Markets & economy

Increasing policy uncertainty

With few exceptions, notably India, most countries experienced slower economic growth in the first quarter of 2018. Anecdotal evidence suggests that that the pace of growth has now accelerated again. The US economy is operating at close to full capacity. Its unemployment rate is 3.8%, the lowest it has been since 1969. Although inflationary pressures remain benign there are strong arguments in favour of the proposition that, given such buoyant business conditions, the current level of dollar short-term interest rates at 2% is too low. The market currently anticipates an increase over the next 12 months to 3%. As Europe and Japan seem committed to keeping interest rates at or close to zero for some time yet, rising US rates will favour a stronger dollar, and could cause disruptive volatility in exchange rates.

There is widespread concern that trade wars between the US and other countries could destabilise the global economy. The global supply chain has become highly integrated. Although the US only accounts for 22% of global gross national product (GNP), it can potentially cause widespread economic disruption. The victim of tariff increases will be the consumer, who will have to pay higher prices due to local shortages and the cost of supporting less efficient domestic production.

Despite an improvement in confidence since the outcome of the ANC elective conference last December, South Africa’s economy remains trapped in stagnation. The challenge involved in getting the country growing again is formidable. President Ramaphosa has correctly identified that boosting investment will be critically important in achieving a successful outcome. The political debate on issues such as land reform, the new mining charter and healthcare will have a significant impact on the attitude of potential investors.

As a consequence of global risk concerns there has been a significant sell-off of emerging market (EM) financial assets. Since February 2018 all EM currencies including the rand have weakened against the dollar. South African bonds have given up much of the gains they made immediately following the election of Cyril Ramaphosa as leader of the ANC. While a disappointing South African news flow has contributed to this price weakness, it is mainly attributable to the global EM sell off. After hitting a low of 3.8% in March 2018, South African inflation is on the increase again. In May it was 4.4%. Given the deteriorating inflation situation further rate cuts seem improbable in the near future.

The financial services, products or investments referred to on this website are not available to persons resident in jurisdictions where their availability or distribution would contravene local laws or regulations and the information on this website is not intended for use by these persons. This website is for information only and does not in any way constitute a solicitation or offer by Allan Gray Proprietary Limited or any of its associates or subsidiaries (collectively “Allan Gray”) to buy or sell any financial instruments or to provide any investment advice or service.

By selecting one of the countries below I confirm that I have read and understood the above and that:

(a) I am not a South African citizen; or 
(b) I do not reside in the Republic of South Africa; or 
(c) I am not otherwise a person to whom the communication of the information contained in this website is prohibited by the laws of my home jurisdiction; and 
(d) I am not acting for the benefit of any such persons mentioned in (a),(b) and (c) and 
(e) I confirm that any investment with Allan Gray is based on my own initiative and not due to any offer or solicitation by Allan Gray.