best in black business. South Africa’s top black business owners and rising stars arrived to the red carpet for a night full of glitz and glamour. Celebrity TV presenter, socialite, radio personality and Idols SA judge Somizi Mhlongo led the festivities as the evening’s programme director. He was joined on stage by A-list celebrities and prominent politicians.
Jeff Radebe, Minister of the Department of Energy, celebrated 25 years of South Africa’s democracy in his opening keynote address and emphasised the importance of transformation.
“Transformation is well recognised as a change management strategy, which aligns people, which aligns processes and technology initiatives, irrespective of the industry you come from, in order to survive and evolve in this business environment. Changing the structure of the South African economy will result in it being more inclusive, more sustainable… with opportunities for all, integrated value chains, and less barriers to entry. In South Africa, the transformation agenda is very critical in all our endeavours and all our decisions.”
Radebe congratulated the winners of the 15 transformation categories on this recognition of their inspiring dedication:
- Platinum Award: Dr Nobuhle Judy Dlamini, founding chairman of Mbekani Group, is an entrepreneur, author, and philanthropist. Her passion for creating and adding value to society and humanity provided her with the overall platinum award for the evening, as well as the Comair Outstanding Woman of the Year Award.
- Hennessy XO Businessman of the Year Award: Sthembiso Elton Nkomo, CEO of Abalandi Risk Management, was recognised as a professionally qualified, dedicated, and respected professional in the forensic investigation and security services environment.
- The Innovation Hub New and Innovative Business Award: AET Africa, a manufacturer and supplier of energy efficient and clean technology products, developed various products targeting the commercial and residential sectors.
- Emperors Palace Community Builder of the Year Award: Emmanel Bonoko, Founder of EBonoko Holdings and a social entrepreneur. He founded EBonoko at the age of 21 with the aim of serving others and fostering leadership, youth empowerment, and entrepreneurship.
- Dormehl Phalane Property Group Transformation Champion of the Year Award: ICT-Works, an organisation that provides innovative technology solutions. At its core it also enhances the lives of millions of people.
- Best Employer of the Year Award: Maredi Technologies CC, an 100% black owned ICT infrastructure solutions provider for the private and public sector.
- Trade & Investment KZN Young Business Achiever Award: Pravashen Naidoo, Founder and CEO of e-Waste Africa, established Africa’s first light bulb recycling business at the age of 30.
- Bentley South Africa Public Sector Visionary Award: Dr Ayanda Vilakazi, CEO of Lama Marketing and Advertising (Pty) Ltd. He published numerous articles on how to improve services and operations in South Africa. As a seasoned Executive he has expertise in corporate governance, financial management and budgeting, enterprise risk management and strategic development.
- BET New Entrepreneur Award: Ms Thobile Nyawo, Director of Nyawo Civil construction. The 19-year-old construction entrepreneur founded her company in 2015 with no start-up capital.
- CSI Ubuntu Award: Vukani-Ubuntu Community Development Projects, a non-profit organisation that is the largest mineral-beneficiation organisation in the jewellery sector in South Africa and a network off grassroots development projects across the country.
- NHBRC Iqhawe Mentorship Award: Musa Zulu, Creative Director of Valhalla Arts, as well as published author, international artist, celebrated motivational speaker, and prominent disability activist in South Africa.
- NYDA Outstanding Young Entrepreneur of the Year Award: Muhammad Simjee, Founder and CEO of A2D24 with a passion for building gadgets and writing software.
- Nedbank Group Individual Transformation in Leadership Award: Karen Rademeyer, Fundraiser and Communications Manager at Go for Gold, having worked in the non-profit sector for 17 years She is passionate about education: Go for Gold as a dynamic Education-to-Employment programme that recruits school students from some of South Africa’s poorest communities and transforms them into technically qualified graduates.
- LTE Holdings Best Established Black Business Award: Thata uBeke Manufacturing (Pty) Ltd, which offers turnkey solutions by designing, developing, manufacturing and assembling electronic and electro mechanical components for a variety of applications including aerospace, telecommunications, mining, commercial, and military specifications.
The BBQ Awards continue to be South Africa’s most prestigious transformation awards. For more information on the 2019 BBQ Awards, visit http://www.bbqawards.co.za/ or follow them on Facebook (@BBQAwards) and Twitter (@BBQ_Awards).
Why Just Having A Great Idea Won’t Make You The Next Richard Maponya
Tilldan Bunagni – Brand Manager for Firstwatch Whisky shares some insights into what will help you on the road to business success.
All entrepreneurs have hurdles to overcome on their path to success, and it takes guts and fortitude to survive the journey. As self-made publisher, William Feather said, “Success seems to be largely a matter of hanging on after others have let go.”
Richard Maponya has been described as a living legend, and while his first business idea to retail directly to consumers in Soweto proved successful, it was his incredible determination and work ethic that saw him overcome an extremely hostile business environment for black business under the Apartheid Government.
Today’s up and coming entrepreneurs face different challenges and while there is support for SMEs from Government to Corporates, the reality is that starting a business and seeing it develop into a highly successful entity creating wealth for the owner, employees and other stakeholders, is the exception rather than the rule.
So, what are some ideas that will help you pave the way for a successful business providing for yourself, your family, your community
Ensure you don’t neglect the business while chasing the money
One of the worst mistakes a small business can make is not having a good admin system in place. Without booking keeping records, SARS compliance and financial records for example, you will at some point hit a brick wall.
Whether it’s because you are growing and need to access funding – which will prove very difficult without business documentation – or you have neglected your SARS payments and compliance, the wall be there. From the start, learn how to manage your admin yourself, or employ the part time expertise of a professional. It will be well worth the initial spend.
Don’t be scared to ask for money
Many successful businesses have become so because they sought funding when they needed it. Whether this is at the start-up phase or when the business is already established but ready to be fast tracked to the next level. While there seems to be a lack of understanding of how many and what options are available to SMEs in SA, the truth is there are literally hundreds of funding products available. Search Google with keywords such as: Access to finance in South Africa and you’ll be pleasantly surprised at the what is actually available.
Don’t be scared to look for support
Success often comes with support. Being an entrepreneur or small business owner can be a very lonely existence. Whether you seek the backing of a Mentor or join a support programme, improving your business skills and having a cheering squad behind you is empowering.
Another form of support can be found in initiatives and competitions geared towards developing and rewarding entrepreneurs. Look out for ones that talk to the genuine needs of an entrepreneurial business – such as financial support backed by business training and support.
The journey for entrepreneurs is really tough, but certainly well worth the effort in the long run.
How Firstwatch can help you!
Firstwatch is currently running the ‘Firstwatch Entrepreneurs Challenge’. This serves as a platform to move business ideas and concepts to the next stage of growth for the 100 applicants selected to join the two-day workshop. The training programme is chock-full with robust, hands-on experiential learning with some of the country’s leading business experts.
At the culmination of the programme, entrepreneurs will be given the opportunity to pitch their business or business idea to a panel of judges – where the top 10 will be selected. All entrepreneurs will be invited to attend the closing ceremony on the 19th May, where the top 10 will pitch to the entire audience and a final panel of celebrity judges and successful entrepreneurs.
The overall winner will walk away with R50 000 support for their existing or start-up business.
The entry closing date is the 31st of March with workshop dates on 27 and 28 April 2019.
For information on the initiative simply call or send a Whatsapp, SMS or “please call me” to 072 391 9937 or e-mail email@example.com.
Digital Transformation Should Be A Priority For Small Businesses In South Africa
With numbers like that, digital transformation is critical for any small business that wishes to find more customers and grow.
When a water pipe bursts in your home one morning, your initial reaction will probably be to grab your smartphone and search Google for a plumber nearby. Perhaps there is one just around the corner, but you wouldn’t know about them if they don’t show up in your search results. This scenario sums up why a good digital presence has become a must for small businesses in South Africa. The internet – and almost any business opportunity – is where the customers are.
According to the 2019 Global Digital Report prepared by We Are Social and Hootsuite, 54% of the South African population are internet users. This means there are 31 million people in South Africa who are searching for products and services online; 29 million of them are active mobile internet users. With numbers like that, digital transformation is critical for any small business that wishes to find more customers and grow.
First step on the road
We believe the journey of digital transformation starts with creating your own online identity. This is creating a place of your own online, starting with a website, and letting people know who you are, what you do, and what you offer. Think of it as your mobile storefront or your online business card. Start small and grow over time: no need to over-engineer or over spend.
Website builders like GoDaddy Website Builder can help you get a professional-looking website up and running in a short amount of time, even if you don’t have a big budget or any technical skills. And it will look amazing on a smartphone, not just yours! Once you’ve created your website, you can start looking at using tools like social media, search engine optimisation, and e-mail marketing to help reach new customers and stay in touch with existing ones.
Thanks to the internet and the digital tools available today, it’s not as hard or as expensive to create and promote your brand as it once was. First, a solid strategy is important, and it should include ways of showing your target audience what makes your brand and products unique.
Here are some other tips about how you can get value from your digital presence:
- Mobile continues to rise: As we’ve mentioned before, more than 90% of internet users in South Africa are mobile. You should focus on improving site speed, navigation structures and readability on mobile devices, and look to optimise your website from the start for the mobile experience.
- Simple design: This is an extension of creating mobile-first experiences, and it’s important that your website looks and works great on all screen sizes. This year, web design will focus on relevant and catchy content as well as design to help ensure you catch your users’ attention.
- Feature “platforms”. What do I mean by platforms? This includes maps, payment solutions, food delivery services, and shared rides fall into this definition. Our friend the plumber might not need these for his website, but a restaurant could truly benefit from adding maps, partnering with a booking or reservation service and even a customer rating solution.
With an increased number of data breaches occurring, protecting your new website and your customers’ data has become even more important for companies of all sizes. Whether or not a website has an SSL Certificate, it can affect your search rankings, so you should ensure your site has the added SSL Certificate protections.
Voice search and chat – are they in your business’s future?
Looking to the future, we can expect to see the digital world evolve at breakneck speed. Two trends to be on the look-out for in the not-too-distant future are voice search and chatbots. Currently, one out of every five internet searches come from voice queries, which means people are speaking their searches into their smart devices.
Therefore, while optimising your website and content for search engines, it will be important to do it for voice searches, keeping in mind the growing use of virtual assistants like Alexa, Siri, Google Assistant and Cortana. We can also expect to see more businesses using chatbots powered by AI on their websites, as well as social media profiles and applications, to provide instant assistance for their customers.
Perhaps your small business is planning to start implementing these tools during the year. Or it could be several years before these features are on your radar. Either way, they highlight some potential ways your evolving digital presence can allow you to find and interact with customers in new powerful ways.
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