2013-10-28
If 2013 was the Year of the Maradona Dribble, what will mark 2014?
Maradona Dribble? The phenomenon of an aggressor moving in a straight line towards goal with five defenders serially misinterpreting his moves, preemptively dodging as they anticipated feints that never came.
This year was full of such feints, in the US, Europe, China, Syria and not excluding our mining labour strikes and settlements. And not forgetting EM sudden capital stops/reversals
US shutdowns that fizzled. US debt showdowns, Fed tapering starts, Chinese implosions and Syrian takeouts that never came. Hamstringing SA mining strikes that threatened but blew over. EM Armageddon postponed.
It is a long list of things that arose and then blew over, or was simply delayed (or transformed into a different kind of risk than before).
That was 2013, ending with booming stock markets globally and growth finding its way, if modestly.
But what about 2014? How will that play? Another Dribble straight for goal or another promise of severe serial implosions, but this time for real?
My take is that another US government shutdown or debt ceiling cliffhanger won’t happen in 2014. The midterm elections are too near for unpopular capers, and voters would likely punish Republicans more if they were the cause of it, as has happened before (1995).
The US economy has the next six months to recuperate from recent hits to confidence. Its steady progress will continue, with the fiscal drag from budget sequestering waning, thereby gradually taking up more idled labour resources and improving skill set matching with work opportunity.
At some point this will trigger the Fed into starting its bond tapering, possibly in 2Q2014, but likely very slowly and markets possibly not as overreacting as in 2Q2013, as the first hit has been absorbed (and growth needing to be good and resource utilization much better before it happens, acting as a bomb blanket absorbing the disruptive force of bond tapering and a more elevated yield curve, suggesting lessons learned and experience gained).
In Europe, there are no major national elections scheduled. Unless a government falls and has to go to the polls early, restless electorates will have to bide their time to change things later in the decade.
That suggests slow progress with governance issues, banking union and ongoing internal depreciations while gaining from trade even as fiscal drag slowly wanes.
China and Japan are expected to remain supporting props for global activity and markets, assisting in further stabilizing commodities.
All of which sounds remarkably like wishing away global problems which hitherto had such nice crisis potential. Yet that’s my take on these risks.
How does that affect South African prospects?
It would seem that, externally, the Fed taper will be the watershed in 2014, as it suggested to be in 2013.
Between now and the proximity of that tapering start moment, markets feel Fed-supported, risk is backed, bonds tame, Dollar weak, equities and EM currencies in flood (so to speak).
It suggests Rand of 9-10:$, with SA inflation suppressed anew into 5-6% territory. It should keep SARB tame, and interest rates unchanged as we approach elections.
Risk-wise, our budget deficit at 4% of GDP will be high but certainly no blowout, our credit-to-GDP shrinkage these past five years has been by far the most attractive among our EM peers, and our strongly rising JSE no slouch.
The blemish will be the large 6.5% current account deficit, but it will continue to be funded.
When tapering finally starts, its onset should again set in motion disturbances in financial space, as tapering is a signal that the US yield curve can be allowed to lift a little further (but only a little, mind you).
This will again be accompanied by portfolio shifts, with EM space likely seeing its risk-adjusted debt premia raised, with some outflow or at least reduced inflow of capital in places.
No train wreck, as feared so palatably in 2013, but still something we will notice as global bond yields take the next step up in their secular rerating.
It should also see another round of Rand weakness, though I sense less dramatic as in 2011 and 2013 if the Yellen Fed handles the taper caper better.
It suggests Rand in 10-11:$ territory in 2H2014, but with only mild upward pressure on our inflation in 5-6% territory, and SARB vigilantly on hold still.
US, European and British policy interest rates will not start rising until later in 2015 (if then).
That is beyond the remit of a 2014 view. For now we have to absorb the start of the Fed taper. We already have done the ECB and BOE ones without a fuss (remarkable, the difference in market cultures, but then the Fed has been bond market focussed and it is the biggest global pond driving the US economy, with many poorly positioned for a normalizing world).
Besides these titanic global influences over us, what will we ourselves bring to the party?
Macro stability for sure, but that is only a small mercy.
Micro policy will unlikely prove ground breaking through mid-2014 as the election dominates, but with another major round of union action in industry coming into focus next winter. AMCU is already active in platinum mining, Numsa faces metalworking businesses next winter, and public service unions will face off with government. Also, the electricity ceiling won’t have started to lift just as yet, while etolling may cause strains.
That suggests another robust domestic year, in which one would expect confidence still stressed and real income gains and spending strained, as in 2013.
All this domestic SA huffing and puffing may (again) reinforce the Fed tapering stresses on us, providing a bit more upside to Rand weakness (make that 10-12:$) and inflation (but not beyond 6%), yet not triggering SARB, also because growth may remain atrocious near 2% (our temporary new abode while institutionally challenged?)
Why does that make 2014 look so remarkably like 2013, but now with the real taper McCoy (though tempered) rather than the unsettling surprise feint of 2013?
Our lead companies and financial markets should continue to flourish in 2014, even if re-calibrating to changing global and domestic circumstances, with important escape valves into Africa and other fast-growing EM destinations.