What the world needs now is not another love song, but more consumption by Asia. That is one of many lessons one gleans from listening to Professor Brian Kantor, head of investment strategy at Investec Securities, whose lecture sounds like the musings of a maverick and a maestro rolled into one.
This week, Kantor gave a talk to the Johannesburg chapter of the University of Cape Town Graduate School of Business alumni. He also lectures at the school. Kantor told his audience that the South African economy has not only been a surprising success story, but will continue to surprise in the foreseeable future
His view of the world economy today, shared by incoming Federal Reserve chairperson Ben Bernanke, is that it is underpinned by “a glut of savings”, which should ensure that, whatever happens in the short term, long-term interest rates remain low.
The savings are largely driven by oil-exporting countries and Asia, most notably by China. High oil prices, for instance, have brought in an extra $1 200billion for oil exporters, helping countries such as Saudi Arabia turn a current-account deficit into a surplus in a short space of time.
But the big saver is China, currently running at the frequently suggested level of 25% of gross domestic product, with reserves fast approaching $1trillion. A lot of these world savings have found their way to the United States, where they help finance a $2billion-a-day deficit. Kantor says this has helped stave off a recession over the past few years.
Now what needs to happen is for the Asian Tigers to curb their enthusiasm to save and spend some money. An interesting feature of Chinese savings is that the share of household savings is falling. Savings are boosted by an increasing share of corporate savings. Kantor suggests that if the South African government wants to step up savings, one way could be to cut corporate taxes, a view that is not entirely shared by Minister of Finance Trevor Manuel.
Kantor believes the latest drivers of world growth are emerging-market economies, which, as a collective, are growing faster than the world average as they “catch up” to the developed world. The growth in emerging markets will attract portfolio “in search of yield” and better returns, and South Africa has captured 10% of flows to emerging markets. Kantor also believes that “the inflation threat [from oil prices] should be ignored”.
This is because high oil prices creep into consumption spending, acting as tax and reining in consumption, which, in turn, slows down inflation. The only time to worry is if oil prices stay high for a prolonged period. That is certainly not the case now. Oil prices have been below $60 a barrel for a while and the petrol price is set to go down next month.
Kantor also has good news about the apparent decrease in retail spending. Calling himself an “old-fashioned monetarist”, he uses growth in money supply as a lead indicator to predict retail spending patterns. According to Kantor, money supply growth remains robust and should be followed by an uptick in retail sales. The only times the method let him down were in 1994 and 2000, when the first democratic election and Y2K threat saw people hoarding their funds.
His advice to the Reserve Bank is to “keep rates stable” — in order to allow households to keep the economy going — and allow the exchange rate to act as a shock absorber for a turn in the commodity cycle or any other shocks. He reiterates the investment advice he has given over the past two years: invest in companies that benefit from the local economy and “dump dual-listed stocks”.
Kantor notes that we will see less and less of the “misguided ventures into foreign countries” and companies will invest locally. One wonders if that includes his own company, Investec, which recently aborted its bid to enter the US.