“One should stand back and recognise the overall picture of the economic environment that we are in, which shows a lot of volatility and uncertainty,” Kemp, economist and strategist at Sanlam Investment Management told CNBC Africa on Monday.
He said that since the announcement by the United States Federal Reserve’s tapering of its 85 billion US dollar per month bond buying programme, there was a sharp self-off of the South African rand as well as the domestic bond market.
South African investors, government as well as policy makers Kemp added, need to assess the overall economic environment before making any hurried decisions by comparing the current business cycle to the previous one.
“In this cycle, there is a search for yield whereas the previous cycle, the focus was on buying into assets that had growth potential,” said Kemp.
Kemp noted that if you compare the current business cycle to the previous one, you would notice that the uptrend comprised of good productivity levels, fixed investment spending and high private sector investment, changed dramatically to one of poor productivity growth, limited investment spending and strong consumption growth.
While the current global economy may have picked up momentum in the second half of 2013, Kemp believes that the growth would be short term due to the volatility and uncertainty in the present economic environment.
“The growth might even be above trend for a short while but it is in an environment within which growth is lower than what we are used to in the pre-recession era,” explained Kemp.
At the same time, he continued, government debt levels are so high in developed markets, that there is a strong incentive amongst them to keep interest rates very low.
In addition, South Africa is experiencing a slowdown in profits growth.
“Without strong profits and productivity growth, the economy overall is not growing particularly fast and there is no real incentive to invest,” said Kemp.
All these factors need to be taken into account by South African investors and other key players in the domestic market in order to recognise that growth during this cycle will be moderate, low yield interest rates should be expected which will ultimately result in lower returns on investments.
“It’s almost like you have exuberant optimism and mind numbing pessimism around a moderate mean,” exclaimed Kemp.
“South Africa is a small open economy, the currency is very volatile and global capital flows in an uncertain environment.”
The only option investors have at this point, he added, would be to keep an eye on the following major events: The Federal Open Market Committee (FOMC) meeting on the 17-18 September 2013 where the US Federal Reserve tapering program will be concluded as well as to wait for the release of the South African unemployment data and South African Reserve Bank interest rates.