Global economic recovery gaining momentum‚ but slowly
Global economic recovery is gaining further momentum‚ but is still relatively slow compared to the past‚ says chief economist at Old Mutual Investment Group Rian le Roux.
By Maarten Mittner
The global economic recovery is gaining further momentum‚ but is still relatively slow compared to the past‚ chief economist at the Old Mutual Investment Group (Omigsa) Rian le Roux said on Wednesday.
"We are starting to see signs of recovery generated by policy stimulus‚ despite headwinds and risks‚" Le Roux said.
He said the global financial crisis has been contained‚ with financial and macro-economic conditions looking far more stable.
Economic recovery in the US remains subdued with housing already slowing in reaction to mortgage rate rises after the Fed’s initial tapering announcement in May. It pushed the 10-year Treasury yield up to 3.1% as prices fell‚ but it has since recovered to 2.5%‚ although still higher than the 1.6% yield in May.
"As US growth is bound to be slower than the Fed expects‚ it is likely the Fed will not reduce QE until March next year‚" Le Roux said.
With the Fed expected to start unwinding its quantitative easing (QE) programme from March next year‚ the transition could result in global growth accelerating over the next two years‚ but it will still be lower than the strong growth experienced between 2003 and 2007.
Le Roux said higher inflation in global economies was not a real risk as the money creation had not found its way into the credit system.
The effect on SA as an emerging market will remain positive until the first quarter of next year as the strong QE liquidity flows could still see money invested in emerging markets. However‚ the SA economy remains vulnerable as the twin deficit of 6.5% on the current account and 4.2% on the budget are among the highest in the world.
Le Roux said the main threat to global growth could come from China‚ where overall credit was increasing at a rate of 20%. Growth had also slowed to just above 7% from above 10% three years ago. "Credit needs to be managed down which is a difficult transition to effect."
SA faces considerable challenges as the growth and inflation outlook has deteriorated while structural problems are increasingly being exposed. "The Reserve Bank faces a difficult situation‚" he said.
Although local share markets are on a high evaluation compared to the past‚ the JSE all share index could still go higher as central banks keep liquidity high. "They would rather err on the side of easing‚" said Omigsa equities strategist Graham Bell.
Bell said SA shares appeared overvalued compared to other emerging markets. Many industrials look expensive based on earnings relative to long-term trends‚ while on the other hand resources actually look cheap. However‚ SA equities will continue to be supported by the reality that neither bonds nor cash offer attractive returns. "The US market does not look particularly expensive and is an important driver of our market."
SA retail stocks had pulled back from historic highs‚ but were by no means cheap‚ while the banking sector was looking fair value currently‚ Bell said.
According to Old Mutual equities head Peter Linley‚ Naspers remained a firm favourite in the equity fund portfolio. He said Old Mutual became firm buyers when the share price was trading around R300‚ and it is now approaching R1‚000. "Clearly the upside for Naspers is now less than in the past as the share has had a strong run."
But counting in Naspers’ favour is its 34% interest in the Chinese internet company Tencent‚ with investors underestimating the potential size of Tencent’s WeChat rollout‚ as well as the monetisation of its user base.
"WeChat has grown from 250-million users to 600-million in the last 10 months‚ faster than any other social media player‚" Linley said.