World Gravitates Towards Recession


By Mbatjiua Ngavirue WINDHOEK There is concern that the world may be shifting from a benign environment to a sharply negative global economic cycle, with the world economy moving into recession in 2007. Alwyn van der Merwe, Old Mutual Asset Managers (OMAM) investment strategist, delivered this stark message at an OMAM quarterly briefing held in Windhoek recently. Van der Merwe says given the resultant uncertainty there are risks of further falls in the value of the Namibian dollar, as well as a risk of higher interest rates. An economic cycle of higher inflation and interest rates has arrived in South Africa – the severity of which will be largely determined by global economic developments. Van der Merwe is confident that the global environment will remain Southern Africa-friendly even though economic and financial market risks have undoubtedly risen during the first six months of the year. He therefore feels that the region is still heading for a structurally higher growth and low inflation environment, in which the rand is no longer, a one-way bet to weaken. “A local cycle has arrived but we expect it to be muted. We do not foresee a major slump in the currency, provided our global view is correct. “The local rate cycle could therefore be muted.” “Inflation risks from oil, a softer rand and food prices do argue for further tightening. But we think the cycle will be limited to possibly two more 50-basis point hikes,” he says with regard to the local outlook. The risk of a bigger rate cycle is essentially dependent on the global environment, he adds. Against this backdrop, it has been a bumpy ride for investors since interest rate and emerging market jitters set in midway through May and this volatility is set to continue in a global environment of heightened risks. “After recommending an overweight position in equities for the past few years, we have now reduced the risk in our portfolios by taking some money off the table.” He however stresses that OMAM still believes that equities are likely to be the best performing asset class in the longer-term, given the still favourable structural economic and financial outlook for the country. He notes the 40% a year rally in the Namibian Overall Index since 2003 was fuelled by strong earnings growth, a re-rating in the market and foreign investors’ appetite for Southern African equities. This bull-run was also associated with very low volatility and lower discounts for risky assets internationally. During the first half of the year, the equity market experienced several sharp moves up and down but still managed to deliver double-digit returns to investors, he says. Looking forward, Van der Merwe, says investors should not expect excessive returns because the outlook for earnings growth is less certain. “Don’t expect a performance boost from equity ratings because they are above their long-term average and the risks have increased,” he adds.