VOTE ON IT
Post-poll certainty could spell a bright year for SA Inc, writes Pedro van Gaalen
Elections hold key in 2019: certainty could spell a bright year
“Consumer-facing, industrial and banking stocks should benefit most from an improving economy
Next year will be a watershed moment for the country as South Africans head to the polls. The outcome will determine the trajectory of the economy and shape the type of returns investors can expect.
Galileo Capital’s Warren Ingram says the first half of the year will be characterised by market instability due to various political risk factors. “The elections will influence the local market and investor sentiment, while Brexit and the US-China trade war will shape international market trends.”
Iain Anderson, head of investments at Sygnia Asset Management, adds that while there is no clear catalyst for the dissipation of the many headwinds facing SA — higher interest rates in the US, slowing domestic economic activity and a deteriorating fiscal situation — most of the risks are cyclical. “And cycles always turn. As such, despite the weak economic environment, domestic equities could turn in the second half of 2019, or earlier, if investors are prepared to look through the volatility.”
Should the ANC secure a clear majority, Ingram believes that significant opportunities will emerge. “Investors are looking for certainty and most hot-button policy issues will only be resolved after the elections. By securing a 60% majority, the ANC will have sufficient support to implement its proposed policies such as land reform and state-owned enterprise resolutions, which, if done in a rational manner, will benefit the broader economy."
However, an unexpected result or a weak mandate for the party could erode investor confidence and may cause the rand to weaken. Hywel George, director of investments at Old Mutual Investment Group, says: “If this happens, expect returns from the local equity market to shift. If this scenario plays out, investors should be in rand hedge-sector stocks that offer exposure to businesses with non-rand-based profits.”
While a tighter margin of victory will erode the ANC's power base, Ingram says the potential impact of a negative outcome is priced into markets. “There is, however, significant potential for returns off the back of a positive outcome.”
This doesn’t mean we won’t be affected by international shocks, warns Ingram, who says a more conservative approach to international exposure is warranted based on prevailing market conditions.
“International equity markets are expensive and reality is kicking in in terms of valuations. Questions are being raised about the potential scope for further improvement in US markets, which places risk to the down side. The potential is also there for an economic shock which will result in a big market drop, so investors should be cautious.”
Despite some lingering political and economic risks, Galileo Capital has a neutral view on European-based equities as the continent is out of intensive care. “We expect the European Central Bank to start raising interest rates, which is … a good sign of economic health. However, the uncertainty around Brexit should make investors wary of UK-based investments and positions on the pound,” says Ingram.
Based on these factors, he suggests a overweighted focus on emerging-market equities with a multiyear horizon. “Emerging markets had a hard 2018, but if the global economy weathers the threats in the first half of 2019, there will be good opportunities for a strong recovery. This will deliver strong yields from both currencies and shares.”
Locally, SA’s top five rand hedge stocks are looking expensive and therefore don’t offer commensurate reward for the associated risks. “The rest of the local equities market is at worst fair value, if not cheap, especially mid-sized caps and those that generate revenues domestically,” says Ingram. He suggests a basket of less risky big bank and broader financial market stocks, which should perform well and offer fair returns on the back of policy certainty from government.
George is also optimistic about SA’s future and believes that clients will realise good returns from local markets. “As such, domestic equities should form a core part of portfolios in 2019. Consumer-facing, industrial and banking stocks should benefit most from an improving economy and rising consumer sentiment.”
Chantal Marx, head of research at FNB Wealth & Investments, says value seems to be less sector specific and more stock specific. “We see good value emerging in quality stocks with diverse operational and geographic revenue streams, specifically within the local market.”