Investors should take comfort from SA’s track record

As global markets continue to radiate uncertainty, South Africa continues to be an attractive investment destination despite a recent downgrade of its outlook from stable to negative, according to the latest economic assessments and analyses by wealth man

In this month’s political commentary to the wealth manager’s clients, political analyst JP Landman says ratings agency Standard & Poor downgraded SA’s outlook from stable to negative, because of the fear that “economic and social problems may feed into the political debate” in the run-up to the ANC’s elective conference in Mangaung, bringing further pressure to bear on SA’s policy framework.

But Landman points out that none of the concerns raised by S&P were new.

“Per capita income growth of 2%, high unemployment, a current account deficit with the resulting need for external financing - these have been the characteristics of SA for the last decade and a half. Why worry now?”

Landman suggests that what has changed was the way the ratings agency thought about SA.

“It is no longer only about the numbers: growth, budget deficit, current account balance, debt to GDP, and so on. It is now also about social cohesion or social capital, or in other words, that which unites the population at large, around common goals for society. The degree of buy-in has become a consideration.

“Given what is happening in the US and Europe, this change is understandable,” says Landman, pointing out that S&P recently also downgraded the US on fears that its political system may not come to grips with their deficit and debt load.

“Given the polarised political debate in the US, it will be fascinating to see how the US society (social cohesion) deals with the US debt and spending metrics (hard numbers).

“So the change in SA’s outlook by S&P is part of a global re-assessment of the process of evaluating sovereign risk.”

Landman says that investors can take comfort in the very balanced way the tension between building social cohesion and keeping hard numbers healthy has been managed in SA since 1994.

“The record speaks for itself. The hard numbers have improved considerably, while support programmes for the indigent served to build social cohesion. We believe a fear that the balance may slip after the next election would be misplaced, judging by the long-term trend line.

“We have been getting the balance more or less right since 1994, and I reckon we will in coming years as well.”

Landman’s upbeat forecast was released alongside the BoE Private Clients monthly assessment of the latest available domestic and international economic indicators.

On the domestic front, it was predicted that interest rates would stay put for some time.

“A sharper than expected acceleration in consumer inflation could put pressure on the Reserve Bank to hike rates,” says BoE Private Clients Chief Investment Officer Daryll Owen.

“However, given continued global uncertainty and the low level of economic recovery, together with high unemployment, we believe that interest rates will remain at current levels for some time.”

Owen points to another positive: “The surge in the JSE All Share Index this year has taken the market to new all-time highs.”

However globally, the economic outlook remained uncertain.

“Equities remain attractive relative to other asset classes. We would recommend that any serious correction or pullback in equity prices be used as a buying opportunity. In general, emerging market equities now appear to be offering more upside than US or European equities.”

Mike Schüssler, economist and compiler of the wealth manager’s monthly Provincial Barometer which analyses economic activity in the Western and Eastern Cape, Gauteng, KwaZulu-Natal and the Free State, warned that the local economy was losing some steam and that certain constraining factors were impacting on growth.

“The stress index, which measures how easy or difficult it is to do business in the provinces, is starting to rise in the Western and Eastern Cape. Inflation is beginning to play a bigger role and job creation is becoming more difficult,” he says.

“I do not, however, regard this as the start of a downward trend, but rather a loss of momentum. It is important to remember that we are in fact still growing, albeit at a considerably slower rate than we experienced in the second half of last year.”

Furthermore, consumers were still spending.

“But we will have to wait and see what effects will be felt as a result of the rises in the petrol price, higher electricity tariffs and toll roads, which could further impact on manufacturing sectors already struggling to compete globally.”