I have in front of me a media report that deals with the forecasts of 30 economists who participated in an annual forecasting ‘competition’ on the various economic variables for South Africa for the year ahead. Forget for a moment the absurdity of even having such a competition, but rather look at the forecasts themselves.
The competition ended January 2018, not so long ago.
Consensus forecast for growth this year was 2%.
The consensus forecast for the rand/dollar exchange rate average for the year was R12.55 and the rand/euro average R14.73. And so on.
All the forecasts have been hopelessly over-optimistic thus far.
Around about the same time, Goldman Sachs and its MD Colin Coleman, who is regularly seen at ANC charity events, was tipping SA to be this banking behemoth’s “emerging market winner of the year”, forecasting growth at 2.5% for the year. This forecast received widespread coverage and, if I am not mistaken, was the lead story on the business pages of the Sunday Times.
Even allowing for bankers, asset managers, and economists to be wholly engulfed by ‘Ramaphoria’, which was peaking at the time, their forecasts were blatantly over-optimistic, to such an extent that one has to question whether these economists are more interested in remaining within the ‘consensus’ parameters than actually speaking their minds.
Fast forward to August and the consensus on GDP growth from the 30 wise men and women has been adjusted marginally downward to 1.6% and a rand exchange of R13.05 to the USD. Heck, there was even one economist still forecasting an average rate of R11.95 to the USD at the end of August.
Less than a month later, on September 4, comes the news that the economy is in a ‘technical’ recession, whatever that might mean. The rand has blown out to R15.50 against the USD and almost R18 to the euro. The Purchasing Managers’ Index (compiled by the Bureau for Economic Research and sponsored by Absa) has plunged from 51 to 43. At the same time, the JSE remains the weakest major stock market for the year, continuing this trend for over five years now.
I could find no local economic forecast warning of a further decline in the economy in the second quarter. If there was, it was very well hidden. I did find one foreign bank sounding the warning though: global banking group HSBC. At the beginning of August, it warned that it was expecting the SA economy to decline into a recession, measured by two consecutive quarters of negative growth. I could find no report about this on any local media site.
It’s not technical, it’s very real
Even president Cyril Ramaphosa got into this horribly disingenuous act of calling the recession ‘technical’. It shows a lack of sympathy for the 37% unemployed and the millions of other South Africans battling to make ends meet.
There is nothing technical about this recession and it is nothing but an abused euphemism used by our embedded media to conceal how bad things really are, making them equally complicit in this national collusion to appease our political masters, who are to blame for this unfolding disaster.
Manufacturing is in the doldrums, the construction sector has been decimated and in August our bond market recorded the highest ever outflows, an amount of $2.5 billion.
How is it possible, I ask myself, that not one of this group of 30 even remotely pencilled in a recession or the possibility of the rand succumbing to the emerging market meltdown that was already in full swing. This has been discussed endlessly on global websites such as the WSJ, The Economist, Bloomberg or even Marketwatch. Imagine asking your bank economist for a view on the rand in order to place a large export order or whether you should bring in a large amount of money into the country? The losses must be big.
The tragedy of it all is that business people, ordinary savers and investors place a lot of credence on these forecasts. I am often asked to comment on the forecasts from one of these economists, most times when it differs from my own. People buy currency, homes, make investments and even go into business on the strength of these forecasts, which, over a long period of time, have been over-optimistic and quite frankly wrong.
The same goes for the annual forecasts by National Treasury and government officials about the country’s expected growth rates. I have in the past written about the creeping tendency to make optimistically-sounding forecasts at budget time – which are lapped up by an unquestioning popular media but then have to be adjusted downward when the realities of our economic trajectory set in. This fact has already been admitted by Treasury, barely five months into the fiscal year.
When I tried to warn about the financial tsunami heading our way in several articles in 2016 and early 2017, I was shut down by some of our esteemed economists who called me “cynical and ill-informed”. One particular economist predicted a growth rate of 4% for 2017 and no further downgrades!
Even colleagues in the media had a go at me, with one Sunday columnist, about a year ago, urging his readers to remain invested in the JSE and to disregard my advice to move some money offshore. He used the Afrikaans word “twak” and we all know what that rhymes with.
Today, a year later, the JSE is up 5% for the year compared to the S&P 500, which is up 40%. In US dollar terms the JSE is down 24%.
SA now weakest in the OECD universe
Take a look at the following chart compiled by Dwaine van Vuuren, technical analyst from Sharenet, showing the SA economy now to be the worst major economy in the world. I am quite sure that this knowledge has been doing the rounds in the various economic departments at Treasury and in banks and assurance companies, but it took an independent analyst to have the guts to do the work and publish it for all to see.
We have a long history where our big companies and government are in some sort of unholy alliance, especially the banks and large insurance companies.
Banks want to sell you mortgage finance and car loans. Insurers want you to remain invested or invest even more. Economists from these two industries are particularly guilty of painting the future while wearing rose-tinted glasses.
Step out of line with a forecast that does not suit the company/government narrative and you get slapped down or fired. Think Andrew Canter from Futuregrowth who had parent company Old Mutual jump on his neck when he dared criticise the inner workings of state-owned enterprises.
Chris Hart was fired by Standard Bank for a fairly innocuous tweet that did not suit the bank’s political masters.
At least Mike Brown, CEO of Nedbank, had the courage to warn in parliament last week that, if handled badly, expropriation without compensation (EWC) could lead to a banking crisis. Savers and investors need to take note and consider their risk to local banks. The most astounding admission made in parliament is that even if a property owner loses their property to EWC, the bond repayments still remain their responsibility.
So, dear reader, whenever I read and listen to some kind of economic forecast, I first ask who the forecaster works for. In many cases, the answers tell me what I am about to hear or read before the actual event. The few brave economists whose views are more pessimistic simply don’t get media exposure or, rather, they prefer not to get involved in the social media condemnation that invariably follows.
It is now six months since I started what I lovingly call my Ferrari portfolio. This is the Ferrari I was fortunate to have won in a lucky draw competition two years ago at Val de Vie in the Western Cape. I sold the Ferrari for a net price of R2 500 000 and created a proxy portfolio worth R250 000, one-tenth of the amount I received. The objective was to see what would do better: a portfolio or the Ferrari?
This amount was invested at full fees (plus advice fees) on the Investec platform on March 8. I originally started with a spread of developed and developing market funds, but when I noticed the building storm in emerging markets mid-March I moved my funds into the Sygnia 4th Industrial Revolution fund.
I am convinced that the underlying thinking of this fund – artificial intelligence, robotics, internet-technology – is an essential component for most SA investors on the basis that we simply don’t have any local companies that offer the growth potential of these sectors.
Several years ago Stanlib had a technology fund called the Stanlib Technology Fund, but it was discontinued some three years ago on the basis that there was no demand for it. Pity, as technology has been the best-performing sector in the world over the past eight years. Even allowing for a slow start, the Ferrari portfolio was up 26.8% on Friday last week. Not bad, and possibly leaving the real Ferrari behind.
That said, it doesn’t smell and sound the same as the real thing …
* Magnus Heystek is investment strategist at Brenthurst Wealth. He can be reached at email@example.com for ideas and suggestions.