Analysts say now is not the time to go into hibernation
The economy may look grim but analysts say now is not the time to go into hibernation, writes Pedro van Gaalen
Finance minister Tito Mboweni painted a grim economic picture for SA in his mediumterm budget policy statement.
Andre Cilliers, currency risk specialist & director at TreasuryOne, calls the public sector wage bill untenable and says: “Government’s debt spiral is accelerating and capital expenditure is in decline.”
State-owned enterprises remain a drain on the fiscus, siphoning funds needed to stimulate economic growth, which the Treasury has revised down to just 0.5% in 2019, with a meagre rise to 1.2% mooted for 2020.
“The projected shortfall in tax revenue, which lags estimates by more than R50bn, will be insufficient to plug the funding shortfalls,” Cilliers says. “Higher-income earners will bear the resultant increased tax burden, which will add to the negativity and constrain consumer spending in 2020.”
The combination of policy uncertainty, slow implementation of structural reform, an increasingly depressed business environment and a worsening global economy seems to make a Moody’s downgrade to junk in 2020 inevitable.
However, Magnus Heystek, director at Brenthurst Wealth Management, believes that the JSE is a coiled spring ready to bounce back if the government takes the right corrective actions. “If nothing happens before next year’s budget speech, that spring will remain coiled. What SA needs now is action to remove uncertainty.”
Cilliers says this should include steps that show the Zondo commission was worthwhile, with arrests and prosecutions. “To stimulate growth, we also need firm details in an implementation plan on how government will reduce operational expenditure, and more clarity on land reform.”
Brandon Zietsman, CEO at PortfolioMetrix, says markets and currencies, being forwardlooking, will react quickly to any positive developments.
“A rise in confidence could lift local markets and strengthen the rand. This will create opportunities for local investors who have maintained their positions in risk assets within the context of a well-diversified portfolio engineered to withstand a very broad spectrum of possible scenarios.”
Hannes van den Berg, cohead of SA Equity & MultiAsset at Investec Asset Management, says any improvement in the macroeconomic environment would help to restore investor and consumer confidence.
“As institutional reforms continue and we confront our economic cyclical and structural challenges, we should expect capital expenditure and job creation to follow. If we get this right, we could experience some cyclical recovery going into 2020.”
Van den Berg believes earnings expectations have been reset lower and most negative outcomes are already priced into markets, with opportunities emerging in the banking, platinum group metals and retail sectors.
“Select global industrial rand-hedge stocks are also attractive, like AB InBev and Naspers and Prosus. The latter offer investors access to some of the world’s most attractive consumer internet and technology assets at an NAV discount.”
Victoria Reuvers, senior portfolio manager for Morningstar Investment Management SA, says there is good value in many SA equities, which seem to have much of the negative news priced into them at this point, and in SA government bonds, which are offering investors a yield of roughly 4% above inflation.
But Reuvers is cautious on local listed property. “While it may appear cheap, the fundamental headwinds the asset class has faced remain a reality.”
Other promising investments include cash, which is delivering 9% in an inflation environment of 4.5%.
“With an almost guaranteed return after inflation, investors need to take the opportunity with higher allocations to cash,” says Heystek, adding that highincome or enhanced-income funds worked well in the past and will do so until certainty returns to local markets.
Cilliers says currency often performs well in times of low growth and a slow economy.
“With lower local demand there is less pressure from imports, which is positive for trade figures and balances. As such, the rand generally fares better.”
He expects the rand to trade between R14.20/$ and R15.50/$, trending to the upper end following any negative news. “We should see the rand move to R15.05 following a ratings downgrade, with speculators driving it.”
While SA investors will continue to face significant risks in 2020, Heystek suggests that the risk of doing nothing outweighs them all.
“Investors must remain active, especially if they can make changes to their portfolios without incurring costs,” he says.
“Investors, particularly those at or near retirement age, should look to tilt portfolio allocations to improve returns without taking on more risk.” ●
Andre Cilliers … wage bill untenable
Magnus Heystek … JSE a coiled spring