Ninety One: Unrest to have direct and indirect long-term consequences

Ninety One’s co-head of South Africa and African fixed income, Peter Kent, believes that investors need to consider both the direct and indirect consequences to the country of this month’s unrest.

In a video released by the asset manager last week, Kent said that one of the most important indirect consequences will be the impact it has on the government’s reform agenda.

“The president has been very focused on these reforms and has started to deliver, but you do wonder if the security situation is perhaps going to distract from the energy that, thus far, has been put into those reforms,” said Kent, who co-manages the Ninety One Diversified Income fund.

A second indirect consequence Kent highlighted was the potential impact on investment. However, both of these are hard to quantify.

Fiscus

“The slightly easier elements to quantify are the more direct ones and the direct consequence, as a bond investor, is fiscal,” Kent said. “For example, the president mentioned that they are considering a basic income grant.”

Ninety One’s estimate is that, if implemented, this would have to be paid to potentially seven to 10 million people.

“You are looking at a bill of anywhere between R50 billion and R100 billion a year as an annuity,” Kent said. “You know that is going to have a direct consequence on the fiscus.”

At the moment, South African government finances are in a better position than they were six months ago. There is therefore some fiscal room in the short term. However, the longer-term impacts have to be considered.

“These kinds of monetary implications won’t necessarily be a problem this year but, because they are an annuity, they get included in expenses, they compound and they become a little bit more of a problem further out,” Kent said. “Fiscally, then, it does become a little bit of an issue when we are trying to stabilise our debt and that is why you have seen the sort of more fiscal metrics of our market starting to reprice.”

Growth

Similarly, in a note to clients last week, the co-manager of the Harvard House BCI Equity fund, Willie Pelser, also pointed to the impact of the unrest on the country’s economic growth.

“One can draw two conclusions,” Pelser wrote. “Firstly, there will be an immediate impact on our rate of GDP growth for 2021, which we believe could be as high as 0.5%. Subtracting this from the current forecast for 2021, the South African economy might struggle to exceed the 4% growth rate that many economists were anticipating.

“The second conclusion revolves around the longer-term growth trajectory – whether reforms are now going to be fast-tracked. If so, the longer-term impact could be greatly reduced, or even mitigated entirely. We think that the crux of the matter for the longer-term prosperity of South Africa lies in this one key decision: implementation of pro-growth, pro-employment policies cannot be talked about at summits any more. We now need the Nike advertisement to run through our heads continuously: just do it!”

Ideological focus

This is a sentiment that was shared by Ninety One’s co-head of quality, Clyde Rossouw.

“To my mind, what really is needed now is an unequivocal ideological focus on economic growth because, without economic growth, the ability for people to build their livelihoods, and the investment environment with regards to local-only businesses is going to remain quite constrained,” said Rossouw, who manages the Ninety One Opportunity fund.

He added that the levels of unemployment and poverty in the country will continue to create an unstable environment. This has to be addressed through growing the economy.

“We still have to quantify the costs of last week, and we don’t know if there will be other events in the future,” Rossouw said. “The probability of that can’t be zero for as long as we don’t deal with the growth dynamics. So that is imperative that we deal with those.”

Risk

Harvard House, which is based in Howick, had to close its offices during the height of the unrest. The town’s CBD was extensively damaged and looted.

For Pelser, however, it is important to look forward.

“The events of last week are most unfortunate, and they will impact negatively on both near term and longer-term growth through weaker sentiment, spending and investment,” Pelser wrote. “As is so often the case in South Africa, these events will prevent us from reaching our potential – we could have grown at 5% this year. Now that is unlikely.

“The country has bounced back quickly, and we will move forward – albeit at a slower pace than before. But policy reform is more urgent than ever – not only to regain the lost momentum but also to mitigate the risk of it happening again.”

Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.