SA could join Russia and Brazil on the tightrope

David Crosoer, Head of Research and Investments at PPS Investments.

Stay focused and don’t look down.

Russia and Brazil were both downgraded to sub-investment grade in 2015. David Crosoer, Head of Research and Investments at PPS Investments, believes that there is a real risk that South Africa will join them this year. That is if our economic growth continues to disappoint on the downside. In fact, fixed interest markets have already rated South Africa as sub-investment grade. Our currency has tracked the Brazilian real and Russian rouble down against the US dollar as all three countries experience deteriorating fundamentals.

All three economies are vulnerable to the slowdown in China, and the prospect of further US interest rate increases. By its own admission, Chinese growth will struggle to achieve its 6.5% growth target over the next three years, after having - in all likelihood - dipped below 7% in 2015. The Fed’s decision to raise short-term interest rates from 0% to 0.25% in December makes it harder for emerging markets to attract capital, especially given the deterioration of their growth outlook. At the same time Fed hikes (the Fed expected to hike four times this year) despite global economic weakness could put the rand under further pressure as will the likely ratings downgrade for South Africa to sub-investment grade.

2016 could also be an extremely challenging year as for consumers as South Africa’s inflation could get very close to double-digit levels, and further rate hikes from the MPC could push the consumer (and the economy) into recession. Consumers will find it very difficult to absorb an aggressive tightening cycle, and this could put further downward pressure on economic growth.

While some of the deterioration in this outlook is already priced into South African government bonds and cyclical equities, it is clear that things could still get worse before they get better. However, we do believe market volatility could provide us with entry points into asset classes that we are underweight on valuation grounds.

Investing in this environment requires fortitude and a focus on one’s long-term goals. It is important not to be swayed by short-term emotion but rather try to construct sensible robust portfolios that can deliver on one’s objectives over the medium term.