South Africa is facing one of its most critical national elections since 1994, which will have significant repercussions for the country’s economic, as well as political, future. This was the message from Old Mutual Investment Group’s 2019 investment and economic outlook that points out that uncertainty will continue until then, but improved confidence and a pickup in growth after the elections are expected, bringing increased local investment opportunities.
According to Old Mutual Investment Group Chief Economist, Johann Els, Ramaphoria might have waned, but Cyril Ramaphosa’s presidential victory heralded a significant change in SA. “We have already seen some progress in key areas under this new leadership: the Cabinet has been reshuffled for the better a few times; we have the Commission of Inquiry into State Capture and SARS; there are new boards at Eskom, Transnet and Denel; the Mining Charter has been finalised; a transparent process is underway to appoint a successor for the previously ineffective NPA head; and Tito Mboweni was appointed as Finance Minister after Nhlanhla Nene resigned on principle – with Mboweni and the SARB governor being a strong combination,” he highlights.
“We believe the ANC are on track for a comfortable win and, as such, expect more decisive moves to materialise after the elections, all of which will contribute towards the strengthening of confidence levels across the country,” he comments. “And we already know that confidence is a key driver of growth.”
With the latest GDP figure signalling the end of SA’s recent recession at 2.2 percent for the third quarter of 2018, Els believes that we will see a return to positive growth in the second half of 2018. “Consumer fundamentals aren’t currently that bad and are likely to improve as confidence improves, as well as being in line with cyclical economic pickup. In addition, investment could rise sharply again leading to growth possibly reaching 3 to 3.5 percent by 2021/2022,” he says.
Regarding inflation and interest rates, Els believes that the deflationary environment is likely to last for a while, with the consensus facing a downside inflation forecast risk. “Inflation will likely remain within target range and I maintain my 2019 inflation forecast of 4.8 percent, which is well below the consensus of 5.5 percent,” he says.
Els expects the rand to strengthen again in 2019. Even if this is a short term event, he believes it could have significant impact on the likes of confidence and inflation. “This is within the context of a weaker dollar and more balanced, synchronized growth, including better Emerging Markets, as well as a pickup in cyclical SA growth and stable and low local inflation,” he explains. “A good ANC election outcome and policy reform would lead to a stronger rand, based on improved confidence, and it could quite likely reach R12 to the dollar in 2019, with increased rand stability over the next few years if growth picks up in the direction of 3 to 3.5 percent.”
Talking to the market outlook for 2019, Peter Brooke, Head of MacroSolutions at Old Mutual Investment Group, says that with local politics improving, he expects investment opportunities to pick up in SA next year. “The two most important themes that we are considering for the year ahead are a US economic downturn and a recovery in the SA economy. This is a dramatic change in momentum, where previously we’ve seen the US as the global winner, with a strong dollar, a bull market, record profits and superb growth, while the South African economy languished in recession, with a weak rand and an equity market that has gone nowhere,” he explains.
“The US economy is currently running too hot due to unnecessary fiscal stimulus causing higher US rates and a reduction in global liquidity. Further Fed hikes in 2019 will start to take the steam out of the economy and we believe their expensive equity market will de-rate. Twin deficits in the US will also start to drag on the mighty dollar and we expect US equities to underperform, while the rest of the world is offering cheaper equity markets,” he says.
Brooke added that these cheaper equity valuations include the SA market. “The situation in the country is so bad that it can only get better, but the reformist faction of the ANC will need to win the 2019 elections for this to happen. The risk for markets and the economy is if the ANC remains divided and does not make the required reforms, given that there simply isn’t room for error in the economy right now,” he warns. “If South Africa does not resolve the Eskom crisis we will be downgraded to junk status.”
The good news on valuations is spread across almost all the asset classes, Brooke points out, and Old Mutual Investment Group has upgraded its expected long-term real returns. Brooke says: “Cheaper valuations means higher future returns and importantly these are backed by high levels of income, which increases certainty. In a global context, South African bonds look particularly attractive and a small change in sentiment could boost returns. Consequently, now is not the time for SA investors to go offshore and we have actually been increasing our portfolio weights in South Africa. Our offshore allocation is under the 30% regulatory threshold,” he concludes.