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Send  Share  RSS  Twitter  21 Feb 2012

INVESTMENT: SA Brokers and Managers More Optimistic in 2012


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In a series of meetings with key SA brokers and managers in early 2012 Investment Solutions observed a marked improvement in sentiment regarding the global economy and financial markets compared with last year.

Unlike last year, early 2012 finds South African manager and broker sentiment “less concerned with double-dip recession, a hard landing for China, a Lehman-type banking crisis in Europe or dissolution of the European Union” says Philadelphia Oliphant, Economist, Investment Solutions.

This change of heart was mainly driven by an improvement in economic news from the United States from late last year and better-than-expected growth numbers from China. In addition, there was less concern about systemic risks from Europe as a result of ample monetary measures implemented by European authorities.

As such, the general view from brokers and managers is that the global economy would experience positive, albeit sluggish, growth in 2012, of around 3%-4%. This was driven by increased optimism on the sustainability of the current recovery in the United States, “with some even suggesting United States growth could surprise on the upside this year” said Oliphant. That said, the general expectation was for the US to grow by around 2%-2.5% in 2012.

SA Brokers See Stability

With oil and commodity prices more stable and supply-chain disruptions from the Japan earthquake and tsunami largely dissipated, the effect of monetary and fiscal measures (such as the American Jobs Act, Operation Twist and ultra-low interest rates) was expected to help sustain the United States recovery in 2012. Another expectation was that “United States authorities would postpone any fiscal adjustments required to address the sovereign debt situation until after this year’s presidential elections in November” said Oliphant.

China was now largely expected to experience a soft landing, with growth of around 8% in 2012. One manager noted that the recent dip in China was due to deliberate action by the central bank to tackle rising inflation. With inflation showing signs of easing, authorities had room to stimulate the economy through further easing of monetary policy. That said, “the Chinese property market continued to be cited as a key risk” cautioned Oliphant.

The European economy, already thought to be in a recession, was expected to contract by around 0.6% this year. The general view was that European problems had not gone away, but that authorities had managed to limit the severity of the crisis. So, while managers and brokers believed that recent policy actions would help avoid a banking crisis in Europe as well as ease downside market risk, they would not address the fundamental problems of debt and no growth.

While the European crisis was largely seen as a lack of political will driven by fear of being voted out of office, the consensus was that the European Union would remain intact, although some countries, like Greece, might lose their membership.

SA Brokers Found Slow Growing Emerging Markets Helped Inflation Pressures

Managers and brokers generally agreed that, globally, the fall in commodity prices and the stabilisation of the oil price had helped ease inflationary pressures. The slowing growth in emerging markets as a result of previous monetary tightening to fight inflation had also served to slow inflation. As such, “global monetary policy was expected to remain accommodative this year, with emerging markets continuing their easing cycle to stimulate economic activity” explained Oliphant.

Domestically, stagflation seemed to be the general expectation for South Africa in 2012. The local economy was expected to grow sluggishly by between 2.5% and 3%, while inflationary pressures were expected to be high. The consensus view was that “inflation would stay above the 6% target limit throughout 2012” said Oliphant. There were, however, divergent views on when interest rates would start going up, with some expecting rate increases in the second half of 2012 and others only in 2013.

The direction of the rand was expected to remain dictated by global market sentiment. While the rand was expected to remain vulnerable, no further depreciation from last year’s 20% loss in value was expected. The general view was that the rand would end the year at around R7.60/$.

The national Budget also dominated discussions, following Moody’s and Fitch’s downgrade for the outlook of the local economy to negative. The view was that this year’s Budget would be critical as it would determine whether the country’s credit rating was downgraded further. This was especially so as “government faced the difficult task of demonstrating its commitment to fiscal policies without being in a position to restrain fiscal stimulus given the country’s poor growth fundamentals” explained Oliphant. National Health Insurance was also identified as a key risk to the fiscus.

Brokers and managers were also slightly more bullish about global financial markets. The view was that, while risks remained, systemic risks had largely reduced. Therefore, while market volatility would remain, a meltdown similar to the one in 2008 was unlikely. Ample liquidity, ultra-low interest rates, and some improvements in economic activity were seen as positive factors that would support markets.

Global equities dominated as the preferred asset class while global fixed income was the least preferred. SA brokers feel that globally, emerging market equities were expected to outperform their developed counterparts this year with the view on local equities also slightly more optimistic.

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