Arthur Kamp, who has been an investment economist at Sanlam since 2005, is able to provide some guidance on sifting out the economic data wheat from the chaff provided by the ongoing political theatre, which threatens to create so much noise in social media that it drowns out important and vital data and possible tipping points.
“Essentially, when there is uncertainty in the market around the outcomes of economic policy it can cause a lot of volatility in asset prices. So, the key thing is to keep an eye on those long-term values,” Kamp said.
“Firstly, my job is to watch world events, in particular those events that have an impact on debt markets, which are events that drive interest rates, as interest rates are used in the valuations of all assets,” says Kamp.
He notes that the biggest driver of interest rates is having a large part of the population entering working age, a trend that has been much stronger in emerging markets.
“Globally one of the big drivers of savings has been China and the very high levels of saving in China, which has contributed to what Ben Bernanke once called the ‘savings glut’. When you’re at working age, you are earning your most income. When you’re in retirement, you’re more or less consuming. So, if you’re going to save, it’s while you’re of working age,” he noted.
In recent times, and especially since the global financial crisis of 2008, when the major central banks engaged in quantitative easing, there has been significant downward pressure on real interest rates, but that is in the process of changing with the US Federal Reserve and the Bank of England raising rates to what is deemed a more normal level.
“The other important economic trend is expected inflation, because our jobs as asset managers are to beat inflation over the long term,” Kamp added.
In the short term, economists have a fair chance at forecasting inflation, but that doesn’t help asset managers with long bonds. They need long-term rates and need to know what the average rate of inflation over 10 years will be.
Mean inflation in SA since 1921 has been 5.25percent per year. Incidentally, the South African Reserve Bank’s track record since it started implementing inflation targeting is also close to 5.25percent.