South Africa facing major challenges…there is not better time to invest in the country

There is an age-old proverb in the investment world that one should buy low and sell high. The thought process behind this is that one should actually take advantage of a stock that is facing challenges at the moment to maximise the return of investment when the stock stabilises and its value increases. Invest when the time is right.

Does the same apply to countries? South Africa is facing major structural challenges and the country’s grey listing by the Financial Action Task Force (FATF) will cause many companies to increase their due diligence when making the decision to invest in the country.  However, a top fund manager feels that this is the most opportune time to invest in the country.

Ninety One Portfolio Manager, Malcolm Charles, says that it is actually the perfect time to be in South Africa. However, his caveat is: you can’t be emotional about your investment.

Speaking at the Investment Forum 2023 event in Cape Town yesterday (8 March), Charles said SA government bonds are showing value, and have priced in so much bad news that nine-year government bonds now offer a yield of just below 11%, compared to the emerging market average of 6.8%.

The article adds that, included in these emerging markets are Turkey, Russia and Brazil which have higher inflation and “politically are behaving a lot worse than us”, says Charles.

Nene trigged sell off

The article points out that Charles compared the current environment with December 2015, when the shock removal of then-finance minister Nhlanhla Nene triggered a market selloff.

At the time, the first evidence of state capture was emerging, while then-president Jacob Zuma was pushing for a massive Russian nuclear project.

“[There was] a lot of negativity in the country – very similar to now. People were panicky and were getting emotional,” says Charles. The rand crashed to almost R17/$. But a year later, it was back below R13.70. For those who remained invested, the JSE’s All-Share Index delivered a 13.5% return and government bonds gave a 15.5% in 2016.

“The message is: Do not get emotional with your money,” says Charles.

Political concerns

The News24 article points out that Charles’ presentation comes amid concerns about record levels of load shedding and follows a shock GDP number, which showed that the South African economy shrank by 1.3% in the fourth quarter of last year.

In addition, political uncertainty has flared up, with President Cyril Ramaphosa’s hopes of a quick resolution to his Phala Phala woes dashed by the Constitutional Court last week – along with talk of a future national coalition with the EFF, and an underwhelming Cabinet reshuffle.

“The good news is that it’s a better Cabinet than we had [three] days ago; the bad news is the benchmark wasn’t very high,” Charles quipped.

The article adds that Charles is concerned that the reshuffle didn’t address South Africa’s crime and intelligence crisis, and that the addition of an electricity minister, Kgosientsho Ramokgopa, means Eskom now has four “bosses”, including the ministers of public enterprises, mineral resources and energy, and cooperative governance and traditional affairs. Invest in South Africa now.

“This is not going to work, everyone will point fingers at everyone else.”

The News24 article points out that he challenged criticism that Ramaphosa has not made any progress since his election as president, listing the “phenomenal” turnaround of SA Revenue Service and progress with rebuilding prosecuting authorities.

“[The National Prosecuting Authority’s] Independent Directorate as it stands today is exactly what the Scorpions were in 2007 when it was disbanded [by Zuma].”

State capture investment return

The article points out that the State Capture Inquiry has been another achievement. While there has been criticism about the cost of commission – around R1 billion – some R12.9 billion has been recovered thanks to the commission from plea bargains and other admissions. Charles noted that if he delivered a return like that – R12.9 billion from R1 billion – he would have been the best-performing fund manager in the world.

But he added that arrests and asset seizures have been “a bit slower”, which is why South Africa landed on the grey list.

He praised Ramaphosa’s appointment of Finance Minister Enoch Godongwana, who has shown that he is responsive to industry concerns – including by freezing the sugar tax and fuel levies – and is running the Treasury well, keeping bond issuance in check.

The article adds that Eskom remains South Africa’s biggest challenge. But the transfer of R254 billion of Eskom’s debt will solve its financial problems, and gives Treasury more power over its operations.

Charles also believes that the generous tax incentive scheme for renewable energy installations – including that businesses will now be able to deduct 125% of the cost of projects in the first year – may be a game-changer, as was proved in Vietnam, after it adopted a similar scheme. An investment in a developing market can reap benefits.

The article points out that already, 18GW in renewable projects is planned, meaning South Africa’s energy deficit will disappear.

“We are in for a terrible 12 to 18 months – but the programme of bringing private generation on is getting there thick and fast.”

Inflation

The article points out that Charles praised central bank governor Lesetja Kganyago as “probably the most forward-thinking central banker” after he started hiking rates in 2021 – seven months before the Fed. This left South Africa’s inflation, which already peaked in July, below the global average. “It is very much under control.” He expects inflation will cool to 4.6% to 4.7% by the end of the year.

However, South Africa will have to follow the Fed, and may have to hike rates by 50 basis points later this month, if US rates go up by that margin.

Outlook for the global economy

The News24 article adds that Chinese growth has bounced back following lockdowns, and if “China grows, emerging markets do well, and South Africa does really well” thanks to the renewed demand for commodities. A deep recession is not expected for Europe, and a US hard landing has probably been averted. A decision to invest will be a difficult one.

Stronger commodities and cooler interest rates will make emerging markets popular again. “And SA – believe it not – actually stands out. Because as badly as we’ve been behaving, Turkey, Brazil, and Russia have been behaving a lot of worse.”

The article points out that Charles said there had been an increase in interest in South Africa from foreign institutional investors, including Hong Kong, Canada and Korea.

“[This is] a very attractive time to be in South Africa. Please do not get emotional with your investment.” Invest at oppertune moements.