Addressing global supply chains will require substantial new investment and it would take many years to make an impact.
Significant uncertainty, marked by rampant inflation, fears of a looming recession and growing geopolitical risk, clouds the near-term global outlook.
According to Kevin Cousins – Head of Research at PSG Asset Management, the knee-jerk reaction is to preserve capital until the storm has blown over.
“However, we believe that investors should look past the noise of the simple narratives and take a longer-term view based on more enduring factors. Some assets that historically acted as safe havens could in fact amplify risk over the next few years, but investors that maintain and build exposure to carefully selected equities are likely to be well rewarded for weathering near-term volatility,” he says.
PSG Asset Management, a division of the listed entity PSG inflation in the US, UK and Europe is back at levels last seen in the early 1980s and 1970s. South Africa is also experiencing elevated inflation.
However, there is a world of difference between how markets are pricing the future inflation risk in different economies.
Even if inflation stays elevated, a holder of South African government bonds will still make attractive real returns – inflation is priced to get worse in South Africa. By contrast, in developed markets, bond pricing assumes inflation will be rapidly brought to heel.
The combination of the Federal Reserve’s rate hikes restraining demand and base effects will no doubt temporarily lower inflation, but will not alleviate long-term price pressures.
While the consensus narrative has been to blame the Covid-19 demand bump and Russian invasion for high commodity prices, they were mostly catalysts that exposed tight markets, and not the root cause.
Sustained long-term price pressure stem from many years of under investment in real economy sectors (eg energy, materials and shipping), a tightening US labour market, massive resource requirements for the looming energy transition, and the onshoring of global supply chains.
Addressing these will require substantial new investment and it would take many years to make an impact, says Cousins.
What does this mean for local investors? “As a large commodity exporter with ample labour, SA is likely to be a resilient market in this environment. Comparable historic periods (2001 to 2011, 1970s) show our own inflation rate tends to be curtailed by a strong currency.”
The obvious equity beneficiaries are “real asset” sectors such as materials, energy, shipping and capital equipment.
However significant foreign capital flows are likely, meaning lower yields and “SA Inc” domestic companies also perform well.
BUSINESS REPORT