During the tough times, things are never quite as bad as they are painted. But living in the middle of it, one sometimes needs a voice of reason to provide perspective. In this special podcast, Futuregrowth’s Zain Wilson plays part, offsetting the deepest concerns of pessimists without becoming a senseless Pollyanna. So, yes, we’re technically heading into a recession. And, yes, because of self inflicted foot-shooting SA could miss out on the economic upswing that’s catching hold around the world. But there is some bright sky. And it’s not too late to fix things. – AH
ALEC HOGG: Zain Wilson who’s Fund Strategist and Fixed Interest Analyst at Futuregrowth joins us. Zain, there’s a lot of talk going around at the moment about whether South Africa is in recession or not. Today, we had the Purchasing Managers Index coming out again below 50. It certainly looks like this economy is not growing and starting to contract.
ZAIN WILSON: Yes, Alec. If you asked me a week ago, whether I thought that South Africa would end up in a technical recession – and I guess how they classify that is two quarters of contractionary GDP growth – I would have probably said no, because the first quarter data was largely influenced by mining. What you’re seeing now is that all the other moving parts of GDP are also starting to slow down, and they’re slowing down on a trend basis so if we do have another shock, it looks like there’s a very real risk we will have two quarters of GDP growth contraction.
ALEC HOGG: What does that actually mean in the bigger picture?
ZAIN WILSON: In the bigger picture it basically means if you look at the consumer, the consumer makes up about 60 to 70 percent of the growth in the economy. It means that consumers are not spending as much. Consumers aren’t spending as much, wages aren’t rising, and employment is slowing down so on the whole, you have a contraction in spending, which I think is probably the most important part. What we had in the first quarter was really a contraction from the production side of the economy, so that was more of a shock. Obviously, what happened was the mining sector coming through in Q1, but the more worrying part is the trend that you’re starting to see on the consumer side, which is also due to high debt levels, fear of interest rates being hiked, and generally just a consumer that isn’t as healthy as it would have been two or three years ago.
ALEC HOGG: We know that we lost out for the most part on the mining boom that happened in the last few years. Now we see the United States, China, and Euroland recovering and yet, South Africa’s going the other way.
ZAIN WILSON: Yes. After the crisis in 2008 a lot of what was attributable to South Africa’s growth slowing down was that we were in a slower global environment. What we’re seeing now is despite the fact that we’re starting to see the US turn around and the EU start to turn around as well; South Africa is not in a position to take advantage of those pickups in growth. Even though we would usually pick up on the trade side and we’d be able to export more to a growing European Union, what happened now is that because of the side issues we have in mining, manufacturing, and especially with electricity constraints being hit, we’re not able to be as responsive to pickups in global growth and we don’t get the gain that we usually would.
ALEC HOGG: So we’re shooting ourselves in the foot, in a sense?
ZAIN WILSON: Yes, until we get electricity sorted out and until we get labour relations in the longer term sorted out, we’re always going to have a risk of short-term volatile events pulling back any potential we have to grow.
ALEC HOGG: How are you reading the NUMSA strike, which started today?
ZAIN WILSON: If you look at it from about a month ago, when they started talking about striking – or maybe two to three weeks ago – the initial request was for a 15 percent wage increase. On the manufacturers’ side, they were initially pitching a six percent increase, so there’s quite a big gap. The gap’s already come down, in a few weeks, to 12 percent and some are saying ten percent demands from NUMSA, and closer to eight percent from the manufacturers. I don’t think you can look at it the same way you would in the platinum sector where there were pretty significant gaps I think, of a 50 percent demand from the platinum sector versus an eight or nine percent demand from the actual miners. This seems more like it’s the usual kind of annual striking behaviour that we get year-on-year. The one thing to watch out for though, is that obviously NUMSA is starting to position itself as a potential alternative to the ANC if it does move away from the Alliance. They might therefore have more incentive to actually hold out for that twelve percent versus capitulating earlier as they would have done in previous years.
ALEC HOGG: I guess there’s another joker in the pack in that Eskom has called in the security forces to ensure that its workers – who aren’t allowed to go on strike actually, because it is a protected industry – that they can go in when they get picketed tomorrow – if this turns nasty…
ZAIN WILSON: Yes, that’s a difficult one to call. The electricity position as a whole is something that we are very worried about because that puts a cap on what our productive capacity is. If nothing else works out, we’ve already so many delays with Medupi and Kusile that I don’t think we’re at risk – just answering your question of any kind of violent strike happening – because it has been managed with security forces before, at a previous strike at Medupi and Kusile. I would be more worried about what happens if this strike gets extended for a month or two months. We then have a risk of rolling blackouts.
ALEC HOGG: We did see, with the AMCU strike in the platinum sector, that it went on for five months. The biggest losers were the workers. What they gained, they’re going to take ten years to earn back. Do you think that anybody’s learned from that experience?
ZAIN WILSON: I would hope that the unions have learned. It’s a difficult one because there’s a lot that obviously needs to be done in terms of redistribution in this country. You can’t say straightaway that the request by AMCU, when you compare wages in South Africa for miners versus other parts of the world like Australia, where rock drill operators for example are paid very well, that there isn’t an inequality and an environmental issue that needs to be taken care of such as improving housing conditions. It’s a difficult thing to gauge. There’s a lot of social unrest. In addition, despite the fact that workers have five months of pay loss because they’re not going to make it back, they seem quite firm even heading into months three and four when asked about whether they’re happy to continue striking, despite not getting wages because of the social implications of it.
ALEC HOGG: So it’s a lot more complex than what it might appear on the face of it. If you’re sitting, though, where the ratings agencies are…they’ve already downgraded South Africa and they’ve warned that if labour unrest continues we could go to junk status: is this something, particularly as a fixed interest specialist, that worries you?
ZAIN WILSON: There are two thing to think about here. Firstly, on a trend basis, looking at what’s happening with GDP, what’s happening with the current account, and what’s happening with the fiscus, we’ve moved down to BBB- on S&P’s ranking. It’s one step away from junk status and if we look at the trend factor, I don’t think we’ll move towards junk any time in the next year, or two or three years because we sit quite comfortably in that group – just above junk. However, if we have a significant shock… If you have a particularly bad strike and a particularly violent strike that has repercussions on how government handles the strike, I think there’s always a risk so you can’t cut that out completely.
ALEC HOGG: How do you position yourself in the fixed interest market right now?
ZAIN WILSON: Obviously, you have to think about what your view is on the short end, on whether the Central Bank is going to hike or not. In the global environment that we’re in, the Central Bank has made it quite clear that we’re in a hiking cycle. Although it might not happen quickly, it’s going to happen gradually so there’s no real incentive to be on the very short end of the curve – not the 1/2/3/4/5-year maturity bonds. Where it does get interesting is if you move further out on the coast – so the longer maturity stuff, but the risk there is obviously if there’s a downgrade, that’s where we’ll get hit or hurt the most. It’s a matter of matching up that theme on the risk of fiscal slippage and downgrade, with what looks like attractive pricing on the very long end of the curve.
ALEC HOGG: If you look at the equity market, there are many who are worried about valuations on that side; perhaps looking to switch money into the fixed interest end, but as you say, it’s not that easy either.
ZAIN WILSON: Yes, a year ago, we had the opposite story. We had a lot of investors worried about the bond market and wanting to switch from bonds to equities, so it’s really a function of what’s happening globally with a lot of liquidity and Central Banks keeping rates very low that asset prices, over time, have become quite inflated. It’s quite difficult for investors to find value.
ALEC HOGG: Indeed, it is. If you were recommending to your mother and she had unit trusts/equity unit trusts/fixed interest unit trusts, how should she be allocating her R1c000 per month between the two?
ZAIN WILSON: To the man on the street, I would say the most important thing for you to do is make sure you actually save and contribute to a fund consistently. You don’t want to be thinking too much about making asset allocation decisions because you tend to over-trade and you’ll lose out on fees. Keep your 60/40 split because in the long term, the main driver of your investment returns will be your savings and minimising costs.
ALEC HOGG: So don’t try to beat the experts. Just keep putting it away every month.
ZAIN WILSON: Yes.
ALEC HOGG: Zain Wilson is Fund Strategist and Fixed Interest Analyst at Futuregrowth and this undictated podcast was brought to you by Futuregrowth Asset Management.
