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, %
Surge In South Africans Swopping Their Cars For Bitcoin
The cryptocurrency Bitcoin has experienced a seemingly interminable rise. Early adopters have experience lottery-sized pay-outs on minor investments as the currency exploded in value in 2017.
The cryptocurrency Bitcoin has experienced a seemingly interminable rise. Early adopters have experience lottery-sized pay-outs on minor investments as the currency exploded in value in 2017.
As South Africans are itching to get their hands on the digital currency, there’s been an increase in swops and bitcoin-only sales on Gumtree.co.za, says Claire Cobbledick, Head of Core at Gumtree. “This is particularly true for high-value items like cars, bikes and boats. Many sellers are willing to take a gamble with their assets in hopes of a large pay-out.”
This is on trend with other marketplaces. In the United States a McLaren 720S was put up for sale in exchange for 25 bitcoin, a theoretical value of $425,000.
While Gumtree does not allow for the sale of bitcoin miners or services, Cobbledick says that customers can exchange goods for bitcoin on the site, but should be fully aware of the risks. “Bitcoin is a volatile currency, so while you could easily see a 50% increase in your investment, you could just as easily end up with nothing. It’s up to the seller to decide if they are willing and able to take a gamble.”
Some cars currently up for sale in exchange for bitcoin includes a Land Rover Defender, BMW X5 and a rare 1970 Mercury Cougar V8.
“There are also a few other sellers accepting bitcoin in exchange for Kruger Rands,” says Cobbledick. “Perhaps proving that gold as a store of value is falling out of vogue.”
But the most unusual swop would have to go to an entrepreneurial seller who is offering carnivorous plants in exchange for the cryptocurrency.
Zando Sold 80 Items A Minute During Black Friday – By Doing This
Black Friday has brought immense success for numerous local online retailers – reflecting the potential of e-commerce in South Africa. Why not learn from Zando’s success in 2017 to ensure your success during the 2018 Black Friday sales season?
For South African e-retailers, Black Friday is a big sales event. But you need to ensure you’re prepared for the web traffic and that your e-commerce store can handle the logistics of thousands of orders.
According to Zando, they experience 100% up-time during Black Friday and less than a week after the season sales event, 95% of customer orders have already been shipped.
To help fellow e-tailers perform better next year, Zando’s CEO, Sascha Breuss answers some key questions about the company’s preparations and learnings around Black Friday:
1. How did you encourage greater sales on Black Friday?
Over the last few years Black Friday has developed a following in South Africa, so we benefitted from the existing hype around it. We didn’t focus too much on upfront marketing, but put our energy into flawless execution and of course great deals for the customers.
2. How much planning went into ensuring your store platform ran at optimum?
The real ‘hot phase’ started with the first day of November when our IT department went into a ‘feature freeze’ and we focused 100% on site-stability and scalability.
We went through some intense testing of our site with loads up to 15 times the average daily amount of visitors. So, when the actual day came, we were confident in our systems.
3. How were you able to successfully co-ordinate logistics during Black Friday?
Early preparation and experience from past years have been the key to success. We increased our head count in both Warehouse and Customer Service well in advance so that we could rely on well-trained and experienced colleagues come Black Friday.
4. How did you ensure a seamless experience between your website and your app?
We know that our customers are browsing Zando on all platforms, desktop, mobile and app so we implemented some handy features to make the transition between each platform easier. For example, shared baskets and wish lists are now a feature. Some of the deals however have been app-only and sometimes we reward our app users with early access to shop the best deals. So it is definitely worth it to download our app.
5. How did you scale your entire operation for a single event?
This is easy to summarise in one word – TEAMWORK. The Zando staff did an amazing job and were the backbone of our success. Not only did they put the required extra hours in and worked hard until the job was done, but they also showed real team-spirit. When you called our Customer Service during Black Friday it’s very possible that you spoke to someone in our HR, Social Media or Legal team who helped out answering calls.
6. How did your marketing campaign affect traffic on your platforms?
The most surprising element was probably the high volume of traffic that we saw during the night. Visits started to increase every minute before midnight and during the first two hours of the day we saw peaks that were higher than on our strongest week day. This traffic never dropped with a lot of orders being placed between 2am and 3am on Black Friday.
7. How did your technology systems handle the influx of shopper traffic?
In the build up to Black Friday we added additional server capacity and changed the way we handled the flow of traffic. This made us very flexible to switch on additional capacity wherever required. So it was a combination of intensive preparation, close monitoring and ultimately very little sleep for a couple of days to ensure we monitored our system health 24 hours a day.
8. What was your sales strategy?
For us everything that had a discount of 40%-80%, and was still a relevant and recent look, qualified for Black Friday 2017. Once these criteria were fulfilled we made sure that we had sufficient stock available – in some cases the demand was so high that we brought on additional stock from our suppliers during the Black Friday weekend.
9. What were your biggest learnings?
We have been very successful in our approach to remain true to the idea of Black Friday – offering great deals on relevant product and not outdated clearance ranges. The customer is very educated and will identify a good deal, and we have seen consumers’ negative comments on stores who used Black Friday solely as a warehouse clearance opportunity.
10. What surprised you about Zando’s success during Black Friday?
Thanks to extensive preparation we have been able to achieve an uptime of 100% for the full month of November. We also kept the deliveries and returns 100% free regardless of discount or basket size. It seems like our customers appreciated this approach and we have actually seen very positive sales numbers after Black Friday while we expected a drop. I believe the full focus and investment on the Customer Experience has worked for us.
Team Resolutions: 11 Tips To Uncover Passion And Potential In New Hires
If there’s one resolution HR departments should make this new year, it should be to transform the onboarding experience for new hires.
If there’s one resolution HR departments should make this new year, it should be to transform the onboarding experience for new hires says Michelle Seko, Talent Acquisition Manger at Sage Africa & Middle East.
The importance of a good candidate experience cannot be underestimated. Research has shown that 88% of job applicants are more likely to buy from a company if they’ve had a positive experience when applying for work there. Research has also shown that candidates talk about their experiences with a company, regardless of whether they got the job. Some candidates would even refer a friend to the company and others will re-apply for a future role, if the experience was a good one.
Research also found that:
- 69% Of employees are more likely to stay with a company for three years if they experienced great onboarding
- 33% Of new hires leave before their first anniversary, yet companies with an engaging onboarding programme retained 91% of their first-year workers
- Onboarding programmes can improve employee performance by 11.5%.
Businesses enter into a relationship with a new hire the moment they sign on the dotted line. And, as with any relationship, it will only flourish if built on trust, respect and a commitment to self-improvement.
When you set new hires up for personal success, the outcomes naturally feed into your business’ success, which means you both win.
Here are a few ideas to get the most out of your new hires:
Make them feel welcome
Introduce them to the people they’ll be working with as soon as possible so that they immediately feel part of a team. At Sage, we partner new hires with a buddy, or Sage Ambassador, who helps them settle in and meet new people, contributing to the positive on-boarding experience.
Focus on the benefits
Compelling benefits not only attract the best candidates but also boost loyalty and job satisfaction. People are motivated by different things: one person might value flexi-time while another could place more importance on growth opportunities or bonuses. Focus on the benefits that align with the individual’s values when onboarding.
Set goals early and outline a plan to achieve them
This keeps your team focused, especially if they will be rewarded for achieving their goals.
Monthly, at least. Adjust goals and plans where necessary, reward good performance, introduce new challenges and deal with issues promptly.
Show genuine interest
Regular catch-ups and remembering children’s names, for instance, makes people feel appreciated.
Let your new hires apply their knowledge to business challenges and offer training opportunities outside of their comfort zones. Reward ideas that help you do things better and faster.
People thrive when they can learn from others and when they can share their knowledge. Involve experienced team members in the new hire’s training. This is a great way to recognise and appreciate their loyalty and skills.
Do you have difficult clients? Will the new hire have to work overtime? What are the business’s goals? New hires should know what they’re getting into.
Provide solid training on everything from company culture and benefits, to opportunities for growth
The biggest cost associated with training people is the time it takes for them to become productive. But rushing through on-the-job training could lead to a host of other problems, including repeated mistakes and a lack of confidence.
Openly communicate any changes in the business
Manage your team’s expectations and be clear about yours. Allow new hires to question and understand how you do things and to point out errors – their past experience probably gave them new ideas and ways of working that could boost your team’s efficiency and productivity.
Your mood sets the tone for everyone else. You can have the best product in the world but unless your team is passionate and enthusiastic about that product, you won’t get the results you’re hoping for.
Keeping people motivated and productive is hard work
But if you provide them with the tools, knowledge and support to do their best work and to contribute their best ideas, motivation and productivity will come naturally.
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