Are we in an economic recession?
Yes, as per the technical economic term, due to two consecutive quarter declines in GDP of -2.6% and -0.7% (annualised) in 1Q 2018 and 2Q 2018 respectively. However, when comparing like-on-like quarters, 1Q 2018 on 1Q 2017 and 2Q 2018 on 2Q 2017, GDP grew 0.8% and 0.4% respectively. This is a more appropriate measure as it compares “apples with apples” taking seasonality into account.
In analysing the technical recession, the 0.7% decline of 2Q on 1Q was largely due to a 30% decline in the agriculture sector, exacerbated by the drought in the Western Cape. This massive decline in agricultural output led to the surprising lower than expected 2Q GDP numbers.
Irrespective of which definition you use – technical or otherwise – the economy is under pressure. This is not new news and the weakness has been reflected in financial markets for some time.
Why did the Rand collapse?
Over the last month, the Rand/Dollar depreciated 17% from 13.2 to 15.4. This was mainly due to global market effects as there was a massive exodus from emerging markets, sparked by the Turkey and Argentina financial crises. The Rand is the most liquid (highly traded) emerging market currency, resulting in large emerging market shifts being easily effected through the Rand.
Although the recent weak economic data and continued questions over Land Reform is hurting our global reputation, this was by no means the major reasoning for the Rand’s sharp decline. Other emerging markets are in far worse political and economic situations, such as Turkey, Argentina, Brazil and Russia.
Unfortunately, from a currency standpoint, we are lumped together, but these bouts of risk aversion tend not to last very long. The fundamental fair value of the Rand/Dollar is around 12 based on purchasing power parity. Although it is unlikely that the Rand will strengthen to this level before the election next year, due to the unsavoury electioneering noise, we should see the Rand’s recent declines retract as a semblance of rationality returns.
Isn’t the Global economy doing well?
It is, particularly in the US and to a lesser extent Europe. SA usually follows the global cycle, but not this time. Our major commodities, gold, platinum and iron ore have been under pressure. Our manufacturing is not that integrated into global supply networks, tourism has suffered from visa restrictions and the Cape water shortage, plus we’ve been part of emerging market outflows.
How should we respond to the Recession and what about my investments?
The “technical recession” has likely passed and these effects are already mostly priced into your investments. Common sense should be applied to household finances and knee-jerk reactions should not be made to investment portfolios. An investment strategy should only change when personal circumstances change and not in response to market movements.
It is important to note that the JSE only partially reflects the local economy, due to its dominance by global companies, such as Naspers, BHP Billiton, Richemont and BAT. Currently, global markets tend to drive the JSE more and not the local economy and politics.
Balanced (multi-asset) funds have up to 30% invested directly offshore, which do better when the Rand weakens. The fixed-interest (bonds) portion also often benefits in weak economic times as interest rates decline, thus boosting asset prices.
