SA’s long-term outlook not all bad despite pandemic
The economy is headed upwards, but we still have a rough road to travel
Despite the negative economic effects of Covid-19 globally and in SA in 2020, domestic markets rewarded patient investors who remained invested during one of the most challenging years in history.
After a sharp sell-off in equities, government bonds and the domestic currency during the peak of the lockdown period from March to April, domestic asset prices recovered to such an extent that investors would be forgiven for asking what all the fuss was about.
Towards the end of 2020, domestic asset prices benefited from an improvement in risk appetite — similar to global markets — as news on the vaccine front improved and the outcome of the US presidential election was generally viewed favourably.
Low interest rates and social income grants (disposable income) also contributed to the improvement in momentum and our economy is now expected to decline by only 6%-8%.
Foreign investors returned to our shores in December, marking the first month of net inflows into the JSE all share index since May 2019. These inflows, coupled with a record current account surplus, buoyed the rand towards year’s end.
Equity returns during the year were very narrowly based, with only Naspers/Prosus, Richemont and the resources sector (which has benefited from much higher commodity prices) driving the local bourse higher.
Domestically focused shares such as financials, retailers and other SA-only industrial shares ended the year in negative territory as earnings and dividend payments were severely affected by a weakened SA economy.
Economic momentum continued to improve into the fourth quarter, with vehicle sales, manufacturing activity and confidence surveys pointing to better times ahead
While the pandemic has played havoc with the hospitality and leisure industries, other sectors of the economy have fared better. Agriculture benefited from good rainfall and healthy crop yields during the year, and mining companies and export industries profited from a weaker currency and strong commodity prices.
Third-quarter GDP surged 66.1% quarter on quarter annualised, and the economy was 6% weaker on an annual basis. Such numbers are unheard of and reflect just how severely lockdown restrictions affected the economy in the second quarter, when it shrunk 51.7% quarter on quarter.
Tax revenue, employment and confidence took a significant hit from these developments and the full effects of the crisis will only be revealed in time once the support measures from the government and the Reserve Bank are removed.
Economic momentum continued to improve into the fourth quarter, with vehicle sales, manufacturing activity and confidence surveys pointing to better times ahead and illustrating how much companies and individuals have already adapted to the changing environment.
The alarming, countrywide increase in Covid-19 cases, causing the reintroduction of level 3 lockdown measures, coupled with Eskom’s load-shedding announcement and a temporary slowdown in global economic activity, will once again cause a slowdown of growth momentum in the near term. It, however, does not spell the end of the recovery in the current economic cycle.
Structural reforms are slowly being implemented. More companies can generate electricity for own consumption, significant capital has been invested in alternative and more environmentally friendly sources of electricity such as solar and wind, while high-profile arrests within the public sector provide hope that the government is serious about eradicating the corruption that has become so ingrained in the system and has plagued the economy for years.
The misallocation of taxpayers’ money has been very costly and an improvement on this front will hopefully pave the way for improved service delivery and ultimately economic prosperity for all, something that is desperately needed in an economy that has been unable to grow GDP per capita over the last five to six years.
The government’s recent victory regarding public sector wage increases for 2020/2021 also provides hope that there exists enough political will within government ranks to follow through on fiscal consolidation.
This will please ratings agencies and bond investors alike, especially after the recent downgrades to the country’s credit rating. Much more change is still required to sustainably lift SA’s growth trajectory and deal with the country’s huge unemployment and social challenges.
It will take time and a concerted effort from all stakeholders in the economy, as well as a much closer working relationship between government departments and the private sector.
The near-term outlook for the SA economy remains challenging given the effect of the fast-spreading Covid-19 virus and the risk of yet stricter lockdown measures. The deployment and inoculation rate of the vaccines will play an important role in establishing some form of normality in economic activity.
Meanwhile, low interest rates, pent-up demand, a more promising global economic backdrop and the government’s growth initiatives, which are predominantly infrastructure led, will underpin 2021’s economic recovery. Fiscal consolidation will, however, act as a headwind to growth as the government repairs its balance sheet.
In the longer term, SA’s growth rate will be determined by how successfully the government implements growth-enhancing reforms and if Eskom’s turnaround plans have been achieved. An improving economic environment will go a long way in healing some of SA’s social and political challenges.
SA assets are by no means expensive and investors should therefore continue to focus on achieving their long-term investment objectives through adequate diversification across geographies and asset classes, careful selection of investment opportunities, and by looking through the near-term risks emanating from the current wave of Covid-19 infections.
The economy is in an upward trajectory, albeit from a low base, and with President Cyril Ramaphosa’s reform wheel slowly starting to gather pace, investors should expect a reasonable outcome for the year ahead.
• Drotschie is chief investment officer at Melville Douglas.
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