As South African stock investors eye 2020, budget looms large

South Africa’s budget, due to be presented next month, is looming as a key first-quarter event for investors seeking insights on the outlook for a stock market that failed to keep pace with emerging-market peers last year.

Johannesburg’s benchmark index was held back in 2019 by the dismal performance of the local economy, which is at risk of slipping into recession. The FTSE/JSE Africa All Share Index climbed 8.2%, well short of the 15% gain in the MSCI Emerging Markets Index.

Finance Minister Tito Mboweni’s February budget speech will be scrutinised for evidence that South Africa is doing enough to preserve its last remaining investment-grade rating from Moody’s Investors Service. In November, the ratings company changed its outlook on the nation’s assessment to negative and said it wants to see a “credible fiscal strategy to contain the rise in debt” in the budget. Traders will also examine any plans to manage crippling debts at the state-owned power utility, which is struggling to maintain steady electricity supplies, and the loss-making national airline.

“The budget is the next big thing,” said Peter Takaendesa, a money manager at Mergence Investment Managers in Cape Town. Sentiment could be boosted by “any credible effort to show that the government is willing to avoid a downgrade and is ready to present a concrete path to reducing government debt with achievable targets,” he said.

Early optimism among investors of improved management of the economy under Cyril Ramaphosa, president since February 2018, has been partly replaced by impatience over slow progress in areas ranging from tackling ballooning public sector wages to the sale of new broadband spectrum. South Africa’s economy has contracted in two of the last three quarters, and the International Monetary Fund forecasts sluggish growth in 2020, trailing population growth for the sixth year in a row.

“Investors have become increasingly frustrated with the pace of reforms that were expected under President Ramaphosa,” said Michele Santangelo, a money manager at Independent Securities. “The historically weak GDP figures and weak expected growth going forward for at least the next two years have also weighed heavily with economic sentiment and expectations for South Africa-centric businesses.”

Negative sentiment toward South Africa-focused stocks, worsened by weak consumer and business confidence, helped spur record sales by foreigners of Johannesburg-traded equities. By December 30, net sales had reached more than $8.7 billion, the most since Bloomberg began compiling the data in 1998.

“SA Inc. stocks are in for another tough few years,” said Casparus Treurnicht, a money manager at Gryphon Asset Management. “Our economic environment will remain depressed. We are in for a long period of recovery if that happens at all.”

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