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Economic impact is going to be severe, but the economy will rebound with good policy support

25 March 2020 Old Mutual Investment Group

Local investors should stay invested to reap strong future returns.

An early decisive response to the Covid-19 threat should contain the spread of the virus in South Africa, but the economic repercussions in the short term will be costly, says Old Mutual Investment Group.

Speaking at today’s quarterly press conference via webinar, Johann Els, Chief Economist at Old Mutual Investment Group, says local measures to contain the virus will add to an already weak economy and negative global impact. Els forecasts that GDP will contract by 2% for 2020, that inflation will edge 3.5% and that we will see a budget deficit of 10%.

“While we hope to come out more strongly than this, the reality is a stark one in the short term. The efforts so far taken by the South African government have to be applauded, but we need to face up to the fact that there will be severe economic effects to the downside in the short term,” says Els.

However, thanks to a potential stabilisation of the virus, policy support and a low oil price, a “V-shaped” recovery is expected to follow the deep recession of the first half of the year.“The economic impact is going to be severe but short-lived,” says Els.

Els is pencilling in a global growth rate of 4.5% in 2021 from -1.2% this year, while SA is expected to reach 1.8% GDP growth in 2021, withthe potential to hit 2% over the medium term. “It is still not nearly enough to create the jobs and stimulate the higher levels of investment we need, but several green shoots are emerging. We have a President showing he is willing to make tough decisions and is being supported by a commited cabinet.”

“Fixing the state and broken SOEs will continue, as will fighting corruption. Low inflation will help consumers, as will further interest rate cuts. The foundations are being laid for better growth,” says Els.

Old Mutual Investment Group Portfolio Manager John Orford says there will be opportunities for investors as the “fear factor” recedes. “Despite the imminent rating downgrade to junk by Moody’s, it’s important to point out that the market has already priced this in. We continue to see local bond return at an impressive 5.5% over the long term despite being labelled “junk,” says Orford.

“Global bonds are likely to offer ‘less reward ’ risk of only -1.5% over the long term, while local fixed income investors could see much higher real returns as rates come down. “He says local interest rates still can move “much lower”, while he expects lower oil prices to usher in significant benefits for investors and the real economy.

Local equities can be expected to outperform their global counterparts, with an expected long-term return of 7%, versus 5.5% globally. “While we still recommend some diversification, we do see exceptional relative value in local equities and bonds. I expect 2021 to be a better year, with equities offering their best returns since the 2008 global financial crisis,” concludes Orford. The message to investors is simple: “Stay invested to reap future returns”.

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