The delicate dance between caution and optimism
In recent years, South Africa has faced challenges such as sluggish economic growth, issues with load shedding, a rise in crime and corruption, alongside strict regulatory measures, and the complexities arising from the aftermath of the COVID-19 pandemic.
So, this begs the question, is South Africa a viable investment destination?
Reza Hendrickse, Portfolio Manager at PPS Investments chatted to FAnews about the South African investment landscape in 2024.
Investment landscape in 2024
When looking at the local investment landscape in 2024, Hendrickse said, “We expect the macroeconomic landscape to remain difficult, posing a challenge for risky assets. We, therefore, maintain our relatively cautious stance regarding portfolio positioning, preferring fixed income assets (including cash) over equity and property.”
“On valuation grounds, domestic asset classes look attractive, but greater risk aversion due to added pressure on the global economy, as well as continued domestic economic and political malaise, could result in these asset classes underperforming their global counterparts,” he added.
Hendrickse added that despite negative domestic news flow, and the constrained macroeconomic landscape, investors should guard against becoming overly pessimistic. “Much of the negativity is already reflected in financial asset prices and the bar is so low that even a marginal improvement in the backdrop would be a positive surprise for markets. For the more conservative investor, however, cash and bonds are offering significant yields to take advantage of.”
Volatility in markets
According to Hendrickse, elevated geopolitical risk is likely to remain a feature of the investment landscape for the foreseeable future, however, these risks are probably longer term in nature.
“Russia’s invasion of Ukraine not only highlighted the speed at which tensions could escalate but also how far reaching and entrenched the impact of conflict can become. We don’t foresee major geopolitical risks materialising for the remainder of the year, but by their nature, the most impactful events tend to be the ones that few would have seen coming. Nevertheless, given its recency, the war in Ukraine is still an ongoing stress point, as well as a headline risk from US China relations, specifically regarding Taiwan. America’s discomfort around Iran’s nuclear ambitions is another geopolitical risk worth monitoring. These are all potential sources of volatility in markets, which is relevant, given how compressed the VIX has become,” he cautioned.
In terms of financial market impact, major geopolitical events tend to result in oil price spikes, which would be problematic for the inflation outlook. Longer term, given the polarisation between countries, increased spending on national defence over time also seems quite likely.
“Although geopolitical risks could lead to short-term equity market volatility, and might have an acute impact on individual assets, such as gold or oil, investors should stick to their long-term plans, and refrain from excessive de-risking, which oftentimes ends up being at the worst possible moment,” he added.
Key considerations
“Looking ahead, we expect economic growth to accelerate in 2024 from the low base in 2023. This is largely a function of load shedding easing somewhat as the power crisis comes under control,” said Hendrickse.
“On the consumer side, lower inflation is also positive, while any rate cuts from the South African Reserve Bank (SARB) should also support spending growth. Any softness in global growth this year, however, may put a dampener on temporary respite in South Africa,” he said.
“Overall, we remain wary of placing too much reliance on our ability to forecast the macro-outlook, but interest rate policy normalisation stands out as being a key theme for this year. It remains to be seen whether the Fed has, against all odds, managed to engineer a soft landing, and how much of this is already priced in,” he continued.
“In weighing up the risks and opportunities as we currently see them, we believe it is sensible to maintain a healthy, but measured weighting in equities. Outside of this, we are favouring cash over bonds in South Africa at the moment and would look to deploy capital into risky assets should the opportunity present itself, perhaps alongside a spike in risk aversion,” he concluded.
Writer’s thoughts
As we ponder the investment prospects in South Africa amidst a backdrop of challenges, we're confronted with a complex landscape where risk intertwines with opportunity. The narrative painted by Hendrickse prompts introspection, urging us to contemplate the delicate dance between caution and optimism. So, how do you see the current challenges in South Africa's investment landscape influencing your approach to advising clients? Please comment below, interact with us on Twitter at @fanews_online or email me - [email protected]
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