• Editor

Alexander Forbes identifies key economic trends and investment themes for 2021 and beyond

Following the volatile year for the global and domestic economies in 2020, we expect 2021 to see an improvement, though uneven across economies. Isaah Mhlanga, chief economist at Alexander Forbes, says, “South Africa’s economic recovery depends on several factors, some controllable and others uncontrollable, with the most important one being the logistics of Covid-19 vaccines.”

Which factors will drive the economic recovery this year and beyond?

1. The extent of Covid-19 infections and related deaths, and government’s lockdown restrictions

The second wave of Covid-19 infections appears to be moderating. With the relaxation from level three from the third week of February, the risk of a third wave of Covid-19 infections in winter will be a drag on growth. What will make all the difference is vaccination, which includes the ability to procure Covid-19 vaccines, effective distribution, and wide acceptance, which we expect to see in the second half of 2022.

2. Economic costs of lockdown restrictions for businesses and individuals

We expect these costs to continue this year.

3. Pressure for government to extend the temporary employer/employee relief scheme and establish a basic income grant will increase fiscal risk, though necessary

We expect better than expected revenue outcomes for fiscal year 2020/2021 but 2021/2022 will likely remain in line within the medium-term budget policy statement (MTBPS) forecasts. Fiscal risk remains very high, especially beyond 2022.

4. Monetary policy will remain accommodative

It will only start normalising in the second half of 2022.

In addition, Isaah says that, “Global trade volumes show signs of a recovery but the recent resurgence in Covid-19 infections and lockdowns poses a downside risk to the global economic outlook in the medium term. Global growth is expected to rebound by 5.5% in 2021 from a revised projected contraction of 3.4% in 2020 on expected vaccine-driven strengthening and additional fiscal policy support.”

He adds, “Global activity will remain well below pre-Covid, January 2020, levels. Even with the anticipated recovery in 2021 and 2022, output gaps are not expected to close until after 2022 and inflation is expected to remain subdued.”

According to Mhlanga, South Africa’s long-term growth strategies for the economy after the Covid-19 pandemic must consider the following:

  • Localising global manufacturing at consumption site through production onshoring

  • The technological leap, which is permanent with huge benefits to economies, but the digital divide will persist

  • The rise of the home office and the online retail market, resulting in a change in dynamics in the property market: residential improves but commercial is at risk

  • Reduced regional and international travel for business for multinationals

  • Africa Free Continental Trade Area will be transformational but has a lot of hurdles to cross, with the need for an accompanying Africa-wide air transport protocol

Lebo Thubisi, head of manager research at Alexander Forbes Investments, details key themes that he believes are most likely to play out in 2021 and beyond:

1. Entrenching sustainability and environmental, social and corporate governance (ESG) factors

2021 will certainly be a key year for tackling climate change as world leaders will be congregating in Glasgow. We are also seeing a regulatory onslaught of global green finance taxonomies at the same time as National Treasury is working to develop a first national green finance taxonomy for South Africa.

“The Biden presidency will impact global markets with a pro-climate stance, while the shift to renewable energy by the United States of America places pressure on global finance of coals assets,” says Thubisi.

He comments that Covid-19 has led to a rethink of diversity and inclusion practices around inequity, gender pay disparity and parental responsibilities. Based on an annual global asset management survey by Willis Towers Watson, 50% of asset managers surveyed increased the number of ethnic minorities and women at senior positions. As Thubisi remarks, change is firmly in the air.

2. The scale game – the rise in consolidation of the asset management industry

The market environment has meant that there has been a quickening of the pace of consolidation in 2020, which Thubisi expects to continue in 2021. This has come as some larger investment managers have used their scale to expand profit margins, while offering products at lower costs. “Many of these firms have done so by investing in new technology to improve performance and efficiency, while freeing resources for more profitable activities,” remarks Thubisi.

3. Monetisation of data analytics

“One can never be sure that all information has been considered. Artificial intelligence can dig deeper and find the ‘invisible relationships’ that exist between data sets,” says Thubisi. He adds that: “Artificial intelligence has no emotions and is totally indifferent to the outcome of the decision. Its task is to suggest the better option with an unbiased view given the stipulated parameters and make accurate predictions. It may also be powered by a predictor which will allow you to get as accurate predictions as possible considering real-time and historical data.”