Investment 26 |
Investment 26 | www.opportunityonline.co.za
Investment Is SA at a tipping point? Key investment themes to watch in 2020 A number of questions seemed to be left in the air at the end of 2018. How would the 2019 South African National Elections play out? Would equities deliver negative returns for the upcoming year? Should we be excited about the cricket and rugby World Cup events? As always, some events played out as expected and some surprising results unfolded, arguably none more so than the victory of the Springboks in Japan! We’ve rounded up some of the most important aspects to consider, both locally and globally, that could affect investment returns. GDP growth expectations and budget deficit There has been no improvement in GDP growth and the outlook for 2020 was downwardly adjusted in the Medium- Term Budget Policy Statement (MTBPS). The practical aspects of low GDP growth that started playing out in 2019 will likely continue into 2020. Some of these repercussions include: missing the government revenue target, resulting in a budget deficit greater than 5% (and increasing), and the consequent need for austerity considerations for spending. Struggle of state-owned enterprises SAA is the first state–owned enterprise (SOE) to be pushed to the brink by the government’s reluctance to continue offering a bailout to a non-performing entity. It is not inconceivable that SAA is no longer a 100% public company, or even no longer a growing concern, in 2020. The major concern for a country with a 29.1% unemployment rate will then not be the sentimental loss of a national carrier subsidising the middle class, but the job losses that are likely to occur. Although Eskom is in a deeper hole than SAA with regard to debt on the balance sheet, consistent electricity supply is essential to keep an economy productive. Eskom has recently appointed a new CEO, André de Ruyter, who in 2020 will need to balance the demands of making Eskom profitable, reducing its debt, being less reliant on the government for funding and ensuring that the supply of electricity is consistent and not excessively expensive. Moody’s state of mind The concerns raised by the Minister of Finance Tito Mboweni in the MTBPS, particularly the increase in debt to GDP level primarily due to SOE funding, resulted in ratings agency Moody’s changing the neutral outlook on SA debt to negative. This was largely expected, but an ultimatum for 2020 was included, suggesting that a change to the debt trajectory was required to prevent a downgrade to sub-investment grade status. The grass is not always greener… Keeping America great: Trump in 2020 In the US, the popularity of President Donald Trump has been waning, but aggressive primary debates within the Democratic camp has meant that no clear front runner has managed to establish themselves yet. Of greater concern, especially for emerging market economies, is the progress of trade wars between the US and China in 2020. Tariff increases on Chinese goods exported to the US will result in an extra cost to US consumers. This could ironically mean that a relaxation of trade war measures by the US in 2020 would be beneficial to President Trump’s election campaign. Diminished trade wars promote globalisation which promotes risk-on trading and this is positive for emerging market currencies and equities. Investment opportunities in 2020 One can be forgiven for assuming the worst when it comes to investment opportunities in South Africa in 2020. The rhetoric around SOEs and the likelihood of a downgrade by Moody’s does question the investment prospects, but as Albert Einstein said, “In the middle of difficulty lies opportunity.” South African equities have delivered disappointing returns over the past five years, which has led to the overall index now trading slightly cheap of fair. The question on SA equities for 2020 is more likely when one should go overweight, rather than when one should go underweight. When it comes to domestic bonds the investment opportunity is even more compelling. The 10-year government bond is currently yielding around 9%, which is more than 5% greater than the current level of inflation. In addition, investors can lock in roughly 3.5% above inflation by investing in inflation-linked bonds. That may be lower than what is currently available on nominal bonds, but the real yield is guaranteed for 10 years. The concerns around a downgrade are not unfounded and if it does occur, it is likely to result in a spike in yields and a consequent decline in bond prices. This will probably result in a buying opportunity as the downgrade is largely priced into the yield. #Imstaying 2020 There is no doubt that there will be challenges and surprises in 2020, but opportunities will arise as well. Investors should be mindful of their risk profile and the alignment to their investment goals, and not allow perceived difficult economic conditions to affect that – 2020 may just be the tipping point when things start turning around. Luigi Marinus, Portfolio Manager at PPS Investments www.opportunityonline.co.za | 27
