Download Safety During Uncertainty: From Virtuous to Vicious Cycle?

CHRIS HART
Economic Megatrends
Setting the business and investment horizons
Investment implications: longer term
Inflation
Demographics
Economy
and
markets
Technology
Climate
Change
Commodities
Emerging &
developed
markets
2
CRB Commodity index: record commodity
prices following 20-year bear trend
Source: INet
Commodities: inflation adjusted suggests there
is scope for more!
Source: INet
Commodities: long term bull market.
Super-trend, around which there will be
cycles
Supply
Demand
Infrastructure
Depletion factor
Structural rise in demand
from emerging market growth
Expansion and maintenance:
Global backlog across both
emerging and developed
markets
Global demographics will be driving policy and
economies
Age
profile
Dependency
ratios
Demographics
Education and
skills
Longevity
6
Energy prices: records and uptrend to be sustained. New
technology a very long term limiting factor
Source: INet
Economist Food Index: a global problem. Fuel
prices raising production costs
Source: INet
Technological gains: a key change driver
Forgotten post the tech bubble
Commodity
prices
Substitutes
Exploration
Extraction
Food
shortages
Technology
Utility and
advancement
Climate change
Bio fuels
GM, hybrids
Climate
change
Geo-political
tension
Platinum
Uranium
9
Geo politics: economic power shift from the
developed world to emerging markets
A decade ago
US
Superpower
No rivals both militarily and economically
US catches cold…
Now
US debtor
nation
Demographics
Growth dynamics
Internal critical
mass
10
Inflation: a multiplicity of “challenges”
Emerging
market
affluence
Commodity
prices
Global
inflation
Regulation;
protectionism
EM
demographics
Central banks
11
EU bond yields: trend change due to inflation.
No longer benign due to commodities
Source: INet
South Africa: the short term
$/R
BoP
PPI
Trade
Balance
The
Business
Cycle
CPI
GDP
Demand
Interest
Rates
Inflation: relentless rise since mid-2006
Food, fuel, rand weakness
Source: INet
Food inflation: another surge
Solution??
Source: INet
Transport: highest inflation level since 1993!
Source: INet
Furniture: inflation? What inflation?
Source: INet
Maize: at high levels and staying there
Source: INet
Chicago maize
Source: INet
Wheat: tripled in two years
Give us our daily bread will cripple the taxpayer!
Source: INet
Economics: lesson 1
Suppress price and create a shortage
Supply
Price
Equilibrium point
Demand
Source: INet
Quantity
Other key economic issues
GDP growth: cycles evident and roughly two
years in duration
Vicious cycle could become more violent due to
extreme current account gap
The current account: does not matter until it
does!
9 months ago
Current a/c
-6% GDP
Only!
May 2008
Current a/c
-8% GDP
Politics
Slowing growth
ESKOM
26
Interest rates: heading for recession in
consumer sectors
Source: INet
Vehicle sales: in recession already
Source: INet
Property: house prices not keeping up with
inflation for the first time in 9 years!
Source: INet
Inflation: Above inflation target for at least the
next 1 to 2 years
Source: INet
Interest rates: could we reach 2002 levels
Tito Mboweni is in a really bad mood!
Source: INet
Rand not helping
Source: INet
Rand: crash vs euro (but not a crisis!!)
Source: INet
Defeating inflation:
if the hammer was the cause of the
headache, more hammer is not the cure
Supply - demand
Cost - push
Fiscal reforms
Interest rates are bringing
down demand but not
inflation!!
Costs can be absorbed with
higher productivity and
competition
Spend on infrastructure,
lower cost of doing
business, penalize
consumption, reward saving
… and if you think we have a problem:
Source: INet
Keeping perspective
Cyclicality
Current position
Two years hence
Cycles are a natural part of any
economy
In a down cycle at present and there is
further downside. 2008 will be rough!
Resumption of up-cycle with greater
strength due to lessons learned in this
cycle
Thank you
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