South Africa had its fair share of turbulence in 2018 – from higher deficits and worsening unemployment rates to challenges around land reform and a technical recession in quarter two. These challenges have resulted in investors opting to shy away from domestic markets, seeking investment opportunities outside the country.
“While SA’s economic growth still faces some headwinds, we believe investors should be optimistic about domestic opportunities,” says Adriaan Pask, CIO at PSG Wealth.
“Despite lacklustre growth and high unemployment data, the leading business cycle indicators from the South African Reserve Bank (SARB) have been on an upward trajectory for some time,” says Pask.
“Greater certainty on a few key issues such as land reform, and decisive action being taken to stamp out corruption should go a long way towards reversing some of the negative sentiment that currently surrounds the economy,” says Pask.
Lower interest rates and stable inflation
PSG data shows that interest rates could remain reasonably low while inflation could also continue to be relatively stable.
“Although rate cuts are always the ideal outcome, at least over the short term, we don’t think a rate cut is likely. On the flip side, we also think extreme hikes are unlikely,” says Pask.
The hurdle for generating inflation-beating returns is also relatively low.
“When inflation was running at double-digit numbers during the 90s, investors had to generate high double-digit returns to grow the real value of their capital. Now that inflation is lower, investors no longer need an 18% return to cover a 13% inflation rate. Instead, they need high single-digit returns to cover inflation plus 4% or 5%,” says Pask.
The annual inflation rate rose slightly to 4.10% in February 2019 from 4% the previous month. Even with this slight increase, domestic inflation is still relatively low and stable.
Investment opportunities in offshore markets more difficult to spot
Rising inflation and interest rates around the world are reversing the general investment trend following the 2008 Global Financial Crisis. With slower global growth and muted inflationary pressures, the International Monetary Fund (IMF) expects the “pace of removing accommodation to be even more modest than previously expected”.
Most central banks in the developed world are projected to raise interest rates this year, with the US Federal Reserve (Fed) expected to hike interest rates three times in 2019.
Data from JP Morgan seems to suggest that corporate earnings might have peaked, with S&P 500 profit margins (quarterly operating earnings) at a 26-year high of 10.10% at the end of 2018 Q4.
“Our data also indicate that the valuations of most offshore counters, especially in the US, are stretched,” says Pask. “With valuations at lower levels domestically, it’s the best time to find opportunities at cheaper prices. In short, the opportunities locally are more attractive than the majority of offshore counters.”
“Now is the worst time to avoid investing, especially on local opportunities,” cautions Pask.