SIMON BROWN: I’m chatting with Maarten Ackerman – he is a Citadel chief economist. Maarten, I appreciate the time. It was back in February, literally, that we had the budget one day and then a day later Russia attacked Ukraine. This is having obviously massive political issues, but there are economic implications too. One of those is a threat of recession.
MAARTEN ACKERMAN: Yeah. We went into this year with quite a healthy economic base coming out of Covid globally, also in SA. And unfortunately with the war in Ukraine the economic outlooks very quickly deteriorated.
So at the beginning of this year the expectation of the likelihood of a global recession was round about 25%, and suddenly within a couple of weeks we are now sitting very close to 50%.
The reason for that is the impact from Russia and Ukraine is basically now on commodity prices. So all consumers are feeling [the effect] in terms of paying for energy, petrol, food – and that’s eating away in terms of what is disposable income. If that continues much longer eventually – well consumer confidence is already at levels we saw during Covid, so the consumers in the Western world are not happy – and that will impact consumer demand and that can lead to a global recession in the next 18 months or so.
SIMON BROWN: We had some tailwinds last year. One of them was agriculture and, of course, some of the shine has been taken out of that with higher input costs – fertiliser and the like. We also had the mining boom. But you make the point [that] commodities are back a bit. They are still fairly elevated, but it is issues such as cost of energy. We are an importer of oil and it’s gone from $50/barrel to plus $100/barrel. It has doubled.
MAARTEN ACKERMAN: Yeah. In SA we probably in a slightly better position compared to the rest of the world, simply because we export a lot of the commodities that have now been sanctioned on Russia. Last year we definitely had that tailwind from a commodity boom as the world came out of Covid. That really helped us also in terms of more tax revenue collected and a better budget balance.
You alluded to agriculture [which did] extremely well also last year. Now unfortunately this year agriculture is going to face some headwinds, the energy input cost, fertiliser which is also coming out of Russia/Ukraine [so] that will increase in terms of cost. Agriculture [will] definitely [have] some headwinds, but the expectation is that we can again benefit from stronger commodity demand… and we have seen that of late there is definitely a bigger demand for our commodities. But our logistical network is failing: if you think about the ports and the railway and getting commodities out; and on top of that we had the floods in KZN.
But nevertheless there’s still a chance for us to probably benefit from that increased demand…. So, while the rest of the world is slowing, we can again have some commodity tailwinds, but don’t make a mistake – our local consumers are also already feeling the pain in terms of paying more for petrol and food, given the global the issues.
SIMON BROWN: Yes, and you make that point. We’ve got to get those commodities to market; [that] perhaps is our is our bigger challenge. You mentioned your Citadel recession scorecard that has fairly jumped. A recession still isn’t certain. You’re saying maybe 50%, a little bit under 50%. So [it’s] unlikely, but it’s still prudent for investors to look at de-risking portfolios. Truthfully, we should have probably started this process over the last couple of months.
MAARTEN ACKERMAN: Yeah. I think the market today has pretty much already priced in some risk for recession. But where we are right now, even if we don’t see a recession in the next 12 months, the geopolitical environment is very, very uncertain. So we’re probably in for quite a volatile market environment. It is unlikely that growth will improve significantly from these levels.
So in that kind of environment, yes, you are 100% right. To follow a more cautious approach makes a lot of sense, but we’re also sitting with very high inflation globally, so we can’t just hide in cash because you’ll get poorer from making that investment from day one.
So you still need to have some good-quality growth assets, exposure to great global companies in your portfolio to make sure that you can beat inflation in a 25-year period.
SIMON BROWN: Yeah. You made the point in your note to avoid those. You said your team always cautions against the expensive assets, and you’ve certainly seen some of those under pressure.
A last question. You mentioned that maybe we get a recession. The bigger point probably is that we might not get a recession but, as you just said, it’s still going be tough.
MAARTEN ACKERMAN: So the growth, or no growth for that matter, is one side of the coin. The other side of the coin is that we are sitting with inflation that’s guaranteed for many, many years. For an investor that should be the first hurdle to get over – to make sure that your portfolio or even your business can actually beat inflation. Obviously a recessionary environment will make that even more tricky. But that aside, inflation is not going to be disappear very soon given the supply issues that we are dealing and that’s why we know we need to look for real assets that actually add value in that space to our portfolios.
SIMON BROWN: We’ll leave that there. Citadel chief economist Maarten Ackerman. I appreciate the time today.