K for kaboom – the world’s new favourite shape (if you’re on the right side of it, of course!)

My youngest child started Grade 1 this year, and my wife and I found ourselves immediately catapulted back to the days of Kathy and Mark books, first-readers, and the basics of literacy and numeracy. While helping her with reading homework, it struck me just how uncommon the letter K is as the first letter of a word. C, S, M and most other letters are used far more frequently as first letters. Besides the words Kathy, kick and king, words with the letter K don’t feature much in the Grade 1 curriculum.

In finance and economics, though, it is quite the opposite, with the world using ‘K’ with increasing frequency.

Around this time last year, we alluded to a possible V shape in the economic recovery after the March-lows, when the Covid-19 pandemic tightened its grasp on the world, followed by the prospect of a W shape and the risk of a ‘double-dip’ in the recovery. Yet, as the year wore on, the pattern of performance and recovery took a unique K shape, with one half of the economy seeing massive, post-recovery growth and the other half sadly languishing and faltering to lower lows.

Image courtesy of Steward Capital

At the outset of the Covid-19 pandemic last year, as we considered our first national lockdown and what it would mean for us, I referred to that time as a ‘test of balance sheets’. If you had a strong balance sheet, regardless of whether you were an individual, household, small enterprise, large corporate, or even a government, you could expect to be fine. If, however, your balance sheet was weak, the challenge of navigating the pandemic was most likely going to be a daunting task.

With the markets and asset prices at record levels, and with our clients enjoying their highest portfolio values ever, so the K-shaped recovery is proving its mettle.

Along with this has come somewhat more upbeat expectations for the future, as developed countries near herd immunity after robust vaccination programmes, with the relaxation of mask-wearing regulations in some of their public places, and with the prospect of a return to ‘normal life’, or a semblance thereof.

Here in South Africa, however, we are only at the beginning of the proposed mass-vaccination rollout – an initiative that is so desperately needed as a country on the lower leg of the K-shaped economic recovery.

The IMF recently released its forecast for global economic growth this year, which it pegged at 6%. Even off the low base of March/April 2020, this is a startling and massive figure! By contrast, the most generous estimates put South Africa’s growth at a modest 3.5%.

But all is not lost. Despite the stronger-than-expected rand performance, and with our benign inflation figures, South Africa is still showing signs of green shoots and catalysts for more sustainable economic performance in the years to come:

  1. Higher global commodity prices: commodity price cycles have proven to be the single largest predictor for our currency; high commodity prices = stronger ZAR.
  2. South Africa’s trade and current account balances have steadily moved into surplus: the 2020 trade balance was larger than expected, helping the country attract foreign inflows and keeping the rand exchange rates relatively strong; strong rand = downward pressure on inflation.
  3. Historically low domestic interest rates: with inflation expected to be anchored around the mid-point of the SARB’s 3% to 6% target band, the central bank can afford to keep interest rates low and steady for an extended period. This should boost domestic demand and spending once the government has effectively rolled out the Covid-19 vaccine.
  4. Improved South African tax revenue collection: while tax collection by SARS remains disappointing, it is improving. Other positives include a rebound in both corporate and personal taxes.
  5. Increased foreign investment into SA (FDI): the past few years’ negative trend in FDI did an about-turn towards the end of 2020, as foreigners buying into both our local equity and bond markets turned net-positive. South Africa depends on these inflows to support and fund meaningful economic growth through infrastructure and development programmes.

Considering all this, along with the apparent stabilisation of power in the Ramaphosa camp within the ANC, assets at more attractive values than we’ve seen for a while, and new market highs spurred on by global demand and available capital, we may well see the letter K featuring even more prominently – as in kaboom!

Steve Crouse

Senior Advisor and Chief Investment Officer