Herman van Pappendorp, economist and head of macro research and asset allocation at Momentum, paints three possible world economic scenarios over the next five years.
- A base case or muddle through scenario (65% chance of happening). Government stimulation brings some economic growth normalisation but growth, inflation and interest rates remain below historical norms. US outperforms Europe and growth in China remains subdued. Commodity prices remain subdued too. SA’s growth potential will slip and rand will continue to steadily lose value.
- A worst case or “deflation” scenario (20%). Policy intervention proves ineffective. A combination of zero nominal interest rates and falling prices fail to stimulate demand. Capital preservation will be the main objective for investors, where fixed interest investments rather than equities are the preferred asset class. The US Dollar is seen as a safe haven. Emerging markets suffer under this scenario and the rand depreciates at a faster rate than in scenario 1.
- A best case or “reflation” scenario (15%). Policy measures are fully effective in restoring global economy to long term growth. Business and consumer confidence are self-sustaining, global growth resumes upward trend. Inflation picks up and interest rates normalise. Risk appetite increases and US Dollar weakens. Emerging markets benefit, including SA but to a lesser extent if current policy paralysis persists. Economic growth in SA would be 3% – 3.5% with a Rand/USD exchange rate of between R10 – R12
Van Papperndorp expects equity returns to be more muted over the next five years under all three scenarios and favours offshore equities.
(Summary extract from article : courtesy Personal Finance)