The change in presidency and the election of Cyril Ramaphosa is a momentous occasion for South Africa. The country has been in a state of paralysis as it’s been ground down into economic depression, which is evidenced by only 0.9% economic growth over the last three years. But, South Africans have been resilient and have fought back against a delinquent government. There is now real hope that the country can recover, and everyone can start prospering.
Barring all the important policy and structural changes necessary, a mere increase in consumer and business confidence will boost economic growth significantly through renewed spending and investment.
After an uplifting SONA on Friday that was comprehensive and touched on most prevailing issues, evidence of change is necessary to ignite the country’s optimism. Initially these should be:
- A stream-lining of cabinet with significant personnel changes;
- A comprehensive, detailed budget speech on Wednesday. Here, concrete plans need to be outlined on reviving the economy. A key issue will be funding the budget deficit (government expenditure exceeds revenue by around R50bn):
- We hope a VAT increase will not occur as this will stifle economic growth. Further increases in wealth and death taxes are likely, as are additional government borrowings.
- Government expenditure needs to be slashed and refocused for more economic stimulus;
- Avoiding a further rating downgrade by Moody’s. We believe there is more than a 50% probability that Moody’s will give us another reprieve and will not downgrade our government debt. We have held our stance that we will not be further downgraded, as we believe Moody’s has taken the correct political reading of the country and has given us the benefit of the doubt that economically the country will get back on track. We see no reason why their stance should change now.
What does this mean for the South African investment markets?
The Rand should remain firm in 2018. We have been positive on the Rand for the last two years. In December 2017 (Rand/Dollar 12.72), we forecast that with Ramaphosa’s election as ANC president, the Rand would continue to strengthen to under 12 to the Dollar.
Fundamentally, we believe the fair value of the Rand is 11.50 to the US Dollar. However, over the years, we have seen the Rand move materially away from its fundamental value because of sentiment. If Ramaphosa implements meaningful change, positive sentiment is likely to drive the Rand below 11 to the US Dollar.
The JSE comprises two halves. Local shares will do well and International shares will lag. Companies with SA earnings will do well. The earnings bases of most of them are suppressed and offer enormous growth with some positive economic growth. In addition, their low valuations have been ignored as all the attention has been given to the international sector. With global valuations high and rising developed country interest rates, the “Rand-hedge” sector of the JSE is likely to lag.
Bonds are likely to remain firm. They have been very strong, but with a positive economic outlook and likely interest rate cuts they should remain firm.
International markets are risky. Developed world valuation remains stretched. Inflation and interest rates are rising, and volatility is returning. The positive is that synchronised global economic growth is materialising, which will particularly drive emerging markets and South Africa should benefit.
Investonline Portfolios
Within the context of our views above, our recommended portfolios continue to benefit from underweight offshore positions. We are in discussion with unit trust fund managers and we are monitoring portfolios closely to ensure investments will benefit from the renewed positive local outlook.
Balancing risk remains vital and we need to incorporate risk factors into the appropriate long-term investment strategy. The last three years have been a frustrating time for all investors as we have been held hostage by a rogue government. Ramaphosa hit all the right notes in his SONA address and laid out a clear and ambitious vision for the country. With this political change, we should see a far more positive investment environment resulting in better returns.