While we cannot offer insight as to how this situation will unfold, we can make decisions on portfolio positioning if necessary.
14 July 2021
The impact of the violence and looting over the past few days on our country and economy is clear. Many people have unfortunately lost their lives, over 1 000 arrests have been made, and the South African National Defence Force has been deployed. Economic growth under these conditions is impossible and the short-term effects on food security and loss to businesses, both large and small, is extremely concerning. Additionally, setbacks to the rollout of Covid-19 vaccines will hamper all the attempts to return the economy to a degree of normalcy.
While we cannot offer insight as to how this situation will unfold, we can make decisions on portfolio positioning if necessary. To this end we are monitoring the situation closely and evaluating the extent of the short-term versus long-term impact on the South African earnings of companies where our portfolios have exposure.
It is important to remind ourselves (in crisis situations particularly) what our approach to asset allocation is: we aim to earn appropriate risk premiums when available and avoid risks we are not compensated for. Our current view is that headline indices do not capture the divergence in underlying opportunities, and we have therefore been advocating selectiveness across all asset classes.
We have for some time positioned the equity portion of clients’ portfolios with a deliberate tilt away from South African earnings. The current look-through earnings composition in our equity model is 61% non-South-African earnings and 39% South African earnings. In addition, we have maintained broad diversification across industries, sectors and economic factors. Our equity exposure in portfolios is modestly overweight compared to the strategic benchmark.
Our view on JSE-listed equities before the recent turmoil is as follows:
We have retained some exposure (but remain underweight) to capitalise on attractive entry points, but caution that a focus on quality is of the essence. The property sector has been under pressure from a nascent economic recovery, fundamental demand/supply imbalances and increases in operating costs (municipal costs and services). Distributions from property companies remain at risk from decreased earnings from rental reversions, rental holidays and business failures, disruption like e-commerce and balance sheet pressures.
Property valuers are taking a more cautious stance, with financial results revealing meaningful impairments to property asset values. This reflects both cyclical weakness and the threat of structural change with new remote-working and e-commerce trends accelerating. Retail and offices have been most vulnerable to a renewed focus on affordability of space and where rates should normalise in a post-Covid-19 world.
We retain a focus on balance sheet strength, given deteriorating fundamentals and aggressive mergers and acquisitions in previous years.
Cyclical tailwinds have benefited the fiscus with revenues surprising to the upside, while expenditure remains within budget. This has helped conclude the 2020/'21 fiscal year with an improved budget deficit of R51, 5 billion, decreasing the main budget deficit to 11,2% of GDP from 12,3%. The improved outcomes enabled a further decrease in bond issuance, a positive signal for the bond market.
Food inflation, increases in electricity tariffs, a higher oil price and base effects will see inflation increase during 2021. Local demand however, remains weak and should keep inflation contained in the medium term. Fiscal metrics presented at the Medium-term Budget Policy Statement will likely be better than Budget 2021, but the longer-term trends matter. Public sector wage negotiations remain an outstanding risk. Global central banks are likely to remain supportive, but market pricing around inflation expectation and the
withdrawal of liquidity will likely be the cause of more volatility in the year.
Given the starting valuations in our local bond market, we believe nominal bonds are still attractive on an absolute and relative basis, even allowing for a variety of scenarios for global bond yields and local inflationary dynamics. Fiscal risks, however, remain elevated with high execution risk.
The extent of the current turmoil is not known at this stage, but it will definitely have a negative impact on the economy. A day of lost productivity is one day too many for a country in repair. Client portfolios are currently not significantly overweight in equities and within this asset class exposure to South African earnings is less than 40%. The equity portion is well diversified. We are monitoring the situation closely and evaluating the extent of the short-term versus long-term impact on the South African earnings of companies where we have holdings and will adjust if necessary. The exposure to the property sector is low. There will be negative impacts to affected property owners and banks that have lent to them. Insurers are exposed to business interruption risks but are not liable for damages as a result of riots, this falls on South African Special Risks Insurance Association.
It is times like these that show the importance of diversification across assets classes, geographies and sectors. We remain vigilant in this fluid environment and will look to make portfolio changes where we view changes to be structural and permanent.
|This communication is issued by Nedgroup Private Wealth (Pty) Limited and its subsidiaries (“Nedbank Private Wealth”) for information purposes only, and recipients should not rely on such information as advice without obtaining financial, tax or other professional advice. The information referred herein has been obtained from various sources and may include facts and events or prevailing market conditions as at the time or date of the information going to print. Nedbank Private Wealth does not warrant the completeness or accuracy of any information contained herein, nor does it not make any representation that the information provided is appropriate for use by all investors in all jurisdictions. All opinions expressed and recommendations made are subject to change without notice. Nedbank Private Wealth and its employees may hold securities or financial instruments mentioned herein. The information contained in this document does not constitute an offer or solicitation of financial services or products and Nedbank Private Wealth accepts no liability for any loss or damage of whatsoever nature including, but not limited to, loss of profits or any type of financial or other pecuniary or direct or special indirect or consequential loss howsoever arising whether in negligence or for breach of contract or other duty as a result of use or reliance on the information contained in this communication.|
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