2013-12-19Staff Report 2 By Johannes !Gawaxab Managing Director of Old Mutual Africa OperationsGlobal Economic Outlook In 2014, global growth will probably be around 4 percent. The key issues facing the global economy in 2014 will be all about growth and policy. We do expect a stronger, more synchronised growth in the developed world initially which will be led by the manufacturing sector. The United States (US) is expected to lead this recovery. There are no inflation concerns in the global economy as yet, commodity prices are not set for significant strength and policy is expected to remain growth supportive. Advanced economies are expected to play their part and emerging markets need come to the party. On the policy front, the US tapering is expected to start slowly on the back of an improving economy. US interest rate increases are still a long way off. The lag between nominal Gross Domestic Product (GDP) acceleration and rate increases is long and the first increase in rates in the US is forecast in 2015. The US tapering will however boost American interest rates and the dollar, attracting capital back to American shores. It is expected that money will fly out of emerging market assets back to where sufficient growth and yield can be found. This creates a vicious circle of weakening emerging market currencies, which in turn, creates growth challenges for economies that have become dependent on capital flows financing current account deficits. The GDP in the Eurozone is expected to pick up in 2014 and policy will be expansionary for the foreseeable future. In Europe the overall picture looks more positive with government deficits reducing significantly, productivity improving, unit labour costs falling and current account deficits becoming more manageable. Japan will also continue with its policy of accommodation. Japan is expected to raise its consumption tax, their VAT equivalent, which at 5 percent is the lowest in the rich world. In China reforms aimed at shifting from an investment-led to a consumption-led growth are being introduced. The country is expected to implement the Third Plenum reform agenda which will benefit growth outlook. A question one might be asking is whether we are potentially going to see a banking crisis of some sort in 2014 in China? It is a known fact that too many loans have been made to different branches of the bureaucracy and crony companies. Local Economic Outlook Back to home territory, Namibia in 2014 will be dominated by growth, employment, the Namibian Dollar and national elections. Reaching the fourth National Development Plan (NDP 4) growth targets for 2014 will be a challenging milestone to reach. We also anticipate that the Namibia Dollar will stabilise in the short term but its weaker medium trend remains intact. Inflation is expected to be within the ‘acceptable’ band and interest rates are likely to be flat in 2014 with a moderate up cycle in 2015. The Bank of Namibia will continue to talk tough, but slow growth and high unemployment will limit any hike potential. However for this to play out as predicted the N$ and inflation must behave. The high unemployment and labour challenges will continue to be rogue players in the Namibian market, whilst electricity shortages, if not managed proactively, could impact growth potential and investor sentiment. Namibia has improved its overall ranking by two places in the Global Competitiveness ranking to 90 out of 148 countries in 2013 from 92 in 2012. Property rights, independent judiciary, transport infrastructure and a generally good financial services sector are things the country needs to further build on whilst driving efficiency in the local economy remains critical. Namibia also has to improve its health services delivery and educational systems which were ranked 123 out of 148 countries and 124 out of 148 respectively in the global competitiveness index last year. Asset Class Outlook Cash: We do not expect a change in interest rates and believe the Bank of Namibia is dovish. We therefore expect no real returns from cash. Whilst cash is king, it remains unattractive from an investment perspective over the next six months. Offshore equity: On a risk-adjusted basis this is the preferred asset class and, in a low return world, we can see few alternatives to delivering on client returns. Local equity: We have reduced our real return forecast due to expected long-term growth. This is a function of lower dividend cover, meaning companies have less income retained for future investment. The end of the resource super cycle will put pressure on margins as well. So while the prognosis for 2014 is not that of gloom, recovery is strongly linked to conscious decision making by governments across all continents. The word that should accompany all discussions will be policy, as it will either restrict or enable intended outcomes. Debates about the new global developmental agenda and how to attract investments and infrastructure for Africa will continue. Let us hope the election season which will hit Africa’s four biggest economies – South Africa, Nigeria, Egypt and Algeria – in 2014 won’t derail economic prospects for the continent. 2013-12-19Staff Report 2
