2021 could see a turnaround in South Africa’s market and macro-economic prospects, despite the continuing challenges it faces from low growth and the global pandemic. This was the message at Old Mutual Investment Group’s quarterly investment briefing, where presenters shared their views on an improving local economic landscape, driven by the confidence boost of an unexpectedly positive Budget and South African corporate resilience in the face of significant economic challenges.
Speaking at a media briefing this morning, Old Mutual Investment Group Chief Economist, Johann Els, pointed out that a possible economic comeback in the country is based on a strong local growth rebound in 2021, a strong and stable rand, low interest rates and, finally, a new fiscal turning point to bolster confidence. Added to this are better long-term growth prospects, which should further reduce fiscal risks.
“The recent Budget could be a gamechanger in terms of improving confidence levels in the country, despite the execution risks that still exist,” says Els. “Treasury appears to be back with a remarkable show of strength in this Budget, which should drive confidence up, if they can follow through on their commitments.”
According to Els, in addition to this fiscal turning point, further factors in SA’s resurgence include a very strong post-Covid pandemic global economic rebound, expansionary US policies, a weaker US dollar, strong and stable commodity prices, risk-on trade expected to increase, favourable emerging market conditions and a strong SA growth rebound.
He expects +5% GDP growth in 2021, up from -7% in 2020. However, it is the medium-term outlook, for the period from 2022 to 2026, that is more important than this rebound, he says. “I expect an uplift in medium-term growth to around two percent from 0.8%, a significant move given where we were just a few months ago,” he highlights. “Factors that will help lift growth to this level include global economic support, the easing impact of Covid-19 from 2022 onwards, fiscal consolidation, continued improvement at Eskom, headway in the corruption fight, and improvement on a number of policy measures such as infrastructure, lowering the cost of doing business, market-friendly changes to SA’s investment regulations and facilitating regional trade.”
Els adds that SA has a number of positives going for it, in addition to this more recent good news including a politically stable democracy with a free media, an independent central bank, huge mineral wealth and tourism potential, growing trade and investment links with Africa and Asia, a strong financial sector, a generally healthy corporate sector and an easing fiscal crisis. “The missing link is stronger confidence and 2021 could be the turning point for confidence,” he says. “Businesses need confidence to thrive. Better confidence brings better growth and better growth brings better confidence, and so the cycle comes into play.”
Senior Portfolio Manager at Old Mutual Investment Group, Siboniso Nxumalo, built on this sentiment by pointing out that long-term wealth creation is littered with crisis. “Every famine is followed by a feast and while we’ve started to see some of this position come through in the JSE recently in global stocks, such as Naspers, and commodities companies, SA Inc stocks are still lagging,” he says. “This presents a significant opportunity against the current SA backdrop.”
Nxumalo highlights a number of factors that could contribute to the upswing of SA Inc. “Firstly global interest rates are low, with global monetary policies supportive of local demand,” he explains. “Fiscal policy is also supportive of corporate SA, as is a continued rollout of vaccine programmes overseas and at home.
“We are also seeing opportunity in pent up demand, as high consumer cash deposits as a percentage of income is set to further prop up the economy and SA companies. This is an interesting phenomenon, given the pressure that many consumers have been put under by the Covid-19 pandemic and the hard lock down of 2020. However, higher than expected savings rates from changed consumer circumstances suggests a level of pent up demand that should drive up sales as economic conditions improve.”
Lastly, high commodity prices remain good for local company profits, mining wages and bonuses, tax receipts for the fiscus, investment spend by mining companies and dividend income and investment returns for shareholders. “Intriguingly, South Africa is cheap compared to other emerging markets, adds Nxumalo.
“South Africa And Mexico stand out as the cheapest relative to other markets in emerging markets, with the north Asian markets trading on the most elevated premiums. This is despite many of our emerging markets such as Brazil and India having similar economies and demographics to ours’,” he says. “This means that no one is paying attention to the resilience of South African companies, with plenty of local companies such as Foschini, MTN, Itatile, Supergroup and Shoprite starting to emerge as testament to this from their profits.
“Ultimately, economies and markets naturally go through cycles and investment funds’ performance styles are cyclical. But if there was ever a time to support and buy local, now is that time,” he concludes.
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