By David Crosoer and Prieur du Plessis
ARE YOU MORE optimistic about South Africa’s prospects today than you were at the start of the year?
Given the events of the past month, it’s understandable that many of us may be feeling more despondent. But even after accounting for last month’s riots, most professional forecasters have upgraded their economic growth numbers compared to the start of the year.
And many local asset managers are still sticking with their South African overweight equity and bond positions.
Admittedly, these upward revisions are coming off a low base.
At the start of this year the International Monetary Fund expected the country’s economy to grow by just 2.8 percent in 2021 and 1.4 percent in 2022. Subsequently, it upgraded South Africa’s growth outlook by a cumulative 2 percent over the next two years, significantly more than the 1.2 percent upgrade to its outlook for world economic growth.
The shift to upward growth revisions is a positive development.
In our view, the recent riots won’t change this dynamic. So even if the unrest knocks off more than 0.5 percent from 2021 gross domestic product growth, the economy is still expected to grow by more in 2021 than most forecasters expected at the start of the year. This is a welcome change from previously where downward revisions were the norm.
Of course, investors buying into a South African recovery story have been disappointed at least twice in the past 18 months, first by Covid-19 and then by the unrest in parts of the country. Going forward, the point is not so much whether the unrest could reoccur, but whether the return on offer from holding South African assets offers sufficient compensation regardless of the form of the next shock.
The Covid-19 pandemic exposed the country’s fragilities for all to see, while recent unrest reminded us how far the country still has to go to restore credible state capacity. Equally important, foreigners are not yet buying into the turnaround story and remain net sellers of both our bonds and equities. Thus, the bar for government to exceed expectations is incredibly low, while the valuations for both South African equities and bonds remain attractive relative to their own history, and what investors can get offshore.
How then to proceed?
It goes without saying that we need to sensibly diversify SA-specific risk, as there are inherent weaknesses in our economy, and there will be further negative shocks. But we should acknowledge the potential upside given the prospect for limited success, and how low expectations currently are.
There is also potential for further upward surprises. The severe contraction in the economy in 2020 was not as severe as many feared, while feedback from many asset managers has been that listed companies have typically managed costs better than expected.
At the same time, our current account is benefiting from strong revenues from mining companies on the back of high commodity prices. In addition, there has been important progress on structural reforms, including SAA and electricity generation, and on the public sector wage bill.
There are even signs that the unrest could spur a notoriously indecisive president to act, even if the recent Cabinet reshuffle still got muddled in the delivery and he didn’t use the opportunity to resize it appropriately.
As South African investors, we are fortunate to have valuations on our side, and improving fundamentals. Resilience and the prospect for exponential growth in a fraught world counts for something, but SA investors still need to look offshore to access many of these opportunities.
As always, we argue investors should hold diversified portfolios and not just turn away from investments they regard as risky. In fact, what you perceive as risky might very well be priced appropriately to reward you for taking on that risk.
On the margin, many SA asset managers are attracted to SA assets and believe they are receiving sufficient compensation for the risks involved. In addition, in holding assets widely regarded as safe, you might simply be locking in low future returns, if markets are priced efficiently.
David Crosoer and Professor Prieur du Plessis are Chief Investment Officer of PPS Investments and Chairperson of PPS Multi-Managers respectively; email: [email protected]
*The views expressed here are not necessarily those of IOL or of title sites