With the US and China agreeing not to escalate the trade war, and even possibly to roll back some of the past tariff increases, a big downside threat to the global economy receded. As it stands, the latest data available shows that, while global growth has slowed considerably, fears of a global recession were overblown.<\/p>\n
Old Mutual Wealth noted that overall household income growth in the US is slightly more than 4%. With inflation below 2%, this implies decent real income growth that supports household spending, the largest driver of economic growth by far in the world\u2019s largest economy. Therefore, the US economy is growing at a 2% annual pace in real terms (after inflation).<\/p>\n
The Eurozone is growing at 1%, and China at 6%. These growth rates are all lower, but remain positive, it said.<\/p>\n
“With downside risks having diminished, more investors can reach for upside in growth and high yielding assets. Global equity returns for 2019 to date are north of 20%. The panicky lurch lower in developed market bond yields, pushing many into negative territory, has also eased, though it is still very much a low global interest rate environment.<\/p>\n
“This is a much safer global backdrop for South Africa, irrespective of progress or lack thereof on domestic challenges,” Mohr said.<\/p>\n
Already junked<\/strong><\/p>\n So what would a Moody\u2019s downgrade mean?<\/p>\n “Firstly, South African government bonds are already rated sub-investment grade (junk) by S&P Global and Fitch. The sky did not fall on anyone\u2019s head when these downgrades happened, despite much wailing and gnashing of teeth,” Mohr said.<\/p>\n “The simple reason is that markets react in real time to the information ratings agencies incorporate in their models.<\/p>\n “Ratings agencies make periodic announcements, but markets price the most likely future scenario in immediately. Moody\u2019s is the last major ratings agency to maintain South Africa\u2019s investment grade rating. This is not because it is more generous or patient than the other agencies, but reflects the fact that each agency has its own methodology.”<\/p>\n Old Mutual Wealth pointed out that Moody\u2019s methodology places a large weight on institutional strength, and it is hard to argue that this has not improved over the past two years, even if the fiscal situation has deteriorated.<\/p>\n “The reason so many analysts worry about a Moody\u2019s rating specifically is that a downgrade by Moody\u2019s would lead to South African bonds being excluded from the FTSE World Government Bond Index. Funds that passively track this index would have to sell out,” said Mohr.<\/p>\n “Active funds that use it as a benchmark would have likely sold out long ago. No one has a firm grip on the extent of potential passive outflows, but it\u2019s estimated to be between R20 billion and R200 billion.”<\/p>\n However, most foreign investors are here for the yield, not the quality of the rating, he said.<\/p>\n “In any event, while a downgrade announcement can cause volatility, it is unlikely to fundamentally change borrowing costs or the level of the exchange rate. South Africa has already seen cumulative net outflows of R125 billion over the past two years, according to JSE data. Despite this, long bond yields are essentially flat over this period.”<\/p>\n These yields remain high and have detached from other emerging markets, even ones with higher debt levels, who have seen much lower yields. “Ultimately, it depends on global risk appetite,” said Mohr.<\/p>\n Bonds rallied and foreign purchases surged in 2016 in the aftermath of \u2018Nenegate\u2019 and ratings downgrades for the simple reason that international investors switched large-scale into emerging markets. South Africa benefited despite deteriorating fundamentals, the financial services firm said.<\/p>\n Chart: 10-year local currency bond yields<\/strong><\/p>\n Source: Refinitiv Datastream<\/em><\/p>\n Old Mutual Wealth said that while there are many things to worry about in South Africa, Moody\u2019s should not be top of the list.<\/p>\n “While some have argued that the threat of a downgrade is good for spurring the government into action, it could equally be considered a deterrent to investment as some businesses and individuals sit on the side-lines until they know the outcome. And unfortunately, this has dragged out for many years now,” said Mohr.<\/p>\n Not all businesses are sitting on their hands. A reported total of R363 billion in business investments was announced at President Ramaphosa\u2019s second investment conference. This represents a healthy increase over the amount pledged last year, but clearly those investments have not contributed much to economic growth, which remains anaemic overall (and was possibly negative in the third quarter).<\/p>\n These investments are implemented over a number of years, so the actual amount being spent this year and next will not move the needle much. Total private fixed investment spending was R873 billion in 2017 and 1.5% higher in 2018 at R886 billion.<\/p>\n Even in a tough economic climate, companies spend more than R800 billion on machinery, vehicles, buildings, software and the other necessities of running a business, Old Mutual Wealth said. When businesses get excited about the future, they will spend a lot more. Business investment peaked at 15% of GDP in the tail-end of the pre-2008 boom.<\/p>\n Today the number is much lower at 13.5%. However, it must be said that this is well above the average of the 1980s and 1990s, Mohr stated.<\/p>\n![\"\"](\"https:\/\/businesstech.co.za\/news\/wp-content\/uploads\/2019\/11\/OldMutual1.png\")
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