Cees Bruggemans: Business reinventions, Dollar reevaluations and energy price reductions

by Cees Bruggemans

oil price volatility
Cees Bruggemans discusses falling oil prices and the strengthening Dollar in his latest piece.

It may not be conventional wisdom, but business is not remaining silent, the oil windfall is not being lost and the Rand is not disorderly retreating. It may not all be good news, but 2-out-3 isn’t bad going? For some it is even 3-out-3.

Business is being castigated for being ‘silent’. But what is the use of arguing your case if those in authority are not tuned in, preoccupied with weightier, meatier matters?

Instead, business does the next best, natural thing. It is hedging its bets, actively globalising, meaning migrating outwards into more promising growth markets, shrinking its home footprints, not necessarily in an absolute sense (nobody aside of foreign mining houses is selling major assets) but certainly in terms of balance sheet structures.

Growth at home has been slow for years and it is getting worse. Prospects are not for an early break in the clouds. Instead, it looks like more of the same for some considerable while yet. Businesses cannot allow this to catch them out in a competitive world demanding performance. It requires an adequate response.

Actions speak louder than words.

Some of our quoted companies are now for 99% a Chinese business. Others are turning into Greater African, European and Asian businesses, too, to a degree in which one no longer recognises the old business platforms.

Shareholders of JSE quoted companies,  on average already for nearly 40% foreign, do not suffer from this relocation. They benefit. For surplus local labour and suppliers it often may be a different matter, for expansion focus is no longer primarily at home. It is where the action is. This is where it should be.

Then there are laments at large that we are losing our oil windfall. That isn’t true. Brent at $60 is not $110. Oil remains half priced to us, just like it remains to the world at large, for now.

That our petrol/diesel pump prices are rising again are a simple matter of Finance Minister Nene taking his cuts (as expected) and the Rand weakening as a reflection of a soaring Dollar in anticipation of continuing US growth and resource uptake, and the Fed starting its interest rate normalisation (back once again to a June starting gate).

This pump price erosion for SA households and business users of oil merely means the country’s oil windfall is being redistributed away from them, towards Nene (on all our behalf) and towards SA exporters (benefiting from the weaker Rand).

Rejoice. The oil windfall is still very much with us, though rapidly shrinking in your hands, favouring us in more roundabout ways, beside the shrunken direct benefit still enjoyed by you (for now).

Another talking point is the Rand which shot through 12:$ last week, with intimations of 13 around the corner. In contrast, the Rand shot the other way against the Euro, through the 13:€ floor and can the 12 floor be far behind? With the Euro down to 1.08:$ and looking towards $ parity, and then through parity, with the Rand in hot pursuit?

Yet none of this is happening in a disorderly fashion. Far from it. There is price volatility, obviously, but not in the manner of one-sided runaway trains and fire sale asset dumping as we have seen on occasion in the past.

Instead, the whole world is rejigging, adjusting to a changing Fed policy stance, half completed (bond tapering) with the other half now to follow (interest rate normalisation through 2017). Thereafter looms Fed balance sheet shrinkage, but that could take up to a decade (or longer).

Every country is responding to this mega-change, and the implied greater strength of the Dollar, in its own way and pace, reflecting its own fundamentals.

The US recuperation remains gradual, and the Fed inclined to act slow, giving a slow larger world and stronger Dollar, too. Markets may still at times overreact but the broad unfolding is likely to remain orderly, with minimal fallout damage in terms of inflation and interest rate shocks for us.

Euro and Yen have been and are weakening, given their accommodative policy stances. Many Emerging Market central banks and others have cut their interest rates in recent months, actively seeking weaker currencies, in support of  their trade, growth and higher inflation, ‘stealing’ some of the American thunder on offer via its higher anticipated interest rates and stronger Dollar.

The global adjustment of the post-crisis (2008) era remains firmly on track as we universally keep seeking higher growth and resource take-up while trying to keep inflation expectations anchored at low single digits, yet well short of descending into genuine deflation.

So far, so good, as global recuperation proceeds apace, assisted by US currency readjustments, lower commodity costs and especially lower priced oil and gas.

SA business is reinventing itself, being strengthened in the process. The long-term step-down in global energy prices should benefit us. It is not the Rand that is falling out of bed, having been singled out, but the Dollar that is being revalued worldwide, in reasonably orderly fashion (the real miracle of the decade).

 

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