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George Herman
Chief Investment Officer


It is often the case that when you climb a mountain the descent on the other side is tougher than the climb. Even runners tell you that the ‘down run’ in the Comrades marathon is tougher than the ‘up run’. Thanks to fiscal and monetary interventions the global economy has now ascended to levels higher than where it was before the pandemic and is, in fact, still growing rapidly. We must, however, start asking about the peak and the inevitable descent that must follow.

As investors, we want to know whether the peaks for growth and earnings are in sight or if they are a thing of the past. If we are heading for a descent, how steep will it be? Will it merely be a slowdown in growth and earnings growth, or are we facing a contraction of economic activity again?

Global economic growth has accelerated in the first half of 2021 on the back of a super-charged punch in the form of supportive monetary conditions and expansionary fiscal policy. In fact, the crest of the growth wave is upon us, and the third quarter of this year will probably mark the peak of economic growth. This is truly an astounding rebound, a mere 15 months after a synchronised global crash into a lockdown-induced economic recession.

Despite this robust growth, much has not returned to pre-pandemic normality. Employment is still significantly lower than at the end of 2019 and inflation is much higher than what is has been in the last five years. This just highlights how the financial engineering employed to save the globe from a systemic meltdown, has benefitted owners of assets dramatically more than salaried employees. As such, inequality is much worse than before COVID and is bound to influence our political landscape for a long time, as low-income groups grapple to recover from the economic fallout.

However, these healthy growth conditions have enabled companies to generate exceptional earnings growth as consumers come back on stream. The earnings recovery has also been divided between manufacturing and services, and between geographies. Manufacturing survived the recession better than the services industry, and recovered rapidly as retailers ordered multiples of their normal volumes as soon as signs of normality appeared. In fact, this wave of manufacturing orders caused a shortage of many input materials and capacity constraints, leading to price inflation.

The recovery in services, however, has taken much longer and is much slower as social distancing and the restriction on travel is still negatively impacting the travel and leisure sectors. In terms of recovery, the United States rebounded much more rapidly than their European and Japanese counterparts, who are only catching up now. This staggered recovery means that this growth has longer legs as it is not a traditional globally synchronised cycle, but rather a process that is unfolding at a different pace between countries and sectors. The global growth peak should thus only materialise in 2022 and even then, it should only slow down and not turn negative.

In the meantime, equity markets along with several other growth assets have experienced material gains on the back of extremely supportive monetary policy and pent-up demand from consumers returning to the economy. Central banks have also been very sanguine about the current bout of inflation, describing it as transitory and not requiring tightening of monetary policy. Risk assets are bound to maintain their levels and even expand further if earnings surprise to the upside.

In South Africa, we reached the pinnacle of our constitutional democracy when former president, Jacob Zuma, was given a 15-month jail sentence for contempt of court. Unfortunately, this was soon followed by widespread anarchy, as looting spread through several locations like wildfire. This highlighted again, that high levels of unemployment create the dry tinder that can set a country aflame in an instant. South Africa needs strong leaders who will implement structural reforms that support economic growth, employment growth and fixed investment. The stand-off between the public and private sectors about which of these changes happen first, needs to be broken by these with a commitment to growth and investment goals. Until we see that happening, South Africa will battle to keep up in the global race to a new post-pandemic normal.

At Citadel, the only thing burning is our deep desire to care for our clients’ hard-earned wealth. The Citadel Asset Management team is, and will remain, 100% virtual for the foreseeable future. The risk of infection of many team members simultaneously due to physical interaction is just too big. We have thorough contingency plans in place for all physical and technological failures, so you can rest assured that we are always fully operational. Some members of the team have been infected but have already recovered, whilst the ‘senior’ members of the team have had their first vaccinations.

I hope you enjoy this edition of the Citation.