As Russia continues its attack on Ukraine, the world is once again on the precipice of another significant crisis. And this at a time when global consumers are already under pressure from rising inflation and declining global capital markets.
A recent Business Day Dialogues LIVE online event, in partnership with global investment firm RisCura, put the spotlight on the war along with other key themes, and discussed the implications thereof for the world at large, as well as for Africa and SA.
RisCura investment strategist, Glenn Silverman, explained that the ‘butterfly effect’ is part of chaos theory whereby a minute localised change in a system can have large effects elsewhere. In an interwoven, highly connected global system such as ours, many of the crises afflicting the world at present are having ripple effects and an outsized impact on the global economy and markets, even far from the source.
The event, moderated by Business News Anchor, Nastassia Arendse, focused on five themes with the largest impact on the global economy: The Covid-19 pandemic; the war; global supply chains; inflation woes; and central bank (rate) tightening.
Covid cases globally, both infections and deaths, have reduced sharply of late. Most countries have now (wisely) decided to live with Covid-19. It is those countries still attempting a zero-Covid policy who are discovering the huge associated economic and social costs associated, and the ones now most negatively impacted.
As far as the war is concerned, Silverman feels that the master strategist himself, Russian President Vladimir Putin, has made a huge and costly error. He misread not only the determined fightback from the Ukranians, but more importantly, the immediate, strong and coordinated response from the West and NATO.
While the outcome of the war remains uncertain, it is fairly clear that the global geo-political landscape has now been altered forever. In addition, the war has also exacerbated the pre-existing (Covid-19 driven) global supply chain challenges resulting in further shortages of critical commodities such as oil, gas, fertilizer and food. Countries are increasingly looking at how they can be more self-sufficient; a sensible move, yet one that further compounds the constraints.
Inflation expectations in the West are increasingly embedded, and up-anchored. Debt levels are at record highs in many places, at a time when interest rates are rising – a combustible situation. As rates rise, and economic activity slows, capital markets have fallen sharply in 2022, across most asset classes, unsurprisingly.
Silverman points out that the above events have had several unintended consequences. For example, Germany’s decision to close its nuclear plants for commendable (green) reasons, means that it is more dependent, intentionally, on Russian oil and gas. However, continuing to buy oil and gas from Russia is effectively supporting Russia’s war efforts, unintentionally.
China may (unexpectedly) be a net gainer from the war, as it buys discounted oil and gas from Russia, has huge food reserves, some policy flexibility, and whose property and stock markets, have already corrected fairly severely.
Another unintended consequence, of the intense focus on ESG, has been much higher fossil fuel prices, as access to capital in the sector has largely collapsed, limiting competition and driving both the commodity and share prices (much) higher.
For Africa, these events may mean less investment as the eyes of the world are now focussed elsewhere. The continent faces increasing food inflation and insecurity, and hence a rising risk of a repeat of the Arab Spring. For SA the current risks revolve primarily around – its BRICS involvement, food inflation (though thankfully largely self-sufficient), a repeat of last year’s unrest, power insecurity (Eskom) and reduced capital flows.
At the same time, there are opportunities for SA. It is (physically) far from the war zone, and could thus provide a safer option for (say) tourists, than some others. In addition, the opportunities offered in renewable energy, agriculture, and the real economy loom large – provided crime, corruption and red tape are reduced, and property rights enshrined whilst the ‘ease of doing business’ is improved.
Periods of extreme volatility and sell-offs provide buying opportunities, says Silverman. Once the dust settles, this one is unlikely to be an exception…