Taking stock: SA’s position ahead of elections

Several signs indicate that the environment is going to “align perfectly” in favour of emerging markets this year, says Investec Asset Management director Jeremy Gardiner.

And, he adds, what happens in emerging markets affects South Africa. The country seems to have a few things going for it given current global political turmoil – the rand, our bonds, and our stock market appear to be cheap.

Speaking at a recent Investec ‘Taking Stock’ investor and asset manager event in Pretoria, he said that of the $31 billion net capital flows that went to emerging markets in January this year, the lion’s share ($16 billion) came to SA.

The elections in May will make 2019 a year of two halves – the first will be dominated by political noise and unprecedented mudslinging and the second will see decisive economic and political reforms, a smaller cabinet and some tough decisions about Eskom.

Political analysts seem certain that President Cyril Ramaphosa will remain in power for the next five years. The country has bottomed out in terms of bad political behaviour, says Gardiner.

He referred to research done by the Bureau for Economic Research on the 1o years since the global financial crisis, and incidentally the time former president Jacob Zuma was in charge of the country.

Beyond the infuriating losses

Had it not been for the looting and theft, the economy would have been 30% bigger and could have created 2.5 million more jobs. Tax collections could have been R1 trillion more. In 2015 the firing of former finance minister Nhlanhla Nene cost the country R500 billion and state capture theft left the country R500 billion poorer.

But things seem to be looking up for emerging markets, including SA. Globally the world is slowing, but growing, says Gardiner.

The risk of a no-deal Brexit (the UK leaving the European Union) is evaporating, and that is important for SA because anything that scares emerging market investors hurts at home.

Gardiner says that although investors were spooked by the US-China trade war last year – they thought it would lead to a global recession “which would have happened if he [US president Donald Trump] slapped tariffs of 25% on $200 billion of Chinese exports” – the trade war threat is starting to evaporate.

Trump needs the China deal. He is facing an election in 18 months’ time and needs the markets and the economy to be strong. It does look like the two superpowers have reached agreement on most issues.

Should the deal go through, it will benefit emerging markets. But as Gardiner points out, Trump is at best irrational and if anything happens to scupper the deal this issue will have the opposite effect.

Government finally facing facts

Clyde Rossouw, co-head of quality at Investec Asset Management, says government has – for the first time in many years – tackled the issues facing Eskom and other critical state-owned enterprises (SOEs).

“We [the country] are addressing the issues, calculating and quantifying what the problems are. The markets have priced those [issues] and are assessing those risks – and valuations are attractive.”

Rossouw referred to the staggering debt of Eskom and other SOEs.

If all the liabilities of all the SOEs were consolidated and placed on government’s balance sheet, SA’s debt-to-GDP ratio would go up to 65%.

Compare that to debt-to-GDP of 120% in the US and 247% in Japan, he says. Investors are getting a better combination of opportunities locally.

According to Gardiner, emerging market assets look set to outperform those of the developed world. This year it is estimated that emerging markets will grow at 4.5% and the developed world at 2.1%.

“Emerging market assets are cheaper, so all of that points to emerging markets equities leading in 2019.”

However, SA needs to see a drop in interest rates “across the board” – Rossouw does not see any mechanism by which local stocks will rally outside of that event.

The South African Reserve Bank continues to overestimate inflation (around 4.5%) and therefore continues with its “draconian monetary policy”.

In driving his point home, Rossouw says the currency is at fair value and not oversold.

He says inflation will continue to surprise at the lower end, there has been a little bit of a commodity rebound, the country’s terms of trade is improving, and growth is weak.

“All of these things would suggest that you should be cutting interest rates.”

Source: moneyweb.co.za