Just 2% growth ‘may be enough’
SA needs 5%-6% economic growth per annum to alleviate socioeconomic challenges, but a mere 2% sustained expansion in GDP would be sufficient for investors to earn notable returns on domestic markets, says Izak Odendaal, investment strategist at Old Mutual Wealth.
Though SA needs 5%-6% economic growth per annum to alleviate socioeconomic challenges such as poverty and unemployment, a mere 2% sustained expansion in GDP would be sufficient for investors to earn notable returns on domestic markets.
That’s the view of Izak Odendaal, investment strategist at Old Mutual Wealth, who says this rather cold reality has not been sufficiently priced in to local assets, which may still have room for further appreciation, if moderate growth can be sustained. He says that in the five years that preceded the advent of Covid-19, SA recorded average economic growth of about 0.5% and that, if the country can manage to sustain just 2% GDP growth for five years, it could translate into robust investment returns over that time frame.
“From a social point of view we need economic growth of 5% or 6% a year but from an investment point of view sustained growth of 2% per annum is more than sufficient to earn very good returns,” Odendaal told Business Day in an interview.
“That would be pretty good for SA investors and I don’t think local assets have priced that in. There’s still a lot of pessimism especially among the man in the street retail investor.”
SA’s economy suffered a 7% contraction in 2020, the biggest slump in 100 years, after a series of socioeconomic lockdowns meant to curb the spread of Covid-19 caused output at mines and factories to plunge. That drove unemployment to 32.5% in the fourth quarter as the economy shed more than a million jobs in 2020.
“I don’t put too much value in predicting specific levels but I think investors can expect good returns on SA equities,” said Odendaal. “Our bonds are also still very well priced and investors are getting very good yields. SA property is still quite challenged but over the longer term that might change.”
In terms of overall asset allocation, Odendaal still recommends maintaining a degree of global exposure to hedge against possible SA-specific risks, though he says this has more to do with the country’s reliance on China for its growth than domestic politics. He argues that political concerns are most likely overblown and points to the recent suspension of ANC secretary-general Ace Magashule, which he says was probably worth “one or two cents” to the rand-dollar exchange rate.
“You always have to hedge the potentially good story about SA with the alternative scenario where things don’t go that well,” he said. “SA has a very concentrated local equity market that is basically a geared play on China so if something major happens there we could be toast.”
The vulnerability of the rand to external shocks is why he says local investors should maintain a “decent level” of exposure to offshore assets as the domestic economy is still reliant on “what we dig from the ground and sell overseas”.
Even so, Odendaal points out that SA assets have performed very well in the past despite challenges such as high unemployment, rising crime and political uncertainty. He argues that the poor investment returns experienced over the past seven years are not entirely due to the domestic political climate, corruption and state capture.
“Commodity prices collapsed in 2015 which was a big external shock and we also had a very bad drought that resulted in food inflation and put pressure on consumer spending as well as interest rates,” Odendaal said.
With commodity prices rising again and agricultural production booming after good summer rainfall, he says it should create a “positive feedback loop” in which the government earns more tax revenue and mining royalties thereby reducing pressure on its finances while rising equity markets will improve consumer sentiment, which should translate into higher spending levels.
“Eventually we could also see higher levels of investment and employment by mining companies, which would be an additional boost for the economy.”