South Africa may be suffering currently, but glimmers of hope are starting to emerge that undermine the more negative perceptions plaguing the local economy.
This is according to Johann Els, senior economist for Old Mutual Investment Group, explaining in the company’s quarterly investment briefing that, while local growth is struggling under the burden of issues, such as electricity shortages, commodities under pressure and a weak rand, positive signs, such as an improving trade deficit and inflation figures, could be slightly buoying the economic outlook.
With consumers still absorbing the sting of the recently increased interest rate, the SA economy is looking shaky in a low growth bind and the rand at risk from US interest rate hikes. Els says that indicators of real economic activity have remained soft, with credit demand, especially from households, very slow, car sales falling further and the Reserve Bank’s leading indicator index weakening.
“This all points to little chance of any acceleration in economic growth anytime soon and the Reserve Bank now forecasts 2,1% GDP growth for 2015, down from its forecast of 2,5% made in December 2014.”
However, Els points out that it doesn’t all appear to be doom and gloom, with a second consecutive trade surplus recorded in June, thanks largely to recovering gold and platinum exports and falling oil imports.
“The improvement over the past few months is indeed comforting. We estimate that this could mean a narrowing in the current account deficit to about 3,5% of GDP in the second quarter, down from 4,8% in the first quarter and 5,5% in 2014.”
In addition, a declining oil price, coming closer to previous lows, means that we are likely to see further petrol price cuts. Els highlighted that, while consumer spending may not be at ideal levels, consumers are under less pressure than in previous cycles, with slightly increasing disposable income growth and inflation surprising on the downside in June.
“If you look at inflation plus prime rate and the forecast, we are seeing a far flatter profile compared to the previous cycle where there was a significant spike in both inflation and interest rates,” says Els. “Therefore, this year might not be as dire as many assume, in fact it might even be better than last year.”
Looking further afield, Els says that global market sentiment is being dominated by the imminent first hike in US interest rates since the financial crisis, as well as the economic slowdown in China. “The combination of these two forces is putting downward pressure on commodity prices and emerging market currencies, causing more difficult conditions for many developing countries.”
Els talks about a “Global Goldilocks” scenario and pointed out that global growth recovery is still slow and inflation remains low.
“While US rate hikes are likely to start soon, it will be a slow, but measured, cycle. Still, as the Fed marches closer to the beginning of the hiking cycle, markets remain unnerved by the potential ramifications of rising US rates, especially given the vulnerabilities and weak growth elsewhere in the world.”
Old Mutual Investment Group’s director of strategic projects, Craig Chambers, sees the emergence of the agricultural sector as a viable asset class amidst the low interest rate environment we’ve been seeing globally recently.
“South African farmland has yielded 22,1% over 15 years (to end December 2013) compared to the FTSE/JSE Index of 18,25 over the same period. It has also yielded consistently higher return than international equity (MSCI World), local bond (ALBI BEASSA) and local real estate (IPD) indices over the medium- to long-term,” he explains.
When it comes to the rest of Africa, Chambers points out that over 60% of the world’s arable land is situated on the continent, which makes for a very compelling African agricultural investment case.
According to Chambers, this context presents a significant investment opportunity for institutional investors looking for a good capital preservation tool in Africa that is also a reliable inflation hedge and has low to negative correlations with traditional asset classes.
“Agriculture is also a vital economic driver given a number of socio-economic factors, including population growth, poverty and unemployment,” says Chambers. “These factors present acute challenges and make unlocking our agricultural potential not just an attractive option but a necessity. The United Nations Conference on Trade and Development (UNCTAD) has estimated agriculture’s annual investment gap for the 2015-2030 period at $260-billion in the developing world.”
However, still the most urgent rationale for agricultural investment remains food security. Chambers says that a 70% total increase in agriculture production is needed to feed the more than 9-billion people expected worldwide in 2050 – of which 25% will be in Africa.
“An important point to note is that Africa presently spends in excess of $25-billion annually on food imports,” he says. “Retailers and traders are increasingly looking to secure their supply lines and the balance of power is moving upstream to the supplier of food, i.e. the farmer. Therefore, food independence for Africa can be supported by local institutional investment.
“Due to the availability of low-valued, premium farmland and agribusinesses on the continent, as well as the shortage of locally available capital and skills for agricultural development, agriculture is a particularly viable opportunity for investors seeking capital stability and higher risk-adjusted returns.”