It’s the end of the world as we know it. Or is it? - Adrian Saville
By Adrian Saville
Economist and thought leader Professor Adrian Saville addressed this topic during a breakfast, hosted by the Investor Relations Society of South Africa (IRSSA) this morning. Against a backdrop of unexpected events globally, he spoke to JSE-listed companies about what they may expect from the global and local environment.
It is important to understand that the concepts of risk and uncertainty are often confused. We think we live in a world of risk but in fact we live in a world of uncertainty. Risk has probabilities – flip a coin and you get a head or a tail – something will happen with certain likelihood, or it won't. Uncertainty, or unknowability, comes with unimagined outcomes, and realities where the impossible happens. And therein lies the beauty of uncertainty.
Consider the case of Bitcoin, trading at $95 000 (around R1.76 million) per coin, nothing lies behind its value but the belief or conviction that it is worth at least it’s current price. Ten years ago, Bitcoin was almost unknown. Nvidia is the biggest company in the world by market capitalisation trading at 50x earnings. Much like Bitcoin, unless you had a teenage gamer in your home, there is a good chance that you’d never heard of the business 10 years ago.
2024 was a busy year for democracy, almost half the world went to polls and in almost every case there was a change in leadership. In Mexico, a conservative Catholic society, a Jewish woman, Claudia Sheinbaum Pardo, was voted in as president. Emmanuel Macron called a snap election in France to clarify the political situation in the country and the results made the political situation less clear than before. In India, Narendra Modi’s party failed to win the majority required to form the next government and had to go into a coalition arrangement with the opposition. Uncertainty all round.
Welcome to 2025
Trump threatened and promised economic tariffs on trading partners, as he said, with the dual purpose of helping the American economy and to provide protection to America from the threat of drugs and illegal immigrants. He has proposed off-the-cuff tariffs between 10% and 25% on the US’s three biggest trading partners - China, Mexico and Canada. These countries account for 42% of US imports. In almost the same breath he took on the South African government on the passing of the Expropriation Bill. In effect, the implementation of tariffs by Trump will lead to a possible 2.5% increase in consumer price inflation, resulting in the quiet confiscation of about $400 billion from US’s households. Glass houses and stones should be referenced here.
Factor into the economics that US policy uncertainty is higher now than it has been since Covid-19. Interestingly, US assets are very highly valued with an average valuation of 23x normalised earnings, putting them 50% above long-term average valuation. Contrast that with China, that is 20% below their average valuation.
Get off the dance floor
To navigate uncertainty we must make sense of the noise. As Marty Linsky said in “A Survival Guide for Leaders” it’s about “getting off the dance floor and going to the balcony” to gain perspective. An often-asked question is what the most important driver of business performance is, and the common answer is leadership. The answer, however, lies in the economic environment in which the business operates. Half of revenue growth and half of earnings performance in companies at the aggregate level can be explained by economic growth, or the lack of it. Again, looking at China, the country had economic growth of 8% and in that environment, Alibaba’s Single’s Day sales stands has grown from almost zero a decade ago to 10 times the level of all of the United States’ sales on Cyber Monday.
What this means for business
We need to think about context in which we work. We may not be able to effect change to the economy, but we must understand it. The economy is what is done to our companies, and surprisingly, appreciation of this economic impact is notoriously low, even though the economy is the single biggest driver of what is done to us. Then there is strategy, which is what we do back. Not what we say we are going to do but what we actually do. Like some of the criticism of the President Cyril Ramaphosa’s State of the Nation speech this year, don't tell us what policy promises are, show us that they work.
How we grow our economy
A six-factor model of economic growth and development encompasses six different elements required for an economy to grow, and these are Savings and Investment, Demography, Education, Healthcare, Openness, and Policy and Institutions. On Savings and Investment, a required minimum is 25% of GDP, South Africa is sitting at 15%. Regarding Demography, a country needs more people entering the workforce than exiting it. China has historically been the exception to this but that is now changing. Education and Healthcare are both necessary but healthcare has a higher weighting as people need to be healthy before they can be educated. The element of Openness is relevant right now as Trump is intent on building walls, but data shows that no economy has thrived by building walls. Policy and Institutions need to be stable and capable of implementing these policies. Trump’s actions are challenging the fabric of institutions.
Considering the six-factor model, there is no economic miracle happening in South Africa, although there are some islands of hope. 310 loadshedding-free days is an illustration of this, as well as a great working example of what happens when public and private work together to achieve a goal. The problem is that South Africa’s current economic growth of 1.5% is the same as our population growth, and this means that in 10 years’ time our per capita income won’t have changed.
Make like Mohamed Ali
The great boxer’s greatest attributes were agility and absorption. Companies need to adopt these two principles, and invent and reinvent themselves. Like the Japanese FujiFilm did when digital photography became mainstream, they used the knowledge and skills they had to reinvent themselves and are bigger than ever before.
So what is in store for 2025?
The uncertainty isn't the issue. Risk isn't the issue. The issue is the economic environment in which you operate - what is done to you. The issue is also your business strategy - what you do back. We all need to figure out the probabilities and the possibilities and then craft our strategy. The noise isn’t going to go away, so understand the noise and then work out how you are going to build something unusual, extraordinary, magnificent and different.
Adrian Saville is Professor of Economics, Finance, and Strategy at GIBS and founding Director, Boundless World
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