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Why South Africa's confidence runs deep

24 August 2021 Sanlam

Sanlam is not only confident about South Africa’s future, electing to invest in the country – but says there are strong signs that growth prospects in South Africa and Africa are imminent and real.

At a recent Sanlam Financial Confidence webinar, Sanlam Retail Affluent Chief Executive Officer, Anton Gildenhuys cut through the clutter to explore why Sanlam has confidence in the country’s future at a time when negative news dominates.

Here are some nuggets from his talk:

“In 2020, the Economist released an issue called African Century, deep diving into why Africa may be the world’s last frontier for massive growth. They based this on the changes starting to happen across the continent via democratic means, as opposed to revolution, plus massive education drives. These are having a profound impact. We’re seeing fertility rates decline as women are empowered. There’s migration into Africa. And massive industrialisation. One graph compares the manufacturing activity in Africa to that of China. We’re lower, but the upward trend is very similar.”

That’s Africa. But why South Africa specifically? The news and social media don’t paint a pretty picture. “We all know the scars of the wasted years. We are still near those today. We know the impact of Covid-19 has been devastating. We have record unemployment and political fractures. So why is it Sanlam has such strong belief in South Africa? Why are we investing in this country? Why aren’t we following the trend of moving everything offshore? Let’s do an economic overview…”

An uplifting economic overview of South Africa

- Retail sales have recovered to pre-Covid-19 levels, despite the continued lockdown
- Manufacturing production has also recovered – some sectors took a massive knock, but overall, we’re close to where we were in 2019
- GDP – including government activity has recovered
- Looking forward, the outlook is resilient, with the manufacturers’ purchasing manager index (PMI) improving, indicating business confidence
- Counterintuitively, we now have a positive net household savings rate, which is a seismic shift. People’s net wealth (percentage of disposable income) has actually improved, on average, with an increase in household net wealth and savings. There’s been an increase in people’s deposits in commercial banks. If you look at the deposits with banks from just a year ago, they’ve jumped from R1.3 trillion to R1.4 trillion. That’s clearly a massive buildup of savings. A lot of net wealth is also being driven by non-financial assets like house prices and from holdings in pension funds and other financial assets. The improvement in household savings is not unique to South Africa; Goldman Sachs estimates excess savings worldwide of $5 trillion. Why? Because people had reduced ability to spend in a lockdown environment and the shock of the pandemic changed the attitude to risk – people realised they needed to protect themselves
- If you compare us to other emerging markets, we have a huge competitive advantage due to our large liquid capital market, which will help accelerate economic growth
- Once the vaccination drive opens the economy up, there is likely to be an incredible unleashing of pent-up demand in terms of spending, which will drive massive economic recovery
- We have structurally low inflation, which is contributing to the lowest prime overdraft in 50 years. This is likely to last some time, which lowers the cost of capital and helps fuel economic growth
- We have a trade surplus of more than 6% of GDP, which has never been seen before. One of the drivers of this is the global fixed investment outlook. Biden just approved his $550 billion infrastructure investment plan. They’re going to invest billions in revitalising their infrastructure, which requires steel, copper, cement… the sorts of things South Africa produces. Because of the low resources prices for more than a decade, there’s been a low level of investment in new mines and manufacturing. Sourcing more iron, ore and copper will take time. Demand far outweighs supply, supporting higher commodity prices, which could lead to strong support towards a trade surplus and supporting our economy
- There’s been a massive jump in corporate and personal income tax – while the record corporate taxes have been well recognised (partly fueled by the commodity boom), the record personal income tax receipts to April 2021 have been overlooked by some commentators.
- There could be a further re-rating in equity markets. It is our view that the forward-looking Price Earnings ratio is only at 11 at the moment, which is particularly low in a low interest rate environment.

“Recovery is not equal. While many of the statistics show the overall impact in society, we know that there are many families that have been devastated financially during the past 18 months. Society needs to continue dealing with that. But there are reasons to be optimistic. People underestimated the degree to which economies across the world would recover. We’re starting to price in the pent-up demand and the commodity boom. Because of this supply-demand imbalance, we’re likely to see continued currency support and trade surpluses, which will keep the rand, inflation, and prime interest rate in check. We can look forward to continued growth in tax receipts. It’s almost like South Africa got a ‘get out of jail free card’ from the worldwide economic recovery, and particularly the rise in commodity prices, when we most needed it.

“If this commodity supercycle continues, it will lead to further capital flows into our economy, that will drive downstream business as well. It opens the opportunity for us to rescue our government finances. And while the political unrest was devastating, we also saw that the centre held, and that government accepts the determination of the courts.

Perhaps one of the most important trends over the last 18 months relates to a new relationship between private and public sectors. The joint vaccination drive demonstrates the opportunities that can be unleashed if government and the private sector work together. I’m optimistic we can leverage off these relationships and put South Africa on the right path. I’m proud to say Sanlam lives with confidence in this country.”

 

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