Test Test

Am I bullish or bearish?

This year is more idiosyncratic than usual due to the small matter of an ANC elective conference, the looming threat of politically instigated violence, a Reserve Bank hiking cycle and Eskom dramas in a year of load-shedding and its balance sheet issues. Yet all this can be blown out of the water by US Federal Reserve moves.

My fellow columnist Mamokete Lijane has often written in these pages about how the ebb and flow of global risk sentiment and central bank action can be misinterpreted in SA — in particular when the offshore risk dynamic is supportive and overflatters the actions of onshore policymakers.

The reverse is now true as the global liquidity tide goes out and is a far stronger force than most people can remember. The Fed’s tapering in 2017 was a different kettle of fish — inflation was still low and the labour market recovery, while positive, was slower. There were also no real global supply chain issues. Now all these factors prompt a far faster and more co-ordinated move by developed market central banks.

SA is going into this period in probably the best shape it could. Fiscal policy has seen steady (though insufficient) consolidation,  the wage bill has been contained more than expected, Eskom’s unbundling is progressing (though its debt solution is not), energy reforms have leapt forward, the fiscal and current accounts have been supported strongly by a terms of trade boon that is ebbing but not disappearing.

Growth this year, although flattered by positive base effects from last year’s violence, could be a decent 2.1%. Moreover, it is more widely appreciated now than before that the private sector has shown remarkable resilience after two years of Covid-19.

Risk overhangs

At times like this endless rankings of emerging-market countries are produced. SA this time is not in a “fragile five” group as was first identified in 2012. Such rankings are simplistic and too often based on backward-looking data on current accounts and reserves.

Still, SA flashes reddish-amber for many investors given a justified scepticism over debt stabilising  (reinforced now by ratchet-style social income support policy chatter), worries about state-owned enterprise (SOE) risk overhangs, the slow pace of other positive reforms and the conflicting agenda of economic interventionism from the department of trade, industry & competition.

As the Fed starts hiking, so SA’s negatives, justified or not, will be magnified. This is partly why the risks of jumping headfirst off the fiscal cliff — which  was the focus of debate in 2021 — will be so interesting to contemplate in 2022.

All this puts the busy political year into sharp focus. The positives outlined above will be put to the test of whether they can sustain the current levels of foreigner participation in the local bond market, which is now more hot-money centric, with longer-term investors having reduced exposure after the downgrades of recent years.

This is normal in terms of the long-term to-ing and fro-ing in emerging markets. The new flavour is politically instigated violence, which wraps in inequality and its connection to future fiscal risk. SA has not been in this position before of having social stability risks on top of all the usual macroeconomic ones at this point of the global liquidity cycle. This is why ratings agencies and investors are paying so much attention to it.

Inflation contained

Investors are picking up on the dichotomy of a strong private sector over the past two years coupled with a sharp rise in unemployment and lower wage growth. Inequality will continue to rise and it will be coupled with the lack of consequence management of last year’s violence.

The bullish part of me thinks there is a path through this year. SA is less bad than some peers, markets ignore much of the political noise and keep eyes on a likely re-election of Cyril Ramaphosa, while local inflation remains contained and the currency sells off slowly and in an orderly fashion, meaning the Bank can hike less modestly.

There is just enough reform to keep markets at bay, and fiscal slippage is small enough that with slightly higher bond yields the whole thing stays stuck together with sticky tape. The equity market does OK and the private sector has a decent year focused on energy investments. Yet inequality will still be rising and unemployment not falling and something of an under-the-carpet-sweeping exercise will be going on. This year could well be the calm before the storm.

The bearish part of me sees how unsustainable this potent mix of inequality and unemployment can be, with the inevitable ratchet effect of fiscal slippage for social spending relief and the madness and noise of the political year reflecting it, and a hamstrung second term of more two-steps-forward-two-steps back for Ramaphosa (his silence over Lindiwe Sisulu being just a small preview).

Layer on top the dark underbelly of the Zondo report — calling out the sorry state of inaction at the National Prosecuting Authority (NPA) — and a sense of being trapped in a place without consequences. Such a world ends up with July 2021 and the burning down of parliament on a periodic repeat loop.

We must be careful as the Fed hikes and emerging markets become a contest of who has their swimwear on below the waterline — so we may well seem to be on the bearish track much of the time, even if we end up in a more bullish place by year’s end. The question will still be how long a more positive outcome can last and how sustainable it really is looking below the surface.

Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company. This article first appeared in Business Day

Intellidex’s head of capital Markets Research, Peter Attard Montalto, reflects on how the likelihood of another electricity hike will affect South African consumers on Radio 702‘s ‘The Money Show’ with Bruce Whitfield.

“We’re probably sitting around 35 – 40% below cost effective tariffs and the reason for that is a lot of other reforms have not been done. The debt reforms have not been sorted out. The municipal arrears problem has not been sorted out. The labour force issue for the public force has not been sorted out. If all of those things had been sorted out, this would not be required.” Attard Montalto says.

Listen to the full conversation below.


Intellidex’s Dr Stuart Theobald was interviewed by Bruce Whitfield on Radio 702 regarding how the state should insure (or not) its property portfolio and his outlook for markets in the year ahead. “The problem for us in emerging markets is that [developed market] liquidity has flowed substantially into emerging markets, into our debt and equity markets, and we don’t really know what the withdrawal of that liquidity is going to look like. It could be very unpretty,” Theobald says.  

Listen to the conversation below.


It is hard not to have a sense of apprehension going into 2022. Interest rates in SA are trending up from a 50-year low as we enter an upward cycle. Inflation in big markets is at levels not seen for 30 years. Central banks in the biggest economies are beginning to unwind unprecedented levels of liquidity as they turn towards dealing with inflation. There is no playbook for this phase as we’ve never had central bank balance sheets as swollen with printed money as we do now.

The unwind is happening in a global economy that has had more than a fair share of external shocks thanks mostly to Covid-19 (though Chinese property earthquakes can be big contributors too). Equity markets are at or near historic levels implying that investors are confident that company profitability is going to be strong. Business confidence is positive in all big markets. This is the right kind of environment to be attempting to wind back an experiment in flooding the world with money to fight off a Covid-19-induced recession.

My sense is that investors are less certain than it appears. We are learning as we go, leading to a skittishness that could amplify volatility if something unexpected happens. Markets exhibit a “volatility skew” in that they tend to be more volatile going down than going up, and we’ve had a long period of consistent upward movement. That means most measures are showing a lower risk market that can lead investors into undefensive portfolios that seem safe in the rear-view mirror. But those more forward-looking are likely to turn attention to long-shunned value stocks. Already this year value stocks have outperformed growth stocks in the US by a five percentage point margin as Covid-19 era favourite tech stocks take a hammering.

The problem for investors in SA is that the developed market liquidity unwind will have real consequences for emerging markets. US Federal Reserve balance sheet expansion has proven to increase flows to emerging markets as the extra money goes in search of yield. As this unwinds, we can expect flows to reverse as US yields creep up and become more attractive. Domestic monetary policy in countries such as SA must respond, increasing rates to remain attractive while also dampening imported inflation. We have not previously faced a situation of global central bank liquidity being withdrawn and we don’t really know how it will play out for countries like SA. The one historic episode that may provide some guidance is the emerging markets crisis of the late 1990s, in which hot money rushed out of emerging markets leaving chaos in its wake, and interest rates that hit 25.5% in SA. We certainly hope that is not a model for what might happen now, but the reality is that there is no obvious policy path to walk to counteract developed market liquidity withdrawal.

Of course, investing is a long-term game. You should be thinking about the 10-year view rather than any single year. The Fed balance sheet has doubled in size since Covid-19 to fight the economic shock it could have been, with remarkable success. The Fed will not tip the world into economic chaos now, so withdrawal will be gradual, and we may see it ebb and flow in response to economic conditions.

I am inclined to make the most boring of predictions: stock prices will start to reflect the economic fundamentals of companies. Of course, this is a prediction that is safely always going to be true — the real question is “when?” I expect that wise money this year will be focused on the profits and dividends that companies are actually delivering (the fundamentals), so we will see a continued rerating of low-risk stocks relative to high-risk stocks. These are going to be affected by the economic ructions caused by a changing monetary policy environment, but the only way to keep your head while others are losing theirs is by keeping an eye on how companies are doing on the bottom line.

In SA we will have had plenty of other kinds of ructions to deal with, not least political. We are now in the year in which the ANC will be deciding on its next leader, which will make for a lot of scary headlines, as we’ve already seen. But investors must remember our stock market has little to do with domestic politics, being far more driven by global economic factors.

Inflation, driven by global supply chain shifts and investment in green economy infrastructure, will be good for commodities and therefore many SA-listed stocks. As we go into 2022, with an eye always on the 10-year view, I will take the opportunity to keep looking at who is generating profits sustainably, while ignoring the flows of liquidity that are going to be buffeting all sides.

 Theobald is chair of Intellidex. This column first appeared in Business Day.