Inflation will "continue to surprise SA investors"
03-11-2003
Is the long bull-run over for government bonds — and thus for listed property, which closely tracks the performance of the former?
Inflation, the main driver of the bond market, will fall below the consensus forecast of 5,5% - even to as low as 4% - and continue to surprise SA investors, says Brian Kantor, professor of economics at the University of Cape Town. He was speaking at the recent Rode Conference at Spier Estate.
He says he’s argued since 1990 that SA fund managers are overestimating inflation, with the result that it surprised SA investors, and gave exceptional returns to holders of fixed interest investments.
The JSE, on the other hand, “has gone almost nowhere, in real terms – maybe because it is less representative of SA companies and does not reflect the underlying economy”. The poor performance of the FINDI and resources sectors was a result of the market’s failure to expect lower inflation, he says.
Professor Kantor says the downward trend in the inflation rate is structural, not cyclical. “I think we’ve seen the end of the bull-run on US bonds. US economists have identified a structural shift in productivity growth, which has led to increased output per person employed.
“This is not about to fall. And it is not a simple matter to adjust to an efficiency gain and the extra potential it creates. I’m optimistic about the US economy and their authorities’ ability to come to grips with it.”
In South Africa, inflation can trend down to around 4%, he says. Purchasing price parity (PPP) will hold, in the long run, and exchange rates will follow inflation differences, he says.
Inflation in this country is more a monetary phenomenon than caused by productivity forces. Fiscal policy is therefore fundamental to one’s inflation view, Kantor argues. Because of the fiscal and monetary authorities’ success in bringing inflation down, it is unlikely that they will do anything to change that situation. As a result, inflation will stay low.
“Business must get its head around lower inflation. A weaker rand will not save SA business budgets. We have to get cost inflation down, because the market will not be forgiving.”
As for property sector prospects, he says the yield on property will improve as the yield gap narrows. “But it is not just a matter of interest rates – the industry must learn to manage its business.”
Professor Kantor says interests rates coming down “must be music to property investors’ ears”. Because listed property follows government bonds so closely, he asks whether the time has come to hedge investments in the former.
“The world economy has recovered and commodity prices are coming down. The market watches this commodity cycle as it leads resource earnings. The JSE will do better as a result.
“As long as the rand goes up and inflation comes down, interest rates must be cut. Otherwise money becomes too expensive. We welcome lower inflation rates in the short term. It is encouraging for rand players, as long as the commodity price cycle trends down and the world economy keeps recovering,” he says.
