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Changing the game isn’t easy

18 June 2019 Jonathan Faurie

When compared to other emerging economies, South Africa has been a serious underperformer over the past five years. While still maintaining the status quo politically – with the African National Congress (ANC) being the country’s ruling party – there has been a significant regime change and fresh roots of optimism that have taken shape since Cyril Ramaphosa has become President.

This does not mean that we can ignore our past. The country’s worst economic performances came during the Jacob Zuma regime, a time referred to by President Ramaphosa as the Nine Lost Years. What effect has this period had on the country? How can we kick start economic growth? Current GDP statistics shows that the South African economy shrunk by 3.2% 

A benign flatline

At a recent market update by Allan Gray, Head of Retail Distribution at Allan Gray – Tamryn Lamb – pointed out that the biggest indicator of a struggling economy has been the noticeable flatline in the collective investment scheme (CIS) industry. 

“If we look at the CIS industry over the past three years, we have noticed that there is a severe lack of net inflows into the industry. In 2016, the net inflows into the CIS industry was R2,004 billion, this increased slightly to R2,154 billion in 2017 and decreased again to R2,045 billion in 2018,” said Lamb. 

So, if there are no net inflows into the CIS industry, where are these funds going? “Investors are putting the cash that would be used as net inflows into other areas. This is because there is an increased level of risk aversion in the market and investors are looking to invest their cash into shorter time horizon investments that resemble and offer the same returns as cash,” said Lamb. 

A problematic shift

In recent times, there has been a lot of interest in global equities as an investment that generates significant returns when compared with other assets in its class. 

According to Lamb, the tailwinds that have driven this have slowed down, unless investors are prepared to play the long game when it comes to investing. 

“If we look at the equity market, it has lagged the returns that cash investments have offered over a five-year period. In fact, the only time that equity outperformed cash was over a ten-year period. This is a perfect example of how time in the market is far more prudent than timing the market,” said Lamb. 

Lamb also issued a stern warning against de-risking in the current economic climate. 

Significant challenges

Despite the fact that we have a new government and renewed optimism in President Ramaphosa’s abilities to get us out of the mire that we find ourselves in, Allan Gray CIO Andrew Lapping pointed out the country still faces massive challenges. 

“The problem with South Africa when compared with other countries of a similar sizer is that unemployment in the country is a massive issue.  This is a problem because we have a 27.6% unemployment rate; it effectively means that the tax base is shrinking. Over the past few years, revenue from corporate taxes and VAT has been low which means that personal income tax needs to play an increased role in government funding. The other problem with this is that government spending cannot be decreased too much,” said Lapping. 

A hard sell 

Because of the fact that the country faces significant fiscal constraints, the South African Reserve Bank finds itself in a position whereby it is one of the most fiscally disciplined banks in the world. The fact that interest rates are stable means that the real yield on government bonds over a ten-year period is good. 

“This is good news for South Africa as the country relies heavily on foreign investments; and most of the country’s foreign investments (40%) comes in the form of government bonds. However, this will be a hard sell going forward, especially if other countries continue on their campaigns of devaluating their currencies by decreasing interest rates,” said Lapping. 

The exodus

Just like the wheels of industry need to keep turning, the public’s investments need to keep growing. A significant drop in interest rates would translate into a significant drop in the value of government bonds. And if that is the case, Lapping points out that the public will once again focus on traditional safe haven investments like equities. 

“Why would the public once again return to equities if they are underperforming cash in the short-term? Because it has happened in other countries in the past. It happened in Turkey when the public lost faith in President Recep Erdo?an, and in Brazil when the public lost faith in former President Dilma Rousseff. If the public loses faith in President Ramaphosa as they did in former President Zuma, equities could make a comeback,” said Lapping. 

He added that the next 12 months will be viewed as some of the worst ever by economists. But at the end of the day, this has been the case over the past three years. The secret will be to find investments that generate alpha. 

Editor’s Thoughts:
Investing is far from an exact science and fund managers are at pains to find investments that will provide significant returns to clients. How long can this situation be sustainable? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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