JOHANNESBURG - It has been a cold winter for the South African economy, but there are many green shoots appearing. This is according to PSG Wealth chief information officer Adriaan Pask.
“I dare say we are feeling excited about what may transpire in the months ahead,” he said.
“Tito Mboweni’s appointment is the next chapter in an increasingly positive narrative, coming soon after the announcement of President Ramaphosa’s economic rescue plan.
“We believe this will unlock some economic drivers, particularly through the R400billion infrastructure plan. And if implemented correctly on the new finance minister’s watch this could be the catalyst we need for driving domestic demand and job creation,” said Pask.
Despite the reality checks provided by recent gross domestic product and unemployment data, leading business cycle indicators were on an upward trajectory.
“Although there are many structural hurdles impeding economic growth, the leading indicators have been overwhelmingly positive for some time now,” said Pask.
The Ernst & Young South African Growth Barometer shows that confidence in South African middle-market companies has increased, despite uncertainties. According to this baro- meter, almost one in three middle- market companies is predicting growth above 10%.
On the investment front, longer-dated government bonds are currently yielding near and above 9%.
“Yields at these levels will support investment portfolios, especially during tougher market conditions,” said Pask. “Even if domestic equities experience headwinds, bond yields should support portfolio returns, and it’s crucial for investors to remember the importance of asset class diversification.”
Stocks that have been hammered by harsh conditions and volatility can also offer great entry points to the market.
“Our research shows that the forward blended P/E of the FTSE/JSE All Share Index (Alsi) was trading around 13.5 times at the end of August,” said Pask. However, when the top five stocks by market capitalisation are excluded, the domestic market is trading below 11.5 times. This is much closer to its historic average, which means there are attractive investment opportunities,” said Pask.
“Financial shares in particular look to be attractively priced, especially considering that their multiples are on weak earnings.”
These “unloved” stocks offered investors an opportunity to enter some major banks at single-digit P/E ratios.
What about the impact of interest rates and inflation?
“Although rate cuts are always the ideal outcome, at least over the short term, we think this is unlikely. However, we also think that hikes are even more unlikely,” said Pask.
This means that the cost of capital will not increase, and that interest rates could remain relatively low.
“It also means that bonds are likely to stay in favour a little bit longer,” he added.
When inflation was running at double-digit numbers, investors had to generate high double-digit returns to grow the real value of their capital.
Now that inflation was lower, investors did not need an 18% return to cover a 13% inflation rate. Instead, they needed high single-digit returns to cover inflation plus 4%or 5%.