Stay abreast of COVID-19 information and developments here
Provided by the South African National Department of Health
IS THE GOLDILOCKS ECONOMY
JUST A FAIRYTALE?
During the past 15 years, global financial markets had to navigate two severe events – the global financial crisis (GFC) in 2008/09 and Covid-19 in 2020. While policy intervention resulted in remarkable market recovery in both cases, the aftermath of these measures continues to have a profound impact on asset prices and the shape of the economic cycle. In the case of the pandemic-induced cycle, the uneven recovery of different segments of the economy has made it challenging for policymakers and investors to navigate the current environment.
What makes the Covid-19-induced economic cycle unique is that it was created by both supply-side and demand-side disruptions resulting from government-enforced lockdowns. The government stimulus measures that boosted disposable income ahead of the reopening of the economy resulted in higher prices and a build-up of excess savings.
When inflation started to climb in 2021, central banks initially ascribed it to shortages in the economy due to supply-chain disruptions. They saw this as ‘transitory’ – the situation would return to normal once economies fully reopened. By late 2021, however, central banks became concerned that inflation wasn’t as transitory as first supposed, but that excess demand was fuelling inflation, necessitating a sharp rise in interest rates in 2022 and 2023.
Global asset prices had a weak year in 2022 when the higher interest rates resulted in assets repricing (especially the hyped-up digital economy beneficiaries of the Covid-19 period). Investors also became concerned that the interest rate cycle would result in a recession, in line with historic precedent.
While an imminent US recession was the consensus view at the start of 2023, the year turned out much better than most had anticipated. Not only did economic growth surpass expectations, but inflation also cooled. Many have referred to the current environment as a ‘Goldilocks’ economy, meaning it is neither too hot (causing inflation) nor too cold (resulting in falling growth) – the ideal scenario for central banks. As markets warmed up to the prospect of such a perfect outcome over the past year, global equities rallied. Goldilocks seems to have laid herself down in the most comfortable bed.
The growth side of the Goldilocks coin is perhaps the more surprising, considering the material increase in central bank interest rates and the reduction in global money supply. We think this can be attributed to several factors that have offset the impact of interest rate hikes, especially in the US:
If financial conditions remained looser than expected due to the factors explained above, how did Goldilocks manage to still get such a good inflation outcome? We think this was due to the healing of supply chains in 2023 as economies fully reopened. Some of the ‘transitory’ inflation arguments in 2021 did in fact play out. As input prices normalised from their high levels in 2022, the 2023 inflation numbers declined materially. The shortage of labour in the economy also reduced as more people returned to the workforce and immigration soared.
However, despite these tailwinds, inflation remains stubbornly above central bank targets and we’re unlikely to see the same benefit in 2024 in the absence of a slowdown in economic growth.
While the market has warmed to the idea of a soft landing for the global economy, it is in our view premature to claim this victory. As some of the tailwinds of the past year dissipate, there are risks to both inflation and growth. Whichever plays out will have a material impact on relative asset class performance.
Monetary, fiscal and geopolitical actions will have a significant impact on the shape of the cycle, making the outcome difficult to forecast. In this context, it is crucial to build resilient, well-diversified investment portfolios with assets that can provide performance across various market scenarios. Fortunately, the high interest rate environment has created more opportunities to build better diversified, higher-yielding portfolios.
Given the large support from government spending in the current economic cycle, a key question to consider is for how long the market will be willing and able to fund the large fiscal deficit, especially once excess savings have been depleted and governments start crowding out the private sector. Many governments have taken on huge amounts of debt to raise their economies in the aftermaths of both the GFC and the pandemic. Low interest rates have made this possible, but a world of structurally higher inflation and interest rates will make it increasingly more burdensome to service this debt. Goldilocks shouldn’t get overly comfortable in Little Bear’s bed.
Sanlam Private Wealth manages a comprehensive range of multi-asset (balanced) and equity portfolios across different risk categories.
Our team of world-class professionals can design a personalised offshore investment strategy to help diversify your portfolio.
Our customised Shariah portfolios combine our investment expertise with the wisdom of an independent Shariah board comprising senior Ulama.
We collaborate with third-party providers to offer collective investments, private equity, hedge funds and structured products.
Using your equity portfolio to secure credit allows you fast access to capital.
Sizwe Mkhwanazi has spent 14 years in Investment Management.
Have a question for Sizwe?
South Africa
South Africa Home Sanlam Investments Sanlam Private Wealth Glacier by Sanlam Sanlam BlueStarRest of Africa
Sanlam Namibia Sanlam Mozambique Sanlam Tanzania Sanlam Uganda Sanlam Swaziland Sanlam Kenya Sanlam Zambia Sanlam Private Wealth MauritiusGlobal
Global Investment SolutionsCopyright 2019 | All Rights Reserved by Sanlam Private Wealth | Terms of Use | Privacy Policy | Financial Advisory and Intermediary Services Act (FAIS) | Principles and Practices of Financial Management (PPFM). | Promotion of Access to Information Act (PAIA) | Conflicts of Interest Policy | Privacy Statement
Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
MANDATORY DISCLOSURE
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
INVESTMENT PORTFOLIOS
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.