Down, but not out
Ninety One asset management isn’t abandoning its home market, despite SA’s existential challenges
Even as the rand gets punished by foreign investors, one of South Africa’s largest investment houses remains positive about the country’s opportunities for investment.
And compared with the pain experienced by the developed world’s bond investors,
South
Africans might even count themselves lucky.
“In the rest of the world, the increase in bond yields was far worse [than in
South Africa],” says
Hendrik du Toit,
CEO of Ninety One, following last week’s results.
“American interest rates increased by a factor of 10. Were that the case in
South Africa, we would have had interest rates close to 100%.”
The US Federal Reserve started raising interest rates from close to zero to 5.25% now, whereas the Reserve Bank “only” doubled its repo rate from 3.5% in November 2021 to the current 7.75%.
It has led to a relentless selloff in bonds, which has also laid waste to a number of banks in the US, such as Silicon Valley Bank, Signature Bank and First Republic Bank.
In South Africa, however, consumers and the financial services industry have been used to relatively high interest rates for decades because inflation is embedded in the economy, mainly due to the country having to import most of its fuel and machinery.
“Thanks to the conservative Reserve Bank, we came through [the interest rate hiking cycle] rather well,” Du Toit says. “That’s despite the government.”
“In South Africa, we had a different type of shock [to the rest of the world],” he says. “We had a shock to our future; we had a shock due to the government’s ineptitude [as seen with] Eskom.”
But even as South Africa may have dodged the interest rate bullet, does it remain a place to invest in? Especially considering lacklustre economic growth, rampant unemployment, and the main reason for all these travails: the government’s inability to provide enough electricity to mines, factories, small businesses and households.
Yet, says Du Toit, the South African government still has a good name for repaying its debt. Most of the country’s borrowings are denominated in rand, with a relatively small portion of offshore borrowing.
“The country doesn’t have the same level of foreign debt as its peers in terms of economic development,” he says. “It’s relatively cheap for the government to borrow as long as good management remains at the National Treasury.”
Just this week, Deutsche Bank upgraded its view on South African bonds to “strong overweight” from “overweight”, arguing that valuations are “extremely cheap”.
The question is, however, whether growth capital that which finds its way into new factories and mines, for instance still flows freely into South Africa.
“It’s so difficult to start a new mining [or other] business, because we made the regulations so difficult, and we also have the ‘transformation tax’ [in the country],” Du Toit says.
He is frank about the “deterioration” of South Africa’s economic prospects in the company’s financial results release, in which Ninety One posted a 20% drop in pre-tax profit (to £212.6m) on a 10% slide in assets under management (to £129.3bn). “We consider it our duty to call this out, but also to work constructively with the government, civil society and other stakeholders to improve this situation.”
It is yet to be seen if this situation will improve dramatically because, as Du Toit tells the FM, the government “doesn’t speak from one mouth” when it comes to handling the economy.
As the “headwinds” of inflation may be losing steam in the rest of the world, and maybe to a lesser extent locally, power blackouts will keep knocking the domestic economy.
“Did the country, as a whole, do itself a favour over the past couple of years? No,” he says.