PATRICE RASSOU: Bleak backdrop but let’s not give up on SA

The World Economic Forum (WEF) identifies economic decoupling as a key risk for the world. While advanced economies are expected to surpass their pre-pandemic growth path by close to 1% in 2024, in large part due to enormous economic stimulus amounting to close to a third of GDP, developing countries will lag their pre-pandemic growth path by more than 5%.  

For Sub-Saharan Africa the picture is even more dire. The WEF Global Risks Report also outlines that the top three risks for SA are economic stagnation, employment and livelihood crises, and state collapse. With this bleak backdrop should investors be concerned about investing in SA? Should investors rather look to maximise their assets offshore?

Local investors have been subject to poor returns on the JSE over the past decade. Investing in global equities a decade ago would have meant a trebling of one’s investment in dollar terms, while an equivalent amount on the JSE would have only increased by 50% in dollars. 

The sharp depreciation of the rand also added fuel to offshore returns, with the rand depreciating by more than 80% over the decade. This bifurcated picture is, in the main, due to the spectacular rebound of US equities since the global financial crisis. US equity markets have increased eight-fold, driven by quantitative easing, with the Federal Reserve injecting close to 40% of GDP to support capital markets.  

The lost decade in SA has been well documented. Economic stagnation has meant we have got poorer, with GDP per capita flatlining while our public debt ballooned from 30% to 70% of GDP. Therefore, impactful intervention is required to reverse the rot that has set in. We can be hopeful that there are some initiatives in place to turn around ailing state-owned enterprises. 

Through Operation Vulindlela the government has outlined a joint initiative between the presidency and National Treasury. This aims to accelerate structural reforms and modernise several sectors, such as water, electricity, transport and telecommunication. 

Already there are some examples where policy interventions will assist in “debottlenecking” key sectors. In the electricity sector, allowing for the self-provision of 100MW of electricity will help alleviate chronic shortages. In addition, the expansion of the grid and, potentially, a R100bn of renewable project pipeline, bodes well. Implementation of those could still be held up by red tape, but there are moves to quicken the turnaround of regulatory approvals. 

In the transport sector we have seen a switch of about 20% of the volume of freight from rail to road over the past three decades. Plans are in place to reverse this trend, which should not only reduce the cost of moving goods in our country but also help improve the condition of the road system. Another staggering statistic is that 40% of water losses are due to leakages. Again, decisive action can help turn the tide.

Alongside these timid green shoots the performance of the JSE has started to match that of global equity markets over the past three years. While this is due to the performance of the resources sector, which has doubled, more recently we have seen a strong recovery in the SA Inc sector. For instance, the banks’ index is ahead of levels three years ago, more than making up for its halving in value during the initial Covid lockdown of two years ago. 

The lure of offshore markets with its wide array of potential investee companies will remain. With our pensions funds now being able to invest up to 45% of assets offshore — compared with the previous limit of 30% (and an additional 10% for the rest of Africa), the focus of asset managers and asset owners will undoubtedly turn towards the wider range of opportunities that reside outside our shores. 

That said, let’s not lose sight that over the past two decades the JSE has delivered double the returns compared with global equity markets. Bear in mind that according to a study by Credit Suisse, over the past 121 years SA would have delivered the fourth-best equity returns, outperforming the rest of the world in real terms by about 1% per annum in dollars.

Perhaps we shouldn’t give up on SA just yet. 

• Rassou is CIO at Ashburton Investments.