JIMMY MOYAHA: I’m chatting now with Rhandzo Mukansi from Futuregrowth [Asset Management], looking at the concept of stagflation. Now this is a very technical thing. There are a lot of technical definitions around it. We know that the broad definitions include things around high inflation coupled with low economic growth – and that’s occasionally sprinkled with high unemployment, which sounds very much like South Africa on a normal day.
Rhandzo, your thoughts on this? What’s stagflation for the basic South African out there? Explain it in simple English.
RHANDZO MUKANSI: Good morning, Jimmy. Thank you very much. I think you put it well. Stagflation is really a period marked by weak or weakening macroeconomic growth and increasing or high inflation. And then, as you said, [it is] often coupled with heightened unemployment as well. So not too dissimilar to what we’ve experienced domestically for episodes over the past 10-odd years.
JIMMY MOYAHA: This pretty much sounds like an everyday situation in South Africa. If we look at countries like the UK that are battling with what they now consider potentially heading towards stagflation, their inflation is at 10%, their unemployment is at 3.8%, and they’re all freaking out.
If you look at South Africa, our inflation is not that high up. We’re sitting at about 7.7%. We know our economic growth averages at 1%, maybe 2% if we’re having a good year, but our unemployment is sitting at 40%. This ticks all the boxes to sort of say South Africa is pretty much living in stagflation on a constant basis. How does this then affect South Africa sort of practically, how does it affect your everyday South African relative to something like a recession?
RHANDZO MUKANSI: I think the big impact we’re seeing now is primarily on the inflation side. The central bank has done well to contain domestic inflation. In the past couple of years it has really been well anchored at around 4.5%. And what we’ve seen globally is the consequence of the supply-side shocks, initially from Covid and then subsequent to that, of course, due to the Russia and Ukraine war, the biggest cross-border conflict pretty much since the Second World War.
So you’ve had these very two big global macroeconomic shocks and domestically how it’s manifested significantly is really in our inflation, where we’ve seen inflation de-anchor from that 4.5%-odd we’ve had in the past couple of years to just short of 8% with the July print now. So really the impact on the man on the street is the inflation hits due to their pockets pretty much, where inflation has gone, as I’ve said, from, what, 4.5% to just short of the 8% that we’ve seen now.
Maybe from a broader macroeconomic perspective as well, the risk that we’d see in terms of our investment landscape is to the fiscal channel. That’s really speaking to government finances.
This mix of low growth, high inflation, has potentially significant risks to government finances and, by consequence, against all of our citizens of the country.
JIMMY MOYAHA: Yes. Now you mentioned government finances and that’s the interesting thing. ‘Government finances’ ties into social grants. It ties into infrastructure expenditure by the government. It ties into the ability to finance Eskom in bailouts and that sort of thing. The ripple effects that come with government finances being adversely affected stretch far beyond what you and I sort of see on an everyday basis, and they can actually come to a fundamental crippling of the country in some respects if they’re not adequately managed.
But now from an individual perspective, just before I let you go, from an individual perspective how do you then manage your portfolio to hedge against stagflation? We know that if you’re looking at things around inflation and those sorts of thing, your inflationary hedges are typically things like gold. What we’ve seen recently is the US dollar and that sort of thing. But how do you then hedge your personal portfolio against the effects of stagflation?
RHANDZO MUKANSI: I think firstly you need to be convinced that we are in a period of stagflation, and perhaps my counter to that would be that central banks have responded very strongly to the effects of heightened inflation. We’re seeing that both in the developed world as well as domestically.
But if we are to be concerned about stagflation’s risk, a safe asset in this environment, I think, would be cash – where you want to move away from risk assets, be they equities or bonds, and you want a heavier than usual holding in cash to protect you from the erosion of your buying power as a result of inflation.
So I think we have to be fully convinced, just given the extent to which central banks have responded to the risk. But if we are convinced of that, then the best risk asset in this environment in our view would be cash.
JIMMY MOYAHA: You heard the man. Rhandzo said it: cash is king. Thanks very much. Rhandzo Mukansi is portfolio manager at Futuregrowth.