Is this GNU good for portfolio returns?

Long suffering South African investors are doing their best to label the country’s 2024 Government of National Unity (GNU) as another new dawn, ignoring the myriad warning signs of a continuation of government’s multi-year ‘muddle along’ strategy. Need proof? Just consider the following headline, courtesy News24.com, and emanating from the Minister of Health: ‘Medical aids are out under the NHI, even if it means the end of the GNU’.

Post-reform growth potential

The aforementioned headline soured an overall upbeat economic and financial markets presentation that your writer attended just two days prior. Under the heading ‘GNU: Start of an economic chain reaction’, experts from asset manager M&G Investments shared some thoughts on asset allocations, interest rates and investment returns following the country’s 2024 National Elections. Early on, Leonard Krüger, Equity and Multi-Asset Portfolio Manager at the firm, warned that South Africa would struggle to address its structural issues under the current “anaemic growth”. But if government and the private sector get things right, 3% post reform growth is doable. 

The democratic process came in for some criticism as the presenter reminded his virtual audience of the low participation in the 2024 electoral process. “A very large percentage of the eligible electorate in South Africa have become so disenfranchised that they do not bother to register to vote; and of those that registered, a big part do not show up to vote on the day,” Krüger said. The result was a very low outcome in terms of participation in the South African democracy. Put differently, the 61% of voters who did not bother to vote have no representation in Parliament whereas the GNU, accounting for just 28% of the total voting population, has 72% of the seats. 

The fuel to power SA Inc

Confidence, growth, investment, job creation, policy reform and State Owned Enterprises (SOEs) were all mentioned in the mishmash of factors needed to reignite South Africa under the GNU. “The GNU offers a good foundation from which we can start the process of renewal, reform and change that is so desperately needed,” Krüger said. From his perspective, the standout benefit flowing from the GNU has been a commitment, across the stakeholder pool, to refocus on the so-called reform agenda. This involves ongoing improvements at SOEs coupled with the policy framework necessary to extend important trade arrangements such as AGOA. 

Addressing infrastructure and policy shortcomings were singled out as crucial to lure business and private investors back into the economy. The presenter bemoaned the low levels of investment from both the man in the street and business, and singled out the private sector as the ‘spark’ that would “get the chain reaction going to ultimately start lifting economic growth”. Lifting GDP growth above 1% will allow the country to make improvements in areas like education, electrification, job creation and healthcare, to name a few. M&G shared graphs showing improvements in Eskom’s EAF (Energy Availability Factor) and Transnet Freight Rail’s haulage as promising signs of SOE turnarounds. 

Zyron Melton, Client Director at the asset manager, steered the conversation back to the macroeconomic factors that drive investment decision making. “Interest rates are the baseline for any valuation-based investor,” he said, asking the portfolio manager to share the ‘house view’ on when local interest rates were likely to come down. Krüger declined to predict the timing of the next interest rate move, but conceded that given South Africa’s rates were at the highest level in 25 years, a cut was imminent. “We are going into a cycle where rates are easing globally; some of the central banks have already started … and the United States is likely to follow suit,” he said. “South Africa will probably move in the same direction”. 

Seeking risk-return normalcy

The interest rates outlook is relevant given how much local investors have invested in interest-bearing assets. Using statistics from the Association for Savings and Investment South Africa (ASISA), M&G showed net flows into interest-bearing unit trusts at four times the flows to multi-asset funds, going back to 2017. Krüger then warned that it was fairly improbable, given recent history, that forward cash rates warranted this level of exposure. The question, according to Melton, was whether investors would see a return to a more normal risk-return relationship over the coming years, following the multi-year underperformance from SA Equity. 

“It is very unusual to see high equity portfolios underperforming over a one year time period, or to see a 10-year time period during which the returns on high equity are similar to those on an income type of portfolio,” Krüger said. The financial advisers in the meeting would have been quite familiar with the presenter’s observation that local equities have not weighed in with the expected risk-adjusted returns over the past decade. After all, you will have been explaining this frustrating reality to your clients during your many interactions over the period. Despite these frustrations, the M&G Balanced Fund has done 4% better than inflation over the period. 

M&G said South African assets were attractively priced mid-year 2024 and argued that the return profile across risk classes might should see some of the flows to interest-bearing funds divert back towards multi-asset funds. According to Krüger, local multi-asset funds are spoiled for choice when it comes to asset allocations. He offered a slide showing 4% or higher prospective real returns from cash (4%), government bonds (5.7%), listed property (7.7%) and equity (9%) over the coming 12-months. These prospective returns are well above long-term averages, and also trump the prospective real returns from world bonds (1.1%) and global equity (5.6%). 

One third offshore, high equity exposure

The asset manager’s balanced fund is currently invested one-third offshore across bonds, cash, credit, equities (25.4%) and a small portion of international property; the balance is invested locally including in SA Equity (44%); SA Bonds (17.3%); and SA Cash (5%). “Essentially, we have 44% of our portfolio exposed to the highest potential real return,” Krüger said. He was reasonably confident that the local portion of the portfolio would benefit from positive momentum linked to the GNU, including stabilisation of politics and state services, over the next four to five years. 

Typically, elections do not have enormous impacts on markets over the long-term, but there have been instances where that has not been true; there is a real opportunity for South Africa to turn a corner under the GNU, and we are very encouraged by the initial signs,” concluded Krüger. Over the coming years, local investors can look forward to the reform agenda catalysing a chain reaction of improved investor sentiment and higher GDP growth. As for your clients, they can look forward to a multi-year, higher-than-average prospective return from risk assets, suggesting it may be time to let go of interest-bearing in favour of multi-asset funds. 

Writer’s thoughts:

The upbeat take on South Africa’s Government of National Unity (GNU) was refreshing; but they cynics do not have to look hard for negative warnings. Has the GNU effect convinced you to increase your clients’ exposures to multi-asset funds, or are you taking a wait-and-see approach? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.