In a previous Moneyweb column I wrote about the unfortunate career demise of a former ‘Big Four’ bank chief economist, considered to be too critical of government’s economic policies.
After several warnings to ‘tone it down’ and be more ‘even-handed’, he was eventually asked to leave, essentially ending his career as an economist in South Africa.
Subsequently, during a round of golf, he admitted that his views, which had carried considerable weight at the time, caused a flurry of phone calls between Luthuli House and the top floor of the bank. No doubt, reference was made during those phone calls of the big business being done between the bank and the government on many levels. It was a no brainer: he had to go to protect these business connections and keep the politicians happy.
Ever since, I’ve been very suspicious of the function of economists and the sanitised messages they send out on behalf of their pay-masters, whether it be a bank, assurance or asset management company.
By and large most of their research reports and press conferences tend to be thinly disguised marketing opportunities for their companies, rather than real economic forecasts.
It may surprise readers that there is no formal economist profession, like that of accountants, doctors or lawyers. Heck, even I could call myself an economist and I will have broken no law.
Yet ‘economists’ play a very central and important role in our media and public discourse.
They are quoted almost daily, commenting on anything from the petrol or oil price to economic variables … as if they were clairvoyants.
There are very few local economists prepared to stick out their necks on matters economic. There are a few exceptions, such as Dawie Roodt, Mike Schüssler and George Glynos, but the rest seem to find safety in consensus. I cannot imagine the chief economist of a large SA asset manager, for instance, advising clients to sell their SA assets to move money offshore, even via an asset swap within the same company; or a large mortgage provider’s property economist warning about the ‘economic quicksand’ of the local property market. Such a move would be career limiting.
Yet it is on these and similar economic and financial market forecasts and pronouncements that major investment decisions are based.
Forecasts fall flat
Considering the tumultuous time we’re having in the markets, globally and regionally, I looked at some of the consensus forecasts of the 33 economists who partook in this year’s Economist of the Year competition, as recently as March 2015. The annual economic forecasting competition is organised by the Bureau for Economic Research (BER) at Stellenbosch University with a large media company.
Our current economic canvass is filled with bad and more bad news. The rand is flirting with 14.00 to the US dollar, the commodity cycle is deteriorating on news of imploding growth in China, and our tax revenues are way behind schedule. Business and confidence indices are at 15- and 12-year lows respectively and a global downgrade of our global debt is on the cards.
Compare this with two rather optimistic overall forecasts made by the economist group in March: 2015’s growth rate would be over 2%, while the consensus for the rand was at R11.80 against the USD. Imagine being an exporter/importer and relying on this forecast to hedge forward your currency exposure? It would have been a very costly mistake to say the least.
And it’s not a case of being wise after the event. For most of 2014 and 2015 many global forecasters and commentators, including myself, have warned about SA being part of the initial Fragile Five (now the Fragile Three), with Brazil and Turkey.
Morgan Stanley coined the term ‘Fragile Five’ in a September 2013 research document for the Brazilian real, Indonesian rupiah, the rand, Indian rupee and Turkish Lira – calling them: “troubled emerging market currencies under the most pressure against the US dollar.
“High inflation, weakening growth, large external deficits and in some cases exposure to the China slowdown and high dependence on fixed income flows leave these currencies vulnerable,” it stated.
Two years later, the report is eerily prescient – all the mentioned currencies have suffered considerable declines against the US dollar. In the rand’s case the decline was from R10.30 to this week’s rate of R13.90 to the USD – a 35% decline.
Amongst our crop of economic forecasters and investment strategists – who mostly missed this spectacular meltdown – there’s now the dangerous prevailing argument about ‘mean reversion’ and ‘what goes up will come down’, with a leading economic writer commenting recently that the ‘rand always recovers, doesn’t it?’
Morgan Stanley for one would not agree. Anyone who does could well find themselves on the wrong side of the rand/USD trade.
In a report published last month, Morgan Stanley revisited its Fragile Five scenario and added another five countries to the list, mostly at risk from further meltdowns in their currencies, including: Thailand, Singapore, Taiwan, South Korea, Chile, Colombia and Russia.
The common denominators are a linkage to the commodity cycle and China being their top export destination.
Consensus gets it wrong, again
As recently as the end of July, local economists’ consensus forecast for the rand was 12.43 to the USD and 13.25 against the euro by 2015’s fourth quarter. Unless there’s a dramatic turnaround in the rand’s fortunes, this forecast will be out by about 20%.
On expected economic growth, the consensus is 1.9% for 2015 and a very optimistic 2.4% for 2016. Again, this seems out of touch with economic reality and already FNB (not part of the group) has downgraded growth for 2016 to 1.5% – much in line with Moody’s and other global forecasters.
In a comprehensive investment report, dated August 19, 2015, Bank Credit Analysts (BCA), is even more direct and dramatic in its warning of a coming currency bloodbath for emerging market countries. “Economic and financial pain will instigate major political risk over the next 12-18 months. Investors will have no warning when and how these risks are articulated, but they will almost certainly weigh on the markets given the ongoing structural breakdown in financial assets.”
In short, says the BCA, be long US dollar assets and short EM assets, of which SA is one.
It’s long been my view that our local economists operate a sort of economic forecasting cartel. I most certainly have not been using them for my investment decisions and I would advise you, dear reader, to always ask why is x saying what and who do they work for? Therein will lie your answer.
For what it’s worth, here are my forecasts:
- The China slowdown has just begun. Avoid commodities, emerging markets and even SA assets, especially bonds and commodity funds. Cash returns of 5 to 8% suddenly look very attractive.
- Rand weakness has a long way to go, especially if one compares our productivity and declining levels of foreign investment. We are a capital-hungry country but our government is hell-bent on alienating our largest foreign investors: Germany, Britain, Netherlands and France. These countries have in recent weeks loudly and publicly berated government’s tinkering with the Bilateral Investment Treaties we have with them. Government seems oblivious to these warnings.
- As the economy slumps and starts shrinking (recession) government will find reasons to interfere even more, crowding out the private sector.
- Government needs to make structural changes (education, labour, regulations etc) to the economy, as the BCA implores. Instead, it will choose the economically popular route to appease the left-wing opposition.
- The Springboks will win the Rugby World Cup. Ok, I’m only joking; I was just checking if you read to the end.
*Magnus Heystek is the investment strategist at Brenthurst Wealth. He can be reached at firstname.lastname@example.org for article ideas and suggestions.