As economic growth eludes, the case for investing in SA is not clear-cut

18 May 2018Bastian Teichgreeber, Prescient Investment Management.
Bastian Teichgreeber, Portfolio Manager at Prescient Investment Management.

Bastian Teichgreeber, Portfolio Manager at Prescient Investment Management.

Equities look expensive, but attractive valuations make a positive case for listed property.

Despite improving political momentum and policy clarity, if below-par growth continues to characterise the economy South Africa risks more of the same in terms of falling short of fulfilling its not insignificant investment potential.

According to Bastian Teichgreeber, Portfolio Manager at Prescient Investment Management, South Africa’s escape from another sovereign rating downgrade to junk bought some time to implement urgent political change and introduce a higher level of policy certainty on which investors can base informed decisions.

In the long-term, however, the country needs to generate competitive economic growth to turn around its investment story on a sustainable basis.

“We expect that growth will come through, not only because South Africa is finally doing the right things, but because the country’s economic prospects are highly correlated with international growth - which is currently characterised by a synchronised global upswing.

“However, while global growth is expected to approximate 3.5% this year, the expectation for South Africa is somewhat lower at around 2%. We believe that growth of this order is achievable given that a lot of economic data has already started turning. Business confidence, for example, recently jumped to the three-year high. While this was from a low base, with indicators, direction is more important than the level.”

But Teichgreeber added that he’s cautious about the stock market, which is inherently expensive against a background of tightening global monetary policy.

“The global economy has entered the later stages of the current cycle, making a slowdown inevitable. For the investor in South African assets, it may be too early to de-risk completely,” he said.

Although lower interest rates in the wake of falling inflation will make domestic bonds more expensive, Teichgreeber says they remain attractive due to the real yields on offer. This is especially the case in a global context because most developed economies still have negative real interest rates.

By comparison, real yields of 3% or 4% are available from the domestic bond market, leading to fund inflows that support the rand.

However, the downside for bonds lies in the inevitable rise in global yields and the risk this will pose for the South African bond market. It is for this reason that Teichgreeber is also neutral on SA bonds.

One sector he’s more bullish about is listed property. Negative press on the land expropriation issue is amongst the factors that have impacted local prices, while there’s been a sell off of property globally, triggered by higher interest rates.

“Together, the stronger economy, lower refinancing costs as domestic interest rates come down and attractive valuations make a positive case for listed property,” said Teichgreeber.

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