Sitting here in South Africa, we have an extraordinarily clear sense of the strange asymmetry between capital markets around the world. There are many examples, but let me bring up just three.
First, a year ago, the global economic consensus was bleak. It was widely assumed that there would be recessions in a whole host of developed markets. At the start of 2023, the International Monetary Fund predicted that US GDP would grow by just 1.4%, Germany would barely register positively, and the UK would contract by 0.6%. The report predicted that China and developing Asia would lag behind in global growth, with GDP growth there projected at 5.2% and 5.3%, respectively. Overall, on average, global growth will be OK, but below par, at 2.9%.
These numbers look ridiculous now. The US is nowhere near recessionary, with the labor market absurdly tight, as is Europe too, and although the GDP numbers were a bit disappointing. US economic growth for the second quarter came in at 2%, nearly 60% higher than the agreed figure. It is almost unknown that the most analyzed market in the world can be so badly misunderstood.
Things are looking so good in the US economically that President Joe Biden has been touring the country promoting “BedAnomics”. Germany is already in recession but the UK is not. China may not be way ahead, but none are far behind, while India continues to strengthen.
I think that forecast made perfect sense at the time, as the world was used to the idea that high inflation kills economic growth. So economists looked at inflation expectations and drew the obvious conclusions – except that they weren’t so obvious.
Forecasters also assumed that a Russian invasion of Ukraine would sever supply lines and reduce European energy capacity much more than it actually did. Geopolitical uncertainty is certainly a factor in 2023 — perhaps not as much as it seemed natural to expect in, say, the middle of last year.
Second, my guess is that stock market pundits would have figured that developing markets would be the place to be in 2023, to the extent we can still describe it that way. But China’s stock markets have almost been hit hard this year, and big companies in particular are going sideways. If the Hong Kong stock market falls 1% more (it’s down 6% so far this year), it will be trading at levels last seen in 2009. That’s very strange for a country and region that’s growing at 4.5%. European markets don’t look too bad, which is odd for the exact opposite reason.
But the big surprise is that the US markets are growing by leaps and bounds, which is wild considering there should be at least some return investment left given the high interest rates. The S&P 500 is up 15.6% year-to-date. The great symbol of the US market, Apple, is now a stock worth $3 trillion (or just under), which is almost unimaginable, with Microsoft not far behind. People who once confidently assumed that China would naturally overtake the United States as the world’s largest economy are now saying that may not happen at all. (I think he will.)
economy and innovation
Third – and this relates to the two above – the fundamental nature of the economy shifts from a world dominated by manufacturing to one dominated by innovation. The clearest example of this is the sudden explosion of generative AI, but that’s just the tip of the iceberg. In some ways, the reason for the amazing increases that Apple and Microsoft have achieved in the first half of the year isn’t really so much what they’re offering, as it may be that they’re impressive. Both companies trade at levels that most would consider too expensive.
I suspect its value is underpinned by the anticipation of what innovative heavyweights will be able to do in the future in any and all areas of the economy. From manufacturing technologies, to global entertainment, to agricultural improvements, businesses that have innovation built into their systems will succeed; Those who don’t, won’t.
This is becoming more clear now. Data is not the new oil. Data is assumed. The ability to use data effectively is the new oil. Or, not to broach the point, Reed Hoffman, who helped build PayPal and Linkedin, among other ventures, said recently that while Steve Jobs once stated that computers would be bicycles for the mind, artificial intelligence would be its new steam engine.
South Africa appears to be in contrast to all of these trends. South Africa’s economic outlook in 2023 turns out to be not overly pessimistic but overly optimistic. One commenter called JSE a “chocolate box” – almost every company seems absurdly cheap. And the absorption of new technology is very slow; It does happen in some places, but if you can’t get your power supply right, you’re not likely to make any meaningful contribution to the creation of artificial intelligence anytime soon.
More and more, South Africa’s lost economic decade is starting to look like a lost decade and a half. Sorry to be miserable, but the simple fact is that SA needs more than an improved outlook: it needs a policy violation. It needs a comprehensive rethink of its entire economic system.
It’s that easy. DM