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

Financial Mail - Investors Monthly - - Contents -

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

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.