[TOP STORY] Inflation, rate hikes, stagflation, greylisting and bonds in 2023

SIMON BROWN: I’m chatting with Rhandzo Mukansi, portfolio manager at Futuregrowth. Rhandzo, I appreciate the time today. I think it’s fair to say that from the monetary policy perspective hawks pretty much ruled the roost last year. Things could start easing this year. Inflation is coming back a bit locally and globally. Is it fair to say that that inflation has mostly peaked in developed economies and locally in South Africa?

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RHANDZO MUKANSI: Hi, Simon. Thanks for having me on the line. I think it is fair to say inflation has peaked. Domestically we saw that peak at about 7.8% mid last year, [with] perhaps the developed market slightly behind in terms of the peaks. But in the last quarter of last year we have a fair degree of comfort that we have seen peaks in inflation globally, and that inflation should tail off this year.

As far as the continuation of rate hikes go, our view is there’s a little more to come both domestically and globally, but more so where real policy rates are, and real rates are just on inflation.

The developed world is quite far behind where South Africa is in terms of that real policy rate. So in our view, regardless of inflation falling over a little bit, we still think that there is some hiking to come from global central banks.

SIMON BROWN: Yes, certainly some hiking to go. And hose DM [developed markets] rates – they’ve still got some upside to go, it’s likely [to be] higher for longer. Inflation is coming down, but targets – and I’m thinking of the US Fed target of 2% – those inflation targets are still a way away.

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RHANDZO MUKANSI: Yes, certainly. Relative to target rates, inflation is well above those rates at the moment. If you consider the US’s target inflation rate is about 2%, as is the Eurozone’s, spot inflation rates are well in excess of that. The US’s last inflation read in terms of consumer prices was about 6.5%; euro areas [are] stuck at about 10%. So in our estimation [it’s] still a long way away from target rates and, by consequence, we expect monetary policy rates to remain elevated for some time to come.

SIMON BROWN: You mentioned Europe, the UK as well. Things [are] not so sunny there [in terms of] their inflation, and they’ve got issues. The Ukraine war is most notable and of course the energy concerns, although a warmer winter helped with that. But the outlook there is perhaps less sunny than, for example, in the US.

RHANDZO MUKANSI: Indeed. I think you touched on the concerns as far as the euro area and the UK are concerned, and their geographical proximity to Russia and Ukraine obviously doesn’t help, as doesn’t the energy inflation that they’re experiencing perhaps more than other areas. So [for] the euro area, we do have some concerns around the growth trajectory this year, as well as the slowness in terms of the normalisation of rates. By consequence you see inflation there slightly higher, and we are concerned about the slowness of the normalisation there relative to the rest of the developed world.

SIMON BROWN: What about risks of stagflation? I had a couple of conversations with commentators last year, and the general consensus was that no one absolutely wants stagflation. The risks were probably fairly low. Is that still a fair comment?

RHANDZO MUKANSI: In our assessment those risks have escalated somewhat. Our sense for 2023 is you have this rolling over of inflation, as we discussed, but growth as well is rolling over post the Covid rebound and post some buoyancy last year.

So our concern is that, although inflation is rolling over, growth seems to be slowing more than inflation.

And in this world, where monetary policy rates need to normalise to combat inflation, you’ve got this complexity that’s brought about by weaker growth which is expected in 2023.

So our assessment is stagflation is very much still topical and a risk for the developed world in 2023.

SIMON BROWN: Bringing it home, one of the risks to our currency and potentially inflation is the Financial Action Task Force. They had a couple of meetings last year [and] they’ve got a plenary meeting next month. We are going to be on the agenda. Have you any sense of the likelihood of a greylisting for South Africa and the potential implications?

RHANDZO MUKANSI: I think our sense is there’s meaningful risk of grey listing next year, and it’s really brought about by legislative concerns domestically, where we haven’t been as strong as we perhaps should have been in terms of anti-money laundering and terrorist finance – and the policing and enforcement thereof.

On the legislative side we’ve certainly seen some progress being made, but on the policing and enforcement side, we still have some concern that domestically we’re not where we should be [in terms of] the requirements [of] the Financial Action Task Force.

So our sense is that greylisting risk is real.

And in February this year, as you mentioned, there is a plenary sitting and South Africa will be discussed and we think there’s significant risk that South Africa can be greylisted.

As far as the implications go, Simon, I think [that is] a little more challenging. There’s not a great precedent for a country like South Africa as far as greylisting is concerned. The risk could be on foreign direct investment primarily. But, as I mentioned, there’s no great precedent and we’re a little bit uncertain as to the consequences.

SIMON BROWN: Yes, it won’t be nice. Unfortunately we are going to have to find out, almost in real time.

Local bonds in 2022 certainly compared to equity – not a bad year for local bonds. [Your] expectations for 2023 in terms of the local bond market?

RHANDZO MUKANSI: I think, as we spoke about earlier, South Africa’s real policy rate is good, and that should be supportive in our estimation for bonds this year. So, as you mentioned, relative to equity, last year was not bad for bonds. This year we expect a little more of the same.

As far as risks go we’ve spoken about the stagflation risk. I think that’s a prominent risk into 2023 for local bonds, as is South Africa’s fiscal situation where we – or Treasury at least – expect some level of fiscal consolidation, where [we] perhaps [are] not as enthused as they are on the prospects for the local fiscus. That should add some risks to bonds in 2023 in our assessment.

SIMON BROWN: We’ll leave it there. That’s Rhandzo Mukansi, portfolio manager at Futuregrowth, I appreciate the time.