Citadel’s Chief Economist Maarten Ackerman says South Africa can return to trend growth by 2025 if the private sector remains invested in the country and government avoids a debt spiral.
Unpacking the current global economic environment and market cycles, Chief Economist and Advisory Partner at Citadel, Maarten Ackerman, predicts that the global and local economy is heading into a proverbial winter season in 2024, which should be milder than the economic downturn during the Covid-19 pandemic, followed by a rebound in economic growth from 2025 onwards.
Ackerman was speaking at Citadel’s annual client presentation. The talk centered on the theme of how investment and wealth managers navigated the metaphorical summer, autumn, winter and spring seasons in economies and markets.
To know what the weather is going to look like you need to get information on the temperature and rainfall. The same applies to the economic weather outlook. Depending on inflation and growth trends in the economy, one can define the economic weather outlook. Using inflation and growth, four economic seasons can be identified, from depression (winter) to deflation, stagflation, and a goldilocks scenario (summer).
The Citadel investment philosophy is based on four pillars:
- The future is uncertain and will surprise – plan for economic seasons.
- Being valuation sensitive makes sense.
- Diversification improves portfolio returns and reduces risk.
- Asset allocation and financial planning drives performance.
A long-term investment approach, understanding the market cycles and accurate scenario forecasting and planning ensure that portfolios can weather economic seasons.
THE ECONOMIC OUTLOOK
“Most economic indicators suggest that the global economy should slow down further going into 2024 – moving into a winter cycle before spring arrives in 2025.” Germany is already in a recession and the United States is heading that way. South Africa is no different and given the local structural issues, our economy should experience a “colder economic winter” compared to many other parts of the world.
Ackerman said South Africa’s economy was underperforming due to structural factors such as unreliable electricity supply and the dysfunction of the country’s rail systems and ports which hampered exports. “So how do we turn winter back into spring? We need the private sector to invest in the economy. Fixed capital formation as a percentage of gross domestic product declined from almost 20% in 2012 to less than 13% in 2021. Since then, we’ve seen seven positive quarters, showing that the willingness of companies to invest is returning. This is the first step to rebuilding capacity in the economy.”
He said it was critical for the private sector to remain both financially and emotionally invested in the country – in other words not losing faith in the country – and if it did so, it could help the country enter an economic spring by 2025.
Ackerman also mentioned that South Africa was lagging its peer group and would continue to do so until the government fixed the country’s structural issues. Only consistent investment over time could bring the country back to a stronger economic position.
“With winter coming it’s probably best to have some dry wood in the form of cash and bonds in your portfolio, but the risk-reward is getting less rewarding when it comes to equities. South African equities still offer some opportunities, as well as certain global regions. Keeping quality equity exposure will benefit portfolios as market conditions improve.”
NAVIGATING GLOBAL INFLATION
Ackerman said the world saw a massive increase in inflation after the pandemic, which was exacerbated by the Russia-Ukraine war. Central banks around the world tackled the problem by raising interest rates quickly to much higher levels. Given the stickiness in inflation locally and abroad, investors should prepare that interest rates will remain higher for longer.
“In the next few years, we’ll probably remain stuck in a stagflation scenario, where we struggle to get growth going and inflation remains sticky.”
During this winter period the world is also facing some further geopolitical cold fronts. Over the past couple of months, the chess game between west and east intensified. At the BRICS summit six new countries joined and to counter the G20 invited Africa to become permanent members. Recent developments in the Middle East will add to this uncertainty and will cause more volatility.
“To summarise, global growth should bottom out during 2024 and return to trend growth from 2025 onwards. Globally and locally, political volatility is contributing to the winter we are in. But, the seasons will change, and spring is certainly due to return.”