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Maarten Ackerman
Chief Economist and Advisory Partner


When historians and economists look back at the events of 2020 they may well regard it as the year in which capitalism finally reached its peak. The COVID-19 pandemic has acted to fast-track the past decade’s slowly emerging global trends, including calls for greater government intervention and a shift away from globalisation towards regionalisation.

Capitalism works as a system because profit incentives drive business, labour and entrepreneurs to be productive and maximise wealth. This is typically why so many state-owned enterprises (SOEs) around the world are financially inefficient – they lack profit incentive and productivity since governments will most of the time step in to support them if need be. The flip side of this coin, however, is that this same profit drive behind capitalism can also result in extreme greed, reflected over the past two decades in the excesses seen in executive salaries and bonuses, the numerous cases of corporate corruption and in the widening inequality gap.

After the great financial crisis governments adopted policies to support the economy by dropping interest rates to historical lows and starting quantitative easing. These policies resulted in savers getting poorer (with interest rates almost zero and well below inflation) while those with capital (property and equity) benefitted from markets rebounding. Growing dissatisfaction over the divide between the haves and have-nots then manifested in the Brexit vote and Donald Trump’s presidential victory in 2016, both of which were driven by calls to put their respective nations first and bring jobs back home. More recently, this same anger fuelled the George Floyd protests in the United States (US), as widespread demonstrations not only protested racism, but also provided a convenient outlet for simmering tensions over the loss of millions of jobs and a lack of financial support from the US government and, specifically, the country’s private sector.

Rising frustrations and criticism mean that we are likely to see increased government interventions and spending in the future, and, as a result, more debt. This is already evident in the extensive government stimulus provided in response to the COVID-19 crisis. Notably, where the US and Trump have been largely alone in pointing fingers at China for unfair trade practices over the past few years, suddenly Australia, Japan and Europe have now joined in to voice their discontent, looking to diversify away from a reliance on Chinese manufacturing.

Seen together, the implication of this is that not only will all the stimulus and liquidity being pumped into the system eventually drive inflation, but as countries move towards regionalisation and bringing supply chains back onshore, costs will increase which again will cause inflationary pressures to build. This approach of financial repression - with central banks keeping interest rates below inflation in order to “deflate” the significant levels of debt while, at the same time, keeping interest payments low - will further feed inequality. By keeping rates this low central banks are using future generation’s savings to pay back debt to fix current problems. This will further increase social tension in many countries.

As South Africans we often seem to think that we’re alone in struggling with challenges of inequality. However, trends such as rising calls for a fairer society and the redistribution of wealth, alongside growing government involvement (and as a consequence rising taxes), are playing out globally. Worldwide, countries seem to be shifting towards a hybrid economic system blending capitalism and socialism – a model which China, for example, has implemented fairly successfully.

As we enter a new decade, these trends will continue to develop. This will have a massive impact on economic growth, how we do business and how we invest money.


Against this backdrop, the outcome of the November elections in the US will also play a key role in shaping the modern world for the next few decades, determining the strength and speed with which these trends will develop.

Trump is obviously a more nationalistic, protectionist leader, and a Trump win would almost certainly see more globally disruptive trade spats and retaliatory tariffs. Such actions would then accelerate the backlash against globalisation and shift towards more closed societies.

In fact, China may just want Trump to win at this point, since many feel that he is doing even more damage to western democracy and US relations with the rest of the world than he is harming Beijing economically with tariffs. For instance, if Trump wins and escalates the conflict with Europe, Europe would also turn its back on the US, potentially opening the door for China to play a bigger role globally.

Another four years of Trump at the US helm could work to diminish the country’s influence and strength as a global competitor and leader, playing into China’s ambitions to assume a greater global role. Furthermore, if the US continues to withdraw from international organisations and agreements, an additional risk is that the fabric of co-operation between the US and China, as well as the US and the rest of the world, will begin to tear.

If, on the other hand, Joe Biden wins, then there is still a chance that these trends may stay in place. However, Biden would be more likely to take a softer stance on China and tariffs, with the US playing a bigger role as a global leader in terms of promoting co-operation and bringing nations together. Biden is likely, however, to continue with a bigger role from government’s side to deliver on the rising social demand on the ground. He already pointed towards the end of an era of shareholder capitalism and is likely to tax corporate America more to fund his social programs.


Turning to the immediate economic challenges, we are seeing a strong economic recovery after initial lockdowns and, as economies reopen, countries are releasing some promising data on the back of synchronised stimulation from central banks and worldwide fiscal spending.

The US deficit, for example, is likely to increase to 25% of GDP – the highest number seen during peace-time history, and in line with levels seen during the Second World War. Additionally, the US Federal Reserve’s balance sheet will expand to close to 40% of GDP over the next 18 months, with the Fed delivering some US$12 trillion in stimulus – twice the amount provided in 2008.

The fact that the markets are currently doing so well, even though the economic figures are simply not there yet, is primarily attributable to the world’s largest central bank throwing everything and the kitchen sink at the problem.

Likewise, China’s deficit is also expanding, to close to 15% of GDP – a record high. And we are seeing similar numbers across Europe, as governments globally look to support markets and economies.

However, it’s important to recognise that the pandemic and subsequent lockdowns caused historic declines in manufacturing, industrial production and retail sales, as well as a significant rise in unemployment and job losses. So while we are seeing a rebound, the reality is that we are coming off an extremely low base and we still have a long way to go before returning to pre-crisis levels.

For example, the loss of some 20 million jobs in the US during lockdown severely impacted consumer income, which in turn saw a 22% decline in retail sales and a 13% increase in the household savings rate, as people cut back on spending and focused on saving instead. As the US economy slowly reopened we then saw retail sales jump 13% – which is back to only 80% of the pre-crisis level.

While the US created 4.5 million new jobs again last month, unemployment still remains at 11%. Additionally, it’s worth noting that many jobs may not come back at all, such as those in the air travel and leisure industries, as a switch in consumer behaviour sees a reduction in travel and leisure activities. It took more than six years after 2008 to normalise unemployment levels in the US, and something similar may take place now, especially as consumer behaviour and spending remain depressed given the risk of infection. This is likely to be the case until the breakthrough of a successful vaccine or other medical treatment.

In China, we also witnessed an extremely strong decline in economic numbers followed by a strong rebound. However, the construction industry is only 90% back to pre-crisis levels, only 85% of small firms and 80% of malls have reopened, and restaurants remain 50% below capacity. Notably, China’s motor traffic levels are higher than they have ever been, as consumers remain cautious of public transport due to the ongoing threat of the virus and as the world waits for a medical breakthrough.

With this in mind, 2020 is likely to be a story of two halves, marked by a deep decline in the first half and strong rebound and recovery in the second half. The Organisation for Economic Co-operation and Development (OECD) expects global GDP to decline by 5% overall this year, before achieving 5.5% growth in 2021, which would leave the global economy still 6.5% lower than pre-pandemic levels.

Overall, despite the appearance at first glance of a V-shaped recovery, there is still concern that we won’t see an immediate return to capacity levels. This will impact the prospects of a long-term recovery, limiting company profitability and the ability of the global economy to create jobs.


Worryingly for South Africa, which entered the crisis already on its knees fiscally, we are not only facing recession but possibly – and even probably – a depression. For instance, while the -2% print for the first quarter of 2020 GDP (quarter-on-quarter, seasonally adjusted and annualised) was slightly better than anticipated, this performance takes us only up to the end of March, excluding the largest part of the lockdown.

The worst, by far, is yet to come, as the South African Reserve Bank (SARB) anticipates a 30% decline in the second quarter as a result of one of the world’s harshest lockdowns. This grim result follows on from the recessionary environment we were already stuck in with -1.4% recorded in Q4 2019, which itself followed -0.8% in Q3 2019.

The SARB and National Treasury currently expect the local economy to contract by 7-8% in 2020, a far worse figure than witnessed in 2008. In fact, this figure is in line with numbers last seen in the 1930s, surpassed only by South Africa’s record 12% decline in 1929. National Treasury then expects economic growth to reach 2.6% in 2021 and 1.5% in 2022, which are both realistic forecasts, but still too weak to address many of our structural issues.

Unfortunately, this means that we are likely to undershoot our revenue target this year by some R304 billion, which will require funding. Borrowing requirements are, therefore, increasing rapidly to cover the shortfall, which now stands at R780 billion, compared to about R340 billion in the February Budget.

This means that we are likely to see tax increases in the medium term, with tax changes on the cards for October’s Medium Term Budget Policy Statement and the February 2021 Budget. Importantly, government has also mentioned accessing some funding from external providers and, in his Supplementary Budget speech, Finance Minister Tito Mboweni mentioned a possible US$7 billion could be obtained from these sources. South Africa last engaged with the International Monetary Fund (IMF) during the dark days of sanctions around 1982 and 1983.

Trade unions have already made their objections to such a path clear, as an IMF loan would likely be accompanied with conditions such as cutting back the government wage bill and reducing the public sector head count. However, perhaps this is exactly what may be needed to force government into exercising some fiscal discipline and making the right choices.

Government will, in any event, be looking to cut back on its expenses. Mboweni was very clear on the need for fiscal discipline, explaining that overspending leads to hyperinflation and long-term penury for the country, citing examples such as Germany in the 1920s, Argentina and Zimbabwe in the early 2000s, and Greece more recently.

But many – including ratings agency Fitch – have called government’s commitment and ability to curb its spending addiction into question. For example, as we see more private sector job losses and businesses entering rescue or closing entirely on a daily basis, the unemployment rate has already breached 30% and is sadly likely to increase further. Meanwhile government has added jobs again according to first quarter GDP data – exactly the opposite from the challenge around reducing head counts, which was highlighted in the Supplementary Budget.

The good news is that we can also expect a strong rebound from a low base in the second half of the year, similar to that of China and the US, as higher frequency data such as vehicle sales and the Purchasing Managers’ Index already show signs of a recovery. But, given the structural economic issues and difficulties in the global environment already hampering growth, it is absolutely crucial that government finally enacts the policies and reforms necessary to avoid falling into a debt-trap, which would mean using most of South Africa’s budget to pay interest on loans.

Fortunately, Finance Minister Mboweni and SARB Governor Lesetja Kganyago, who are both highly respected internationally, fully understand the issues at play and what needs to be done to fix South Africa’s economy. In line with other central banks, the SARB has already cut interest rates four times this year in a bid to support the economy, and there are more cuts in the pipeline. This means we are likely to see a total of 3% in interest rate cuts this year. Additionally, the SARB is continuing on its short-term bond-buying programme in order to provide additional liquidity during this volatile time.

The effectiveness of this programme can already be seen given that local bond yields are now drifting back to pre-downgrade levels, despite the worsening of our fiscal metrics. This said, one now needs to question whether our bond yields are offering a fair reflection of our current fiscal situation. Additionally, uncontrolled bond buying and money printing by the SARB could devalue the currency, leading South Africa down a similar path to Venezuela or Zimbabwe – a risk that Kganyago has himself raised, emphasising that current measures are simply temporary in nature.


Turning to markets, Bloomberg’s Business Week Magazine summed up the current situation with what it termed “the great disconnect”, as markets are telling a very different story to what’s happening on the ground economically. Global stocks have continued to rise, despite record unemployment levels, a world struggling with a recession, business and consumer confidence hitting all-time lows, and rising geopolitical risks including the situation in Hong Kong and US anti-racism protests.

In such an environment it is crucial, as an investor, that you stick to your investment philosophy. Focusing on having the right assets in the right types of investments for the right time horizons will ensure that you are able to both build and protect your wealth.

We do think that market returns over the longer term are likely to be lower than we have seen in recent years. Returns will undoubtedly be impacted as the world enters a period of slower, below-capacity growth, and as governments assume a greater role in curbing the excesses of capitalism. However, long-term investors will still need to consider investing in real asset classes, such as equities.

This is because inflation is likely to surface again in the longer term, given the surge in money printing by central banks and the global shifting of supply chains onshore. With this in mind, fixed-income investments will not offer the same inflation-beating potential as equities, which are usually dynamic enough to adjust and grow despite short-term volatility. Furthermore, amidst this volatility, time in the market rather than attempting to time the market will also prove critical.

Citadel’s approach is to maintain the cash necessary to cover income requirements for the next two or three years in fixed-income investments, avoiding the volatility of equities, then four or five years in prudent portfolios which try to match or beat inflation. We then emphasise keeping long-term investments in real asset classes, which offer the potential for inflation-beating growth to create and preserve wealth.

Overall, we remain quite defensive given the current environment, but as markets correct from time to time we will use the opportunities thrown up by volatility to grow exposure to growth assets.

Turning to South Africa, we still prefer fixed-income assets, as local government bonds are offering good real yields – compared with many countries in the West which are offering low or even negative yields. With careful portfolio construction we will continue to manage the risk of yields moving higher, depending on government’s fiscal situation.

However, we are still overweight global equity, as countries in the rest of the world have far more dry ammunition at their disposal than South Africa and can, therefore, support their economies and drive faster recoveries. This, in turn, will support company earnings. Additionally, many international companies hold similar or even lower valuations than companies on the JSE.

Turning to the prospects for the local currency, the rand recently started to strengthen as a result of all the liquidity swirling around the system and has benefitted from investors’ search for higher yields, which has driven emerging markets higher. However, this risk-on rally won’t last forever. As sentiment towards emerging markets changes, the rand will come under significant pressure again – especially given our poor local fiscal situation. In the medium term, this means that we are likely to see the rand devalue to its weakest level yet against the US dollar, hitting somewhere between R18 and R20 to the greenback.

This said, the US dollar has enjoyed the benefit of a very strong bull market for a number of years, which will eventually run out of steam – especially as investors turn around and realise that they are earning 0% in interest rates. The search for higher yields will then likely see the rand settle back at around R17/$ going into 2021. Any rand strength above this level represents, therefore, a good opportunity to consider buying US dollars.