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Ok. Got itSouth Africa: A country at a cross road
Global growth and international investors seeking higher interest returns (the carry trade) are currently supporting the local economy and bond markets. But the local economic environment remains uncertain and low confidence continues to inhibit growth, which will continue to put pressure on businesses and consumers. Although there is scope for monetary easing due to lower inflation, any room for fiscal policy stimulus (to stimulate growth through a decrease in taxes, or increased government expenditure) is severely limited. The ANC Elective Conference in December remains a key determinant for policy direction over the next 10 years. Risks are high and the next two years will likely be more volatile than usual. However, on the upside, current levels of weak South African growth and confidence provides a low base, and improvements could provide a springboard for demand, investment and growth.
Focal points for local investors
At Nedbank Private Wealth, we believe a globally diversified balanced portfolio is optimal for investors to capture returns, while protecting against risks at the same time. We continue to take a long-term, through-the-cycle approach and actively manage risks in the way we build our portfolios.
We expect lower returns from equities, bonds, property and cash
If we consider current expected real returns (after inflation) relative to the last 10 years and the longer term, we are left with a few conclusions:
Our portfolios remain cautiously positioned and well diversified.
Food inflation has decreased, thanks to a rebound in agriculture
The good news is that, there have been record harvests for maize and other crops. This rebound in agriculture has been one of the sole drivers of GDP growth and has had a positive effect on food price inflation. The decrease in inflation has provided consumers some much-needed relief and has also enabled the South African Reserve Bank to start cutting interest rates.
It’s getting harder to balance the books
As a country, we are spending beyond our means. South Africa has increasingly relied on debt to fund our shortfall. In this fiscal year, South Africa spent an estimated R148 billion on servicing debt. To put this into perspective, this is of similar magnitude to what is paid towards social grants each year and the cost of the entire Medupi Power Station (based on 2015 figures).
Increasing debt without economic growth creates a structural long-term problem
One of the challenges adding to the debt burden is the guarantees extended to state-owned enterprises (SOEs). These have grown meaningfully over time, leaving potential debt exposure closer to 70%. In parallel to this, there has been very little real growth in the South African economy. This essentially means South Africans are getting poorer.
The state of the real economy is challenging
The diagram below shows the primary challenges we face. These are structural problems that require sound, long-term solutions.
Sources: Statistics South Africa, IMF World Economic Outlook (July 2017)
Poor business and consumer confidence will stall economic growth
Confidence leads investment from business and consumers which fuels growth. The last driver of growth is government but government has a budget constraint. Business confidence, as measured by the BER Business Confidence Index, shows a dramatic decline over the past year. The BER Consumer Confidence Index also shows a steep decline over the same period.
The FTSE/JSE All Share Index (ALSI) excluding Naspers was flat over the last three years
Despite the ALSI holding up, a primary source of growth has been from Naspers (and within this, primarily Tencent, whose growth takes place in China). If you exclude Naspers, the ALSI has delivered poor (negative) returns since late 2014 to date. This does mean that within the broader South African market, with moderate earnings growth but no price movement, there are pockets of value opening up.
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