Simon Brown: I’m chatting with Martin Ackerman – a Citadel chief economist. Marten, I appreciate the time. It came back in February, literally, we had a budget one day and then a day later Russia invaded Ukraine. This is obviously a huge political problem, but it also has economic implications. One of them is the threat of recession.
Marten Ackerman: Yes. From Covid to the global, we have entered SA this year with a fairly healthy economic base. And unfortunately with the war in Ukraine the economic outlook deteriorated very quickly.
So the probability of a global recession earlier this year was about 25%, and suddenly in a few weeks we are now sitting very close to 50%.
Its because the influence from Russia and Ukraine is mainly on product prices now. So all consumers are feeling [the effect] In terms of paying for energy, petrol, food – and eating it in terms of disposable income. If it lasts longer – good consumer confidence is already at the level we saw in Covid’s time, so consumers in the Western world are not happy – and this will affect consumer demand and could 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, higher input costs – fertilizers and the like were some of the glossy outlets. We had a mining boom. But you make the point [that] The product returns a bit. They’re still fairly advanced, but that’s as much a problem as energy consumption. We are an importer of oil and it has gone from $ 50 / barrel to $ 100 / barrel. Has doubled.
Marten Ackerman: Yes. At SA we are probably in a slightly better position than the rest of the world, simply because we export a lot of products that are now approved in Russia. We certainly got that tailwind from the product boom as we came out of World Covid last year. It has also helped us collect more tax revenue and balance a better budget.
You hinted at agriculture [which did] Extremely good last year too. Now unfortunately this year agriculture is going to face some headwinds, energy input cost, fertilizer which is also coming from Russia / Ukraine [so] Which will increase in terms of cost. Agriculture [will] Definitely [have] Some headwinds, but the expectation is that we can benefit from strong product demand again… and we’ve seen lately that there’s definitely a huge demand for our products. But our logistics network is failing: if you think of ports and railways and unload goods; And on top of that our KZN was flooded.
But we still have a chance to benefit from that increased demand. So, while the rest of the world is slowing down, we may get tailwinds of some products again, but don’t get me wrong – our local customers are already in pain for paying more for petrol and food, a global problem.
Simon Brown: Yes, and you make that point. We need to bring those products to market; [that] Perhaps our biggest challenge. You mentioned your Citadel recession scorecard which jumped fairly. The recession is not yet certain. You might say 50%, a little below 50%. So [it’s] Impossible, but still prudent for investors to look at risk-free portfolios. Honestly, we should probably have started this process over the last few months.
Marten Ackerman: Yes. I think the market has already set prices at some risk for the recession today. But where we are 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 a pretty volatile market environment. Growth from these levels is unlikely to improve significantly.
So in such an environment, yes, you are 100% correct. It makes a lot of sense to follow a more cautious approach, but we are sitting with very high inflation around the world, so we can’t just hide the cash because you will become poorer from that investment from day one.
So you still have to have some good-quality growth assets, exposure to great global companies in your portfolio so that you can beat inflation over a period of 25 years.
Simon Brown: Yes. You have made points in your notes to avoid them. You said that your team always warns against expensive assets, and you must have seen them under some pressure.
One last question. You mentioned that maybe we can get a recession. The biggest thing is probably we can’t get a recession but, as you said, it’s still going to be tough.
Marten Ackerman: So growth, or any growth for that matter, is one side of the coin. The other side of the coin is that we are sitting with inflation which is certain for many, many years. That should be the first hurdle for an investor to overcome in order to ensure that your portfolio or even your business can actually lose inflation. Obviously a recessionary environment will make it more complicated. But on the one hand, inflation will not soon disappear in the face of the supply problems we are dealing with and that is why we know we need to look for real assets that actually add value to that portfolio in our portfolios.
Simon Brown: We’ll leave that there. Citadel chief economist Marten Ackerman. I appreciate today’s time.