Commodity rally a lifeline for SA, says Ninety One

The global commodity price rally has granted SA’s public finances, hit by the Covid-19 crisis and a lockdown that sent the economy into its biggest slump in a century, “a lifeline” and is likely to push the rand to its highest level since the middle of 2018, according to Ninety One.

Surging metal prices may see the rand, the best-performing emerging-market currency of 2021, strengthen to as much as R13/$, SA’s biggest listed asset manager said.

The rand continued its rally on Tuesday, strengthening 0.4% to R13.9819/$ by 5.48pm. Its 5.1% gain in 2021 is the biggest among 24 emerging markets tracked by Bloomberg, with the next biggest gainer up just over 2%.

Hannes van den Berg, co-head of SA equity & multiasset at Ninety One, said the commodities rally could see local equity analysts upgrading their earnings forecasts by as much as 60% over the next six to 12 months.

The Cape Town-based asset manager, which was spun out of Investec and ended last year with assets under management of £128.6bn (R2.58-trillion), says the increase in prices of commodities such as platinum group metals (PGMs), iron ore and gold

– which are among SA’s biggest foreign-exchange earners – will enable the government to earn more tax and mining royalties as resource companies benefit from surging exports.

That will translate into a lower fiscal deficit and reduced government bond issuance, making it more likely that the Treasury will succeed in its goal of stabilising SA’s debt-to-GDP ratio below 90%. When the government announced that goal in its budget, it was greeted with much scepticism because the bulk of it was based on its promise of real cuts in the public sector wage bill, which is being resisted by trade unions.

“Commodity prices, where they are today, have given another lifeline to this country,” Van den Berg said in a webinar on Tuesday.

“That makes the SA environment a lot more attractive. We’re finding a lot more buy opportunities on our local exchange than sell opportunities.”

The global economic recovery is spurring demand for commodities used in manufacturing, while the “green revolution” to more efficient or renewable energy production is also benefiting the resources sectors.

For example, increased demand from carmakers for

PGMs, which are used in the production of emissionreducing catalytic converters, is benefiting miners. And steel producers are increasingly demanding only high-quality iron ore as it requires less energy in the smelting process, which in turn lowers pollution.

“If commodity prices just stay where they are for another six or 12 months there’s an incredible amount of upside left in stocks like Anglo American, BHP and the platinum miners,” said Van den Berg. “SA screams attractiveness from a valuations perspective. You’ve also got to factor in the upgrade in earnings expectations.”

Van den Berg said the rally in commodity prices could enable gold and PGM producer Sibanye-Stillwater to generate free cash flow over the next three years equivalent to its entire R193bn market cap.

The Ninety One Equity Fund, which is managed by Van den Berg, has about 17% of its portfolio invested in what it calls “global defensives”. These include Naspers, AB InBev and Bidcorp, all of which earn a significant amount of their revenue offshore. Another 8% is invested in “local defensives” such as MTN, Pick n Pay and Bidvest,

which are quality companies with strong balance sheets.

However, the bulk of Ninety One’s equity portfolio is invested in global and local cyclical shares — those that sold off at the height of the Covid-19 pandemic but were robust enough to weather the storm and are now poised for recovery as consumer demand improves.

About 43% of Ninety One’s equity portfolio is in “global cyclicals” such as Sappi, Richemont and Sasol as well as diversified miners and PGM producers. The remaining 32% of the firm’s equity portfolio is in

SA Inc stocks, such as FirstRand, Capitec, Sanlam, Absa, TFG, Mr Price, Truworths and Motus.

The Ninety One Equity Fund’s international stock holdings are at 25% of the total portfolio and are concentrated on companies in sectors that are not available in SA. These include Samsung Electronics, Amazon, Alphabet, Facebook and Alibaba.

While Van den Berg says forecasting the rand is a “mug’s game”, he says the local currency may reach R13/$ as long as the global economic recovery continues and commodity prices remain at current levels or continue rising. However, the local currency may weaken back to R15/$ should these positive fundamentals reverse.

“But right now the rand has got more tailwinds than headwinds,” he said.