Financial markets delivered a much improved verdict on the prospects for the global economy last week, while key economic research noted a fundamental shift in investor attitudes towards emerging markets.
In the United States, improved sentiment was reflected by a stronger dollar. On the JSE Securities Exchange in South Africa, the FTSE/JSE Africa all share index shot above the 9 000 level on Wednesday for the first time since the beginning of the year, as foreigners piled into local resources shares on the back of a slightly weaker rand.
This followed hard on the heels of the latest fund manager survey results of Merrill Lynch (ML), the world’s leading equity and economics research firm, revealing that investors see emerging market “corporates” as having as favourable a profits outlook as the US, but on far more attractive valuations.
No surprise, then, that global emerging market equities are most preferred by ML’s panel on a 12-month view, followed by Japan.
“The rally in the dollar since June has been poorly received, with almost half our panel now taking the view that the greenback is overvalued. In contrast, the euro and the yen are regarded as more fairly valued, while emerging-market currencies are seen as offering the best value,” the research note said.
Interestingly, it also noted a new trend in the view on gold, with more fund managers taking the view that the metal was undervalued.
ML’s local fund manager survey, also released on Wednesday, showed that fund managers have lowered the extent by which they expect the rand to depreciate. Over the next year the rand was forecast to firm to R7,96 to the dollar, from R8,28 a dollar in July.
Local fund managers were also strong equity bulls — over the near-term, almost two-thirds of managers want to buy equities, first at the expense of cash and then bonds.
Over a 12-month period, the favourite sectors were identified as general retailers, banks and telecommunication, while steel and gold were disliked.
Chris Hart, senior economist at Absa, South Africa’s biggest bank by lending, noted that emerging markets were leading the global economy recovery, with all emerging market regions enjoying growth levels above the global average.
Hart added that South African investment returns across the range of asset classes had continued to outperform global investment returns over a three-year period.
This was particularly the case with the bond market. Hart said the sustained investment support of bonds was due to a highly favourable inflation and interest rate outlook.
Hart said the irony of rising bond yields in developed markets was that this could stall any embryonic economic recovery, as rising bond yields implied rising corporate financing costs and rising mortgage rates in countries such as the US.
“Although economic growth was above expectation in the US, this was largely due to increased defence spending. Consumers and corporates already hold record levels of debt, and any rise in the cost of debt could have negative consequences for consumer demand,” he added.
The South African fund manager survey showed that only 36% of managers expected a firmer local economy — a slight improvement on April’s 25%, but in stark contrast with a whopping 71% who expected the global economy to be stronger over the next year.
Nearly two-thirds of local fund managers took the view that monetary policy was still far too tight. Most expected the Reserve Bank’s repurchase rate to fall to 9,92% in 12 months’ time.
The Reserve Bank’s monetary policy committee met on Wednesday and Thursday.
The US Federal Reserve’s federal open market committee decided earlier this week to keep its target for the federal funds rate — a key short-term interest rate — at a 45-year low of 1%, hinting that it might stay there for some time.
FNB chief economist Dr Cees Bruggemans said he expected local interest rates to ease steadily by 3% through the rest of the year.
There were a number of factors arguing for a steady decline in interest rates, Bruggemans said.
Among these were the fact that inflation was falling sharply following the very strong recovery of the rand and an impressive decline in food prices. The price of maize, for example, has halved in the past year.
This led, along with the recent correction of Statistics South Africa figures, to a dramatic fall in CPIX (consumer inflation less mortgages).
Gerald Cohen, Merrill Lynch senior economist in New York, noted that the recent sharp rise in bond yields had prompted fund managers around the world to reassess their interest-rate outlook.
“More managers now expect the next move in fed funds to be up than expect it to be down. Such a deterioration in interest-rate expectations would normally be triggered by expectations of stronger global economic growth and the return of pricing power.”