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Where to from here for SA equities

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Duration: 00:33:37


Nazmeera Moola

Duane Cable

Rehana Khan

Ann-Marie Tippoo

Achumile Mashalaba

Yaser Survé

Nazmeera Moola: Welcome to our discussion on the outlook for markets post the recent events in South Africa. Joining us today, we have our South African 4Factor and Quality teams’ Portfolio Managers, Duane Cable and Rehana Khan, together with analysts in the respective teams, Ann-Maree Tippoo, Achumile Mashalaba and Yaser Survé. We are going to start with Duane and Rehana, discussing their views post the recent riots in KZN but also the impact of COVID and the events that we are seeing playing out globally at this point in time.

So, Rehana, if I can start with you right now, what we have seen in South Africa is a stronger than expected macro bounce-back. The economy is certainly in a better position now than we expected it to be at the advent of COVID. This is due to a range of factors. Part of it is the resilience in the economy but there has also been the strength in commodity prices, the sharp cut in interest rates, which has supported the consumer in South Africa, and the wealth effect from the higher equity markets. How has all this fed in to your outlook for the equity markets in South Africa, particularly the events of the recent unrest in KwaZulu-Natal and Gauteng?

Rehana Khan: Thanks, Naz. So I think, if we take a step back and we just look at the global macro backdrop, which then feeds into South Africa, I think our belief is that we have transitioned from early cycle market conditions into this mid-cycle stage; early cycle where growth is really buoyant and, you know, markets are really strong, growth rates are strong and, as you transition into this mid-cycle, what tends to happen is growth rates start to slow but in our mind that growth rate is still going to be at about [trend growth] or slightly above and that cocktail then is very, you know, it is constructive for risk assets to do well albeit, when you are in the mid-cycle stage, risk assets tend to be a little bit more volatile.

So we expect a bit more volatility but the fact is that these things will continue to grind higher and I guess, given that global backdrop, it has been supportive for South Africa. I mean, as you mentioned, you can see it in the commodity prices. Whilst they are off their highs at the moment, the supply/demand dynamic sitting behind that gives us a lot of comfort that these prices, you know, can remain stronger for longer. If you unpack that a little bit, you know, on the demand side you have got inventory levels globally at very, very low levels. So you have supply chain restocking that needs to happen across all supply chains, so that is supportive of demand and, on the supply side, you have got the COVID disruptions and the fact that a lot of these businesses haven’t invested in capex for the last 5 years. So you land up in a position where there is not a lot of supply to meet that demand. So it keeps the tension in commodity markets [tight].

What that means for South Africa is that, you know, these commodity prices have helped us, helped the fiscus with extra revenue, helped in terms of trade dynamics and the rand has been under control, etc., which then, you know, gives South Africa a nice underpin and, in addition to that, I think, while it is very slow-moving in terms of how the wheels have started to turn, we are seeing positive movements on the front of reforms, be it leadership changes that have happened in key bodies or the semi-privatisation of SAA, etc., So, slowly but surely, policy is starting to move in the right direction. There is a long way to go still but those kinds of things just provide some support to the South African investment case.

Naz, you mentioned the riots. You know it did set us back a little bit in terms of the momentum that was starting to build. I think, because it was region-specific and localised, what we found with a lot of the companies that we own was that the impact on their earnings wasn’t that material. Then, to put that into context, our numbers for a lot of these companies were ahead of market forecasts to begin with. So when the riots happened, we did shave some of our numbers but the numbers weren’t material. So it gave us confidence that we still have potential earnings from a lot of the businesses that we own at the moment. So, overall, constructive on the backdrop for SA assets from here.

Nazmeera Moola: I think if we look at growth forecasts for South Africa this year, we have got a number around 4.5%. The Reserve Bank has a number of 4.6%. We had a discussion recently with the Deputy Governor of the Reserve Bank, Kuben Naidoo, and his point was that, without the riots, you would have seen their growth forecast being lifted above 5%. So there is this loss of around 0.5% from the growth outlook for this year but it is still at relatively strong levels for the bounce-back. Maybe the last question before I move on to Duane is do you think there needs to be an increase in South Africa’s equity risk premium because of these riots?

Rehana Khan: Interesting that you say that and I guess the reality of an emerging market is some of these things are kind of expected and it is part and parcel of investing in emerging markets. I think it would have been a much different story if it was a market where, you know, it was unforeseen and the riots happened out of nowhere and then you would see that risk premium moving quite quickly. I guess, with South Africa, it kind of – you can say it is kind of expected that this is part and parcel of investing in South Africa. That being said, over the medium term, and this is where we have to keep a close eye, is that I spoke about the impact of the riots being, you know, like a one hit wonder kind of situation but what we are keeping a mindful eye on over the medium term is the impact on investment and job creation on the back of what has just happened and, if that impacts that over the next few years, that means obviously we will adjust our growth forecasts and, therefore, that idea of the risk premium increasing is a sound assessment, if that is the case.

Nazmeera Moola: And I think that bringing it back to the impact on private fixed investments is really important because you see that in terms of the growth outlook. What determines our ability to grow in future is the amount of investment being made now and we are seeing very depressed levels of private fixed investment at this point in time. Maybe a little bit later in the discussion we can bring it back to what sort of events can change that. For our purposes now, trend growth in South Africa is roughly 1.5 to 2%. Duane, we know that you take a longer-term view, a longer-term horizon in terms of your investment holding period. How does that trend growth affect the way you think of South African stocks at the moment and then have the riots changed your assessment of that in any way?

Duane Cable: Thanks for the question, Naz. I mean again those are the two pressing questions I think investors with a longer-term horizon need to be able to articulate in terms of trying to find opportunities in the market today. I mean, firstly, when we think about trend growth, I mean certainly our base case assumptions, when we are modelling companies and thinking about their longer-term valuations, certainly our base view is that we do not see over the next 5 years, once South Africa has gotten through the carnage of COVID, that our trend growth will be materially different from that 1.5 to 2%. That is certainly what we put into our base case assumptions over the longer-term.

The country certainly today is in a very different space economically than where it was in the early 2000’s and, therefore, I think it is important for investors, when they are making comparisons around the cheapness of the South African market, is to put it into the context of what is that longer-term trend growth for South Africa. And I think what the riots, no matter how sad those events have been over the last few weeks, have demonstrated is that the key problem facing South Africa is that we have got a growth challenge and, given the extent of the divide in terms of equality, wealth levels, unemployment, until we deal with structural growth impediments and get us to the higher levels of trend growth than what we are currently assuming of that 1.5 to 2%, I think some of these challenges will remain and, therefore, investors should expect continued volatility when it comes with the outlook for SA equities.