South Africa is enjoying a high-growth and low-inflation economic environment last seen in the 1960s, but this is not reflected in investors’ portfolios, Alwyn van der Merwe, senior portfolio manager at Old Mutual Asset Managers, said on Tuesday.
Van der Merwe told a media briefing in Johannesburg that the factors feeding the boom-bust scenario that characterised the past 35 years have been worked out and the foundation for a more stable economic environment has been laid.
“We expect South Africa to experience more muted cyclical swings in growth, inflation and interest rates, very much the scenario of the 1960s.”
He said that last year’s rate cuts have seen demand blossoming but the current account has not become a serious problem, the currency has not collapsed and inflation has not become a problem.
But Van der Merwe asserted that this new scenario is not yet priced into the market. If it were, one would find that portfolios have low cash balances because cash does not perform well in low-rates environments.
The property market would boom, benefiting from low inflation and better growth, and while bonds would perform better than cash, their heyday is over.
However, looking at unit trust holdings, only 20% of investors’ portfolios is invested in equities while more than 50% is in fixed-interest investments.
According to Van der Merwe, the two main emotions that drive investor behaviour are fear and greed — and fear appears to be dominating the mindset of investors. He said that from a dividend yield perspective, the market is at its cheapest level in decades with the exception of 1998.
“If you believe the story, that growth will be stronger than most people expect, then dividend growth will also be high,” he said.
However, the market is not pricing in a structural shift and tends to look cheap. Van der Merwe cautioned, however, that the strong rand could hurt some sectors.
When it comes to interest rates, Van der Merwe said that there could possibly be a 50 basis-point rate hike towards the end of the year, but this could be “a good news” rate hike — with demand strong, the hike would be a warning shot from South African Reserve Bank Governor Tito Mboweni not to overspend, but it could be the only hike in this rate cycle.
If the sustained high-growth, low-inflation scenario plays out, rates could remain flat in 2005. — I-Net Bridge