keep targeting inflation
04 June 2008

The Reserve Bank, which is expected to increase interest rates next week, was doing the right thing to target inflation as high inflation could make it harder to attract capital investment, said Philip Saunders, global head of strategy at Investec Asset Management.

Saunders said global financial markets have swapped fears of recession for fears of inflation. From August, the US Federal Reserve was driven by recession fears, so cut interest rates to save the economy from the subprime crisis. Now the Fed was expected to focus on reining in inflation by slowing down on rate cuts.

David Shapiro, investment consultant at Sasfin Frankel Pollak Securities, agreed this was a big issue. “Inflation is a bigger problem than the credit crisis,” Shapiro said.
Inflation in SA started with oil and food, but Saunders said food prices were coming down and the oil price would experience a significant correction. But the inflationary effects from these factors have spread into many local industries, with consumers taking the brunt of the pain and suppliers unable to keep costs at bay. Violence in local townships has also not helped, placing SA under the scrutiny of international investors, said Saunders.

He said the southern African political environment was seen as unstable, with Zimbabwe’s looming election runoff and post-election violence adding to these fears.
On the emerging markets front, Saunders said these countries may not be in favour this year, but Brazil, Egypt, the Middle East and Africa (except for SA) would be his top choices. Looking ahead for the next six months, Investec Asset Management would concentrate on US equities and sectors such as financial services, healthcare, telecommunications and technology. Saunders saw recovery opportunities in the US financial sector and felt debt markets looked attractive when it came to investment grade credit.

“The world economy is like a drunk on a bicycle, it falls off every now and then. It’s not ideal but it is what it is,” Saunders said. “But I feel more confident about the resilience of the world economy and growth. I don’t think we’ll have a global recession.” With additional reporting by Renée Bonorchis.

Loyiso Sibali, www.businessday.co.za