By: Andrew Kingston
Investing relies on maintaining a broad perspective. Markets move in familiar cycles, yet each has unique influences. The current investment phase we find ourselves in requires us to look far back in history – perhaps to the pivotal period in the US that was the 1930s.
Current equity environment
Today’s equity landscape is challenging. The US market has delivered a strong performance in recent years, resulting in investor complacency. However, an economic struggle is underway, particularly between the US and China, as they vie for technological dominance. Global growth is moderating as past efficiencies fade, globalisation recedes, and governments embed themselves further into economic processes. Inflation seems stable, but rising costs and economic strain could spark inflation surges in the future. With global debt reaching unsustainable levels, the need for restructuring looms large. Major economies, from China to the US and Europe, are yet to take substantial action, trapping us in a spiral of slowing growth and potentially rising inflation. This does not bode well for equity markets.
The US: slow growth and inflation dynamics
The US has managed reasonable growth with controlled inflation. However, the aggregate figures mask underlying struggles, particularly for lower-income Americans facing job insecurity, high housing costs, and stagnant savings. Rising interest rates seem here to stay, continuing to strain households. The economic divide between rich and poor is widening, amplified by political divides and elevated debt levels. Other developed markets generally face similar challenges: slower growth, persistent inflation, and high debt.
South Africa’s enviable position
In contrast, South Africa is in a rare position of improving economic growth at a time when developed markets are slowing. Relative growth is stabilising, and we face fewer inflationary pressures due to our already high inflation base. We also have untapped local opportunities provided we can address key bottlenecks.
Despite the US bond market performing well recently, emerging market bonds have significantly outperformed, perhaps signalling a trend shift. Should global financial repression – slowing growth paired with rising inflation – take hold, commodity-producing nations like South Africa could benefit.
Potential catalysts for local growth
The departure of companies from the JSE and a prolonged period of low domestic growth have left local markets undervalued. Now, recent share gains by South African companies may be a sign of a sustained upswing. With many economically sensitive companies on modest valuations and potential interest rate declines, local equities are primed for a rebound.
Who will lead the next phase?
In low-growth South Africa, strong dominant players in each industry have managed to squeeze out growth, often at the expense of weaker competitors, leading to some market concentration. These established players, many with high fixed costs, now stand to benefit substantially from improved economic conditions and increased demand without requiring additional capital investments.
We believe businesses oriented toward the local market, particularly those benefiting from rising economic growth and limited capital requirements, will emerge well-placed.
Two key questions for South African investors
South African investors should consider two additional factors when making decisions: the outlook for commodities in a low-growth world and the influence of the US Federal Reserve.
Mining shares, apart from gold, have struggled recently due to slowing global growth, weak consumer demand, recalibrated green economy expectations, and a challenging Chinese real estate market. Typically, China has responded to slowdowns with aggressive infrastructure spending, but the recent stimulus has focused more on consumer support and “smart manufacturing”. While this curbs commodity demand in the short term, we anticipate that the intensity of commodity use in future economic growth will rise. The disruptions from reshoring and geopolitical tensions drive business costs up, creating pressure on commodity prices.
The Fed’s next moves will be critical. As US growth slows, will the Fed adopt an accommodative stance or remain cautious about inflation? A modest rate cut could support equities, yet risks allowing inflation to grow. Should inflation become embedded, bond markets may face rising yields and increased default risk, with the dollar acting as the likely release valve.
A weaker dollar would boost emerging markets, including South Africa, and support commodities. While we foresee a weaker global equity environment, we believe emerging markets may begin to outperform developed ones. South Africa, having stabilised to some degree, could benefit significantly, and any government initiatives would further support corporate growth.
South Africa’s position in the global commodity cycle
As global growth slows and inflation remains elevated, commodities, particularly gold, offer a hedge against economic compression. South African gold shares, representing nearly 10% of the JSE Capped All Share Index, have already performed well this year. While a short-term correction may occur, this could present a fresh opportunity for investors who missed the initial gains. Gold remains a prudent hedge against inflation, debt crises, geopolitical conflict, and economic downturns.
In sum, we anticipate global equity challenges, with emerging markets poised to outperform. For South Africa, a partially stabilised domestic environment and potential government support could mark the beginning of a sustained market upswing, especially for local companies and gold investments.
* Kingston is the head of equities at Sanlam Investments.
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