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Citation – Second Quarter 2022



Chief Economist
Estimated reading time: 20 minutes 25 seconds read


Over the past four decades, the world has slipped into a comfort zone. Now, in the last few months, it has been slapped with a wake-up call. The way we operate, as a global community, needs to change.

In the last 40 years, in the era of globalisation, we have seen an increase in technology and a rapid increase in global per capita wealth. On the whole, it can be argued, that globalisation has been very positive for the world. However, detractors will say that globalisation has contributed to greater economic inequality. When production, and hence jobs, moved to specific cheaper manufacturing hubs around the globe, millions of people were left unemployed on the other side.

Over the last 20 years, there have been a few events that have hinted at a problem with globalisation. The first was 9/11, where we realised that we are not a global family and that opposing sides do still view the other as the enemy. We cannot reasonably expect global peace, even if that was the ideal after the Second World War. The second event that suggested that all was not well in a globalised world was the Brexit vote followed by the election of Donald Trump as President of the United States (US). This was a stark reminder that countries were feeling left out in the cold and wanted to start looking after their interests once again.

Now, Putin’s attack on Ukraine, has, once again, highlighted the downsides of globalisation, and just how important it is for countries to not rely on a single supply source for their mineral and agricultural commodities, energy sources, or even cheap clothing. Globally, countries are waking up to the need to start diversifying their supply sources.

Supply shortages of fossil fuels across the globe have now also strengthened the climate change agenda and are making countries consider the energy-future of the planet, and how to accelerate the move to green energy. So, after 40 years of relative global peace, the COVID pandemic and the Russian war have forced the world to rapidly consider change. Yet, with this has come a global inflation tsunami of a magnitude that we have not seen since the 70s and 80s.

Globally, countries are also waking up and appreciating that they need to look after their people’s safety in terms of terrorism and peace, their health in terms of medical care, but also their real financial wealth as inflation is eating into everyone’s disposable income. To do this, they are realising that they need to diversify the supply of their goods, which poses a headwind for globalisation and will add to sticky inflation. Despite this, we are still a long way off from seeing the end of globalisation.


We have become so accustomed to getting cheap imported goods, that we have stopped considering the impact when everything falls apart. However, while many of us found the COVID-19 vaccine innocuous, the vaccine for high inflation – namely, interest rate hikes – is rather unpalatable.

Although the severity of this wave of inflation is reminiscent of the inflation of the 70s, it does have several differences. When we think about this instance of inflation, we clearly see how supply issues are driving prices higher. It started during the pandemic when governments decided to lock down their countries, and with that, factories stopped manufacturing and supplying goods for the global market. Then, we experienced supply bottlenecks post-pandemic as consumers wanted to start spending again. Added to this, as economies reopened post-pandemic, we started seeing several logistical bottlenecks like a shortage of transport containers. Just as we thought things could not get worse, Russia invaded Ukraine and we saw a massive supply shortage of agricultural commodities, fertilisers, sunflower oil, wheat, and energy commodities, like gas, oil and coal. And now, China’s zero-COVID policy has also disrupted supply out of its borders, which has added further fuel to the inflation fire.

Another driver of inflation came before the pandemic even started. As Trump wanted to curb imports from China, he started raising tariffs on Chinese imports. China retaliated and did the same. Despite tariffs being implemented, trade between the two countries has not slowed significantly. The only thing impacted has been their bilateral relationship. So, all tariffs have served to do is increase the cost of goods which is further driving inflation. Yet recently, the Biden Administration announced that it is looking at reducing some of these tariffs in an effort to combat the rising inflation figures.

These supply issues will be fixed, but it will take time and probably won’t be resolved for at least another 12 to 18 months. And even if we do get things under control, sanctions against Russia are unlikely to be lifted anytime soon and China, given the number of unvaccinated citizens is probably going to experience another wave of COVID-19, meaning inflationary pressures will be around for a while. That is one side of the coin.

The other side of the inflation coin is demand-driven inflation. As the global economy continues to open up, especially in the West, there is excess demand for goods and services. This pent-up demand is adding to inflation pressures, given that supply is lacking. Demand inflation is what central banks are hoping to curb by raising interest rates.

The idea is that if the United States (US) Federal Reserve (Fed) and other central banks hike interest rates, the cost of capital will increase, putting aggregate demand (from consumers and businesses) under pressure, which should help bring down demand-driven inflation. However, interest rate hikes will not be sufficient to control supply-driven inflation. This needs to be fixed over time by resolving the structural issues causing supply inflation.

As countries start to realise that inflation is linked to the shortfalls of globalisation, we are probably going to see what economists call “slowbalisation”, where globalisation increases at a slower rate, as countries start looking at diversifying their supply from single to multiple trading partners. Although securing supply, it will put play into the hands of high inflation, because countries will no longer be looking for the cheapest supplier of goods. This again suggests that inflation is going to be sticky for longer.

But in all of this, there are good opportunities for the investor. If you think about COVID, for example, there has been a huge increase in funding for medical research. We found a vaccine in record time, compared to previous vaccines. In terms of climate change, and the drive to move away from coal, globally, there have been huge investments into the green energy sector. Then locally, the Foschini group, as an example, has committed to double its spend with local clothing manufacturers, meaning increased production could create in excess of 5 000 local jobs. So this wake-up call is creating opportunities which wouldn’t have existed had the world continued with business as usual.

Given this background, inflation in the West is sitting at 40-year highs. In the US, inflation is currently approaching 9%, and in Europe and the United Kingdom (UK), it is north of 8%. The consumer is not responding well, and we are seeing an increase in strikes all across Europe and the UK. This is because people on the ground are paying a lot more for energy, gas, heating, and food, and are demanding that their governments absorb these increases. These factors have driven consumer confidence to all-time lows. Central banks, therefore, need to take note.

However, in the last quarter, we have seen that central banks are starting to take inflation seriously. The Fed, for example, recently hiked interest rates by 75 basis points, the first time that they have done so since 1994. Fed Chair, Jerome Powell, has also acknowledged that the Fed knows what it needs to do, but that it is walking a fine line between getting inflation under control, and damaging the economy and labour markets. Yet, they need to get inflation down to their target of around 2.5%. This, though, is not going to happen until they can get the growth in aggregate demand below capacity. Powell has stated that to achieve its goals, the US public has to brace for a difficult economic environment, as the likelihood of a recession is increasing. Until inflation rates start declining, the Fed will continue to hike inflation rates, and a hike of as much as 1% is not off the table.

On the other hand, if inflation is brought under control, we will likely see the Fed take its foot off the gas. Although the Fed does not need to see inflation rates fall to 2.5%, they do need to see a strong downward trend in inflation numbers before they relax their rate hikes. Hikes will stop long before we get to the targeted levels of around 2.5%, which will bring some relief for consumers and businesses.

The European Central Bank (ECB) is also looking to close the taps, and they are looking at a 50 basis point hike before the end of the year, which is a big jump when you consider that they are coming off a base of 0% interest rates. With bond markets starting to price in this interest rate hike, the ECB is becoming concerned. A country like Italy, which is one of the biggest lenders through bond issues, could feel the pinch as their cost of borrowing money jumps. A big interest rate hike could push them over the edge and take the EU into an economic crisis. So, it is crucial that the ECB gets eurozone inflation under control.

China, on the other hand, is on a different cycle to other major economies in the world, and while the West is turning off the taps, China is looking to open their monetary policy taps to try and revive its economy. The Chinese economy has slowed down under the country’s zero-COVID policy, with city, factory and port lockdowns impacting local consumption. As a result, China’s inflation figures are currently well below 3%. Food makes up a significant portion of China’s inflation, and currently food prices are being maintained, and pork prices, particularly, have fallen significantly, helping to lower inflation. Heading into 2023, while the rest of the world slows down, China may actually pick up some of that slack and do better economically. The good news is that this will have a positive impact on other emerging markets, including South Africa.

So, in summary, with global inflation at four-decade highs, it is the number one risk to economies at the moment and the resulting policies to curb inflation are of great concern to the markets. However, we do expect to see a decline in the rate of inflation in 2023. Having said that, Citadel is expecting that we will have to manage above-average inflation, of about 3.5%, for the next three years, which is higher than most central-bank targets in the Western world. This is a result of the supply issues that will take time to resolve.


As central banks look to get inflation under control by raising rates, they are risking global growth. The question is: how quickly will rate hikes kill economic growth and potentially send the world economy into a recession?

In the US, company earnings are still strong, but there may be tough times ahead. Right now, however, the economic fundamentals are suggesting that the risk of a recession is increasing fast. When you look at indicators like Purchasing Managers Index (PMI) numbers, they are indicating that we are in a sharp slowdown phase but that they have not bottomed out yet.

In consumer-based economies like the US, the EU and the UK, the consumer is ultimately the most important consideration. For now, we are seeing that consumers are still strong, and we have not seen retail spending collapse. Employment numbers are also still steady, even improving, and in the US, unemployment figures are at a 50-year low. In fact, in the US there are more job openings than there are people looking for work. However, this is not ideal, because it is yet another factor driving inflation numbers, as employers are paying more to fill jobs, and increased wages are enabling greater consumption.

Having said that, consumers are now paying more for food, energy, petrol and other products and their mortgage payments have also increased significantly, which is eating into their disposable income. But we are still seeing strong consumer spending. This is because going into COVID we saw excess savings as a percentage of income. In Europe for instance, the savings rate went from 10% of disposable income to 25%. That was as a result of people sitting at home, spending less, while earning the same. People were also getting a lot of support from their governments. Now these savings rates are dwindling, as consumers tap into their savings to keep their spending up in real terms. People are also able to spend more on credit, for the same reason that they did not spend during the lockdowns of the pandemic.

What we are seeing, is that with strong employment numbers and strong consumers, economies have some support. As such, the likelihood of a recession is probably not imminent.

Even though consumers are financially fine for now, there is a catch that central banks need to be aware of. Should consumer confidence fall further, economies will not be able to count on them to hold off a recession. Currently, consumer confidence is below levels seen during COVID, during the European Banking Crisis in 2013 or even the financial crisis of 2008. This is a major red light for consumer-based economies. If consumers are not confident about the future, they stop spending. Inflation is driving this lack of confidence at the moment and that is why we are seeing social unrest and strikes across regions like the EU where labour unions are demanding higher wages. So, again, central banks need to get inflation under control.

Another red flag that we need to keep an eye on is the rapid increase in the US mortgage rate. We are seeing the fastest increase in these rates since 1986. Even though mortgage rates are below the strong commodity prices then we need our infrastructure to support the export of goods and materials.

Another positive for South Africa is that the economy is back to pre-COVID levels. Although it took a little bit longer than other countries, our economy is now bigger than it was before the pandemic. So with a growing economy and the economic reforms referred to above, we have also printed a lower unemployment rate (although it is still very high). It is therefore critical that we continue with the reforms and encourage fixed investment. Higher growth numbers will turn unemployment around and help alleviate the risk of social unrest in the country.

And where other countries are under pressure, ratings agencies have moved South Africa from negative to stable. As such, the country’s equity and bond markets including the rand are faring well relatively, to our peers.


When we look at the investment environment for the next three years, current indicators suggest that the global economy, and hence, consumers, are going to be under pressure. This poses headwinds for companies and company earnings. Markets are also currently very volatile in a very uncertain geopolitical environment. We are sitting with an inflation battle and there is uncertainty in terms of how far right we need to go to curb inflation numbers. This environment requires us to consider several factors when it comes to our portfolios and how we manage our clients’ money.

The first thing is high inflation. This means that although people may feel safer with their money in the bank, we advise against this. This is because although there is downside risk in equity markets, storing cash will net negative real returns over the next three years, leaving people who run to safe assets financially worse off. So, what should we do?

Citadel has been managing money for 30 years. This is not the first time that we have encountered these types of economic and market challenges. We have been through a number of bear markets, some of them as a result of recession, some of them as a result of external shocks. By sticking to our investment philosophy and strategy, we have always emerged from these down cycles better than when we went in. This means that by taking a long-term investment view, we can beat inflation and ensure you maintain your lifestyle well into the future.

In the last edition of Citation, we chatted about the four pillars of Citadel’s investment strategy:

  1. The future is uncertain, and we need to think about different scenarios and using different asset classes in our portfolios that behave differently depending on the current economic scenario.
  2. Valuations matter so that we do not overpay for our opportunities. We always try and buy at a discount and avoid expensive assets. Right now, global equities are fairly valued and are not expensive and remain a good long-term investment despite some short-term risks.
  3. Diversification is important, especially in this type of environment.
  4. Asset Allocation is key for a financial plan that works for you – matching your cash flow requirements with your capital base.

Point four is worth unpacking more, given the current economic uncertainty. The way Citadel manages portfolios is through a cashflow process. We do not try to time the market, by getting out in tough economic times and then reinvesting when the economy turns around. We believe this will usually result in losses. What we prefer to do is ensure that your immediate cashflow needs are taken care of and that your capital is invested well, with a long-term view in mind.

So let us unpack this with asset allocation in mind. We start by looking at how much money you need for the next two years. We work out a budget for you, where we look at what you need to cover your living expenses – school fees, holidays, and any other day-to-day expenses – and we will invest that amount into cash assets. This way you can sleep well at night, knowing that your living expenses are covered. So even with a potential recession looming, you know that you will be able to cover your daily expenses at least for the next two years. If you are still an accumulator and you do not need cash, then that is the first part of the answer, and you have time on your side and you can afford to stay in the market as you weather the storms.

Then, money that you may need for the next three to four years will be put into prudent, shock absorber asset classes like bonds, which could match inflation over time. There are also alternatives like gold that are good tools to manage market volatility. So, if you think the economy is going to be under pressure for say 18 to 24 months, this gives you another buffer until the economy recovers. Other assets to consider in this space include managed volatility and hedge funds.

Then, the money that you do not need for the next eight years plus, is invested in growth assets like equity. So, if you think we are going to enter a recession in 12 months’ time, this will not impact money that you do not need for another decade from now, because by then, the world will be in a very different economic environment. Equity markets typically move in eight-to-ten year cycles, so the money you do not need can go through these cycles and not only beat inflation, but also grow. The key is to invest in quality companies that are defensive in this part of the cycle. So although equities are more volatile, companies that have pricing power and can keep their margins through this cycle are ultimately going to give you returns upwards of 5% above inflation.

In summary, in an environment that is tough and might get tougher, you can rest assured your wealth is taken care of and you can continue to sleep well at night, knowing you can cover your expenses for the next two-to-six years with the investment pots that cover short- to medium-term spending. Your long-term investment needs are then invested with long-term growth assets that substantially exceed inflation. The Citadel Asset Management team will manage all the investment pots actively throughout time. In times like these, SA bonds as an example should form a core part of the prudent bucket with yields north of 11%. In the long-term growth bucket, the team will ensure that we include the best defensive companies but also increase strategies that will limit the downside – like managed volatility. Building a portfolio in this manner allows you to make the most of all the opportunities that present themselves in tough economic times and ensures that your long-term assets will grow in excess of inflation. You can be assured, that using this strategy, a permanent loss in capital is almost impossible.