The mug’s game, Dynasty Wealth and Asset Management

Forecasts that economists, equities analysts, central banks, multilateral institutions, and diviners make about markets and economies have a tendency to cloud over in retrospect. Looking back at the predictions of some major organisations and publications made at the onset of 2023 compared to the actual outcomes year to date, confirms these outlooks are as unreliable as the use of crystal balls.

Just a few headlines we located include:

“US dollar/Rand to plummet toward 15.00 by end-2023 – SocGen”

“Euro to dollar forecast U-turn, end-2023 Euro/Us dollar tipped now 1.12” – ING

“More than two-thirds of economists at 23 major financial institutions expect the US to have a downturn this year” – The Wall Street Journal

“We see major stock markets plunging 25% from levels somewhat above today’s” – Deutsche Bank

As the year opened, many market commentators had recession in the US and most of the world as their base case scenario. Some expected an end to the rates tightening cycle well within the first half of the year, yet the labour market in the US has stayed buoyant, global equities markets have returned 13% in dollars year-to-date, and few central banks are ready to say that they’ve tamed the war on inflation. Many commentators’ outlook has now been revised to a soft landing for the US economy.

Our intention is not to call out any of the above institutions. (Indeed, we have included selected research-based outlooks in today’s News Flash). Their challenges are to make the best possible calls about what will happen next in a very uncertain world. But the sheer number of variables in play means it’s impossible to make accurate predictions about whether there will be a recession, when the downturn will start or end, and how governments or central banks will respond to economic indicators.

Geopolitics, technological disruption, natural disasters and weather events, elections, consumer preferences and other factors interact in such complex ways that we can often be blindsided. As sophisticated as today’s economic models are and as much data as we may have, we just cannot know precisely what will happen next until it does—at which point it often seems as if it should have been easy to predict.

Even when market forecasters are broadly correct about the direction of the economy, it’s exceedingly rare for them to be spot on about the timing. It’s one thing to know that there will be a downturn; it’s another, almost impossible thing to sell assets at their highest and buy them at the lowest. The risk of missing out on growth or catching a falling knife is ever present.

That’s why we believe that making significant portfolio adjustments based on confident quarter-to-quarter or even month-to-month macroeconomic forecasts is a mug’s game. While macroeconomic research is certainly an important factor in our in investment decision-making process, we also believe that what matters most to us is to follow a disciplined, focused strategy that builds and protects our clients’ wealth for the longer term.

“We really can’t forecast all that well, and yet we pretend that we can, but we really can’t.”

– Alan Greenspan Former Fed Chair

“When it comes to so-called market timing there are only two sorts of people: those who can’t do it, and those who know they can’t do it.”

– Terry Smith in a column for The Financial Times

Global News

Bank of America’s CFO Alastair Borthwick says prospects for a US recession are getting dimmer thanks to robust consumer spending. Consumers are spending 4% more year-over-year and a recession, if any, would be small and pushed out.
The Fed left interest rates unchanged on Wednesday but stayed open to another increase. This was in line with expectations for hikes to be paused for the second time this year as inflation slows.
A less optimistic view, expressed by analysts at various banks, is that a historic autoworkers strike, an expected government shutdown and the scheduled resumption of student loan repayments are threatening their expectations of a soft landing, despite data indicating that inflation in the US is declining.
The US’ economy has been defying pessimistic forecasts while growth falters in China and Europe, leading to the dollar having roaring back over the past two months. It has risen sharply against virtually every major currency recently because of US economic resilience.
Global growth will ease to 2.7% in 2024 after an already “sub-par” expansion of 3% this year, according to the latest OECD forecasts. This is due to interest-rate increases negatively affecting activity and China’s pandemic rebound disappointing. The globe is facing the double challenge of inflation and low growth.
Ahead of COP28, which starts at the end of November, world leaders are gathered at the United Nations General Assembly in New York City this week, and all seem to agree that climate change is among the biggest problems facing the planet. Developing countries feel that the first world, responsible for 80% of emissions, should foot most of the bill in fighting climate change.
Inflation in the UK has slowed down for the third month in a row in August to 6.7% year-on-year, defying expectations. The Bank of England paused it’s Interest rate hiking campaign on Thursday for the first time in nearly two years as a result. However, Britain’s property market has seen rental costs growing at the fastest pace in at least a decade, which puts pressure on inflation.
Alphabet’s Google is in court appealing a 2021 ruling by the EU’s lower tribunal that backed the European Commission’s decision that the firm violated antitrust rules by favouring its own shopping service over those of its rivals. The European Union’s legal team responded saying that it’s been enforcing competition law for decades.
Nvidia CEO Jensen Huang is seeing India as a major AI market as the company seeks to hedge its risk to having China as its major market as the US increasingly clamps down on exports of high-end chips to the communist country.
Marketing and data automation provider Kaviya, which was the third major listing in the US in the past week, climbed 9.2% on its trading debut. Investors include Shopify. Instacart and Arm Holdings were also listed this week.
As at Thursday’s close the S&P was 2.7% down for the week.

Local News

As expected, the Reserve Bank kept the repo rate unchanged at 8.25% on Thursday for a second meeting running. It is still, however, concerned about renewed risks to inflation from recent rand weakness and increased global fuel and food prices.
HSBC believes the rand is headed to a new low against the dollar due to twin deficits in the form of worsening fiscal position and a widening current account deficit.
Finance Minister Enoch Godogwana has warned that South Africa’s finances are in a shocking state. Godongwana said that risks already highlighted in February, in terms of low economic growth and growing debt, leading to an inability to provide services, are coming true. Among the issues he highlighted as plaguing South Africa were ongoing power cuts, logistical constraints, and state capture during former President Jacob Zuma’s rule.
But Godogwana is facing political pushback from the ANC’s alliance partners, Cosatu and the SACP, against the National Treasury’s proposed budget cuts aimed at reining in public spending over the medium term. In a meeting on Monday, with party officials and alliance partners, he was asked to explain plans to increase taxes and cut the number of government departments.
Financial Mail, pointing to tax collection shortfalls, says National Treasury should be sounding warning bells about state spending, and The Daily Maverick has put together tips based on economists’ input to save South Africa’s fiscus that include removing unnecessary expenditure and reconfigure functions such as shifting entities to departments where they make more sense.
Meanwhile, Stanbic says that a sovereign default will lead to local investors dumping government bonds, which would be catastrophic because borrowing costs will become untenable. PSG Asset Management also warned that high public debt amid low economic growth projections might see investors question whether government bonds remain a sound investment.
In a scathing column, Peter Bruce – editor-at-large at Arena – says that there is a serious level of insanity in Cabinet, which is deaf, dumb, and blind to National Treasury’s warnings of a fierce fiscal emergency ahead of next year’s elections.
The vital African Growth and Opportunity Act (AGOA) forum will be held in South Africa between 2 and 4 November despite some US legislators pushing to move it elsewhere. The Act provides South Africa with preferential trade agreements when exporting to the US and, should it be extended, would continue to benefit the economy.
Following moves to create a listed state-owned entity company, Public Enterprises minister Pravin Gordhan said that not all government companies will be migrated to the State Asset Management Company. He said only strategic companies will be moved, without indicating which SOEs.
At the same time, Transnet and Eskom have been excluded from the National Treasury’s updated set of cost-containment measures affecting national departments and provinces. However, they have been encouraged to consider the guidelines.
Electricity minister Kgosientsho Ramokgopa has warned of another electricity crisis ahead as Eskom faces a lack of finance that it needs to expand its transmission system.
Retail sales dropped 1.8% year-on-year in July, worse than market forecasts of a 1.2% fall and the eighth consecutive month of decreases in retail activity, mostly because of tighter monetary conditions, which is indicative of a challenging socio-economic environment, according to FNB.
The retirement industry is pushing for the two-pot system to be delayed by between a year and 18 months so it can plan, while Cosatu is adamant the implementation date should remain 1 March 2024 as proposed. Momentum Metropolitan has warned of a huge outflow in funds from the insurance sector when it kicks in.
Naspers chair Koos Bekker is assuring the market that the sudden resignation of the group’s CEO, Bob van Dijk, on Monday is not a falling out between the previous CEO and the board. Investors have criticised the former CEO because of the gap between its market cap and the value of its investments.
As at the time of writing, the rand was 1.2% stronger and the ALSI was 1.4% lower for the week.