INVESTMENT NOTE LOOKING ON THE BRIGHT SIDE - WEALTH - Old Mutual
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INVESTMENT NOTE
LOOKING ON THE BRIGHT SIDE
DAVE MOHR AND IZAK ODENDAAL | OLD MUTUAL MULTI-MANAGERS
12 APRIL 2021
WEALTHWEEKLY INVESTMENT NOTE
It’s not easy being an optimist in South Africa. As soon as you quick recovery, certainly compared with the tepid and drawn-
think things are improving, something comes along to shake out post-2008 upswing.
your confidence. This happens almost daily. No wonder many
CHART 1: GLOBAL REAL ECONOMIC GROWTH AND
people take a position of permanent pessimism. That way they FORECAST
are less likely to be disappointed. However, even the pessimists
5.5
are reminded from time to time that things are not all bad. 4.5
3.5
Perhaps it is part of our national character to be forever seesawing
2.5
between the emotions of hope and despair. 1.5
%
0.5
KEEP CALM AND CARRY ON -0.5
-1.5
This see-sawing can make it difficult to keep calm and carry
-2.5
on investing. Especially when the last few years have seen -3.5
2008
2000
2018
1982
1998
2010
2012
1980
1986
2016
2022
2002
2020
1990
1992
2006
2024
1988
2014
1996
1994
2004
1984
disappointing returns from local asset classes, while global
equities (more precisely US shares) have flown. As investors we
Source: International Monetary Fund
need to keep emotions as far away from our money as possible,
which is difficult when it comes to something that is literally President Biden last week announced another ambitious
close to home: your country, your family and your people. multi-year $2 trillion proposal to improve US infrastructure.
This has not been factored into the IMF’s recent forecasts.
Above all, investors should avoid what psychologists call
However, this time he faces an uphill political battle, compared
confirmation bias, the strong tendency of humans to seek out
to the earlier rounds of fiscal stimulus, as it is paired with a
information that chimes with their world view and ignore
proposed increase in the US corporate tax rate. The final version
information that doesn’t. To be a successful investor, you need
is likely to differ from the initial proposal.
to be able to change your mind when the facts change.
China is also experiencing rapid growth, with the IMF expecting
And here we are in the second quarter of 2021, finding ourselves
8% this year, though next year’s growth will be more subdued
having reason to be optimistic about South Africa’s near-term
by Chinese standards at 5.6%.
economic prospects. And given attractive valuations on local
asset classes, return prospects also seem bright. TERMS OF TRADE IMPROVEMENT
Global growth supports exports, and, in particular, we’ve
IT STARTS ABROAD benefited from elevated prices of industrial commodities and
It starts with a strong global recovery. While South Africa has
precious metals while the price of oil, our main import, has not
not always benefited from rising global growth, the local
rallied that much. The relationship between export and import
economy has almost never experienced a growth surge without
prices is known as the terms of trade, and historically our
a supportive external environment. economy has only performed well when the terms of trade has
The International Monetary Fund (IMF) has again upgraded its improved in our favour, as has been the case recently, allowing
global economic forecasts ahead of its annual Spring Meeting. for the country to run trade surpluses. The February surplus
It expects the global economy to expand by 6% this year, the was larger than expected (again) at R29bn. Exports in the first
fastest pace since it started measuring global growth in 1980. two months of the year were 13% higher than the same period
Only three months ago it projected 5.5% growth. A big reason a year ago, while the value of imports was 1% lower.
for the upgrade is the additional fiscal injection given to the CHART 2: SOUTH AFRICAN IMPORTS AND EXPORTS
US by the Biden administration. 14 0000
EXPORTS IMPORTS
13 0000
The US economy is expected to expand 6.4% this year and 3.4%
12 0000
next year. As a result, it will recover 2020’s lost output sooner 11 0000
than other major economies, but is also expected by the IMF 10 0000
Rm
to be the only major economy to actually return to where it 9 0000
8 0000
would have been in the absence of the pandemic (by 2024).
7 0000
The headline forecasts for the US (and all other countries) mask 6 0000
Dec-11
Dec-18
Dec-20
Dec-19
Dec-16
Dec-13
Dec-15
Dec-12
Dec-17
Dec-14
the fact that there have been losers as well as winners across
households, firms and sectors, but it would still be a remarkably
Source: SARS
2WEEKLY INVESTMENT NOTE
One would normally also associate a strong global economy boom (home loan growth averaged 20% per year during the
with increased overseas travel for business and leisure, but we last residential property bull market of 2003 to 2008). Reserve
don’t know when tourists will return to our shores in large Bank data showed that the household debt service ratio (the
numbers. A small consolation is that affluent South Africans portion of after-tax income households spend on interest
are also less likely to go on overseas holidays, spending their payments on average) fell to a 15-year low of 7.7% in the fourth
money locally instead. quarter of last year. This hides huge discrepancies in the financial
positions of households, but on aggregate household balance
POSITIVE DATA
sheets are in reasonable shape and they can increase borrowing
Looking at some of the other data releases of the past two
if confidence improves. Subdued inflation means the risk of
weeks, the general trend is positive. The SA Reserve Bank’s
higher interest rates is limited. Confidence remains lacking,
composite leading indicator has reliably predicted turning
however.
points in the local economy over the past 50 years. It typically
does a better job of calling the direction rather than the intensity NOT CONFIDENT…YET
of growth. The strong increase in recent months points to a The Bureau for Economic Research’s long-running consumer
robust recovery underway. The IMF’s forecast of 3% for South and business confidence surveys show that sentiment remains
Africa this year and 2% next year are on the conservative side, subdued on the ground even as economists mark up their
but if realised would still represent significantly faster growth
growth forecasts. The FNB/BER Consumer Confidence Index
than we’ve become used to.
increased by three index points to -9 in the first quarter of 2021.
CHART 3: SA RESERVE BANK COMPOSITE LEADING This brings the index back to the last reading before the global
INDICTOR pandemic hit and the economy locked down, but it remains
25 in negative territory, and well below its long-term average level.
20
15 Similarly, the RMB /BER Business Confidence Index is in net
10 negative territory and below long-term averages. It dipped
5
Y/Y%
0
from 40 points to 35 in the first quarter. This can partly be
-5 explained by the fact that the sectors that comprise the index
-10
– chosen for their correlation with the local economic cycle – are
-15
-20 mostly reliant on domestic demand. Most of the good news
Jan-01
Jan-13
Jan-16
Jan-19
Jan-07
Jan-98
Jan-10
Jan-04
Jan-92
Jan-95
for the local economy comes from outside South Africa with
exporters and commodity producers benefiting the most.
Source: SARB
SUSTAINING THE RECOVERY
The Absa Manufacturing Purchasing Managers’ Index surged To sustain the recovery beyond the immediate bounce from
to 57 points in March. As is the case globally, manufacturers last year’s record contraction, we need supportive policy changes.
are struggling with the cost and reliability of inputs as supply South Africa’s own infrastructure plan is also at an early stage,
chains are stretched amid strong demand. While the Ever Given but is seen by President Ramaphosa’s administration as a key
was freed from the Suez Canal before it could become an April driver of growth. A new report from Business Leadership SA is
fool’s joke, the pressures on global supply chains remain intense. very insightful about the opportunities and challenges. Suffice
New vehicle sales returned to pre-pandemic levels in March. to say it is a longer-term project.
Though the monthly data is volatile and not adjusted for In the short term, the announcement of preferred bidders for
seasonality, it points to continued recovery in a sector that is ‘emergency’ independent power production is positive, though
extremely exposed to consumer confidence. After all, you don’t
not without question marks as to the inclusion of Turkish power
have to buy a new car. You can buy a used car or just stick with
ships. There will be substantial investment in energy projects
what you have.
over the next year, while the fifth round of renewable energy
Overall credit growth is still muted at 2.9% year-on-year in procurement is also set to commence soon. Expect to see many
February, basically in line with inflation. Home loan growth is more wind turbines and solar parks as you drive around the
positive at around 4% per year, but hardly qualifies as a property country over the next few years.
3WEEKLY INVESTMENT NOTE
This does not guarantee an end to load-shedding, since Eskom’s markets). Put simply, given how much the South African
ageing fleet of coal-fired plants are prone to breakdowns and government has to borrow, it cannot afford for bond yields to
several will be decommissioned over the next decade. But there rise much further. A disorderly rise in global yields could also
is progress in the fight against rolling black-outs. Remember put pressure on the Reserve Bank to prematurely hike short-
in South Africa things never move in a straight line. It is two term rates.
steps forward, one step back.
Fortunately, tax revenues are growing faster than expected,
The same is true of other economic and governance reforms. reducing the pressure on borrowing somewhat. Tax revenue
Patchy progress is still progress. While there is a lot of political for the 2020/21 fiscal year is R38 billion ahead of February’s
noise at the moment, mostly within the ANC, it does appear revised estimate. This means the government can possibly
as if there will be policy continuity for the next few years, which provide some concessions to public sector workers without
will be important to allow these reforms to mature and bear changing the overall necessary direction of fiscal consolidation.
fruit. With a muted medium-term inflation outlook and the government
remaining committed to fiscal consolidation, government bond
Still, the list of bad news remains long and familiar: corruption,
yields remain attractively high, but the past two months have
crime, maladministration, the near-implosion of the Land Bank,
reminded us that they can be volatile.
Bafana Bafana not qualifying for Afcon. However, since these
items are persistent, they have little bearing on whether or not SAVE LIKE A PESSIMIST, INVEST LIKE AN
the economy can enjoy a cyclical recovery. So what are the real OPTIMIST
risks? Investment is inherently an exercise in optimism. Rather than
sticking money under the mattress, optimists believe that
RISKS companies will grow earnings, bond issuers will repay, and that
Clearly the main risk lies with the virus, its variants and the prices will rise even when things are uncertain. When deciding
vaccines. South Africa’s vaccine roll-out is still extremely slow how much to put away for retirement, it is probably better to
and hobbled primarily by a lack of supply. This should improve think like a pessimist and rather save too much than too little.
in the coming weeks, especially with J&J vaccines being Either way, even optimists should engage in risk management.
manufactured in Nelson Mandela Bay. It is too soon to tell if They would be deluded not to. In our case it means appropriate
the Easter weekend caused a third wave, but remember that diversification. It should not be a case of local versus offshore
the deadly second wave started long before the Christmas investing as often portrayed in the media, but rather of local
holiday in November already, driven by a new variant. and global investments, balanced in a sensible way to take
account of valuations and risks.
The other big risk is fiscal, given that global bond yields have
predictably increased in response to the stronger outlook for The bottom line is that South African growth can surprise on
the world economy (and the US economy in particular, which the upside, supporting the profitability of domestically focused
drives US yields, the benchmark risk free rate for global financial shares that are still cheaply priced despite the recent jump.
4EQUITIES - GLOBAL
DESCRIPTION INDEX CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR
Global MSCI World US$ 2 910.0 2.39% 3.49% 8.18% 47.64%
United States S&P 500 US$ 4 129.0 2.71% 3.93% 9.93% 47.99%
Europe MSCI Europe US$ 1 960.0 2.24% 2.89% 6.52% 41.62%
Britain FTSE 100 US$ 9 479.0 1.72% 2.45% 7.36% 30.22%
Germany DAX US$ 1 704.0 2.10% 3.34% 11.93% 58.07%
Japan Nikkei 225 US$ 270.9 0.45% 2.80% 1.99% 51.94%
Emerging Markets MSCI Emerging Markets US$ 1 330.0 -0.60% 1.06% 3.02% 49.77%
Brazil MSCI Brazil US$ 1 682.0 2.75% 0.78% -10.34% 30.89%
China MSCI China US$ 108.3 -2.19% 0.38% -0.06% 38.21%
India MSCI India US$ 707.5 -1.41% -0.22% 4.81% 64.91%
South Africa MSCI South Africa US$ 506.0 -2.13% 1.00% 12.44% 64.29%
EQUITIES - SOUTH AFRICA (TOTAL RETURN UNLESS INDICATED OTHERWISE)
DESCRIPTION INDEX CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR
All Share (Capital Only) All Share (Capital Index) Rand 67 191.0 -0.07% 1.06% 13.10% 39.95%
All Share All Share (Total Return) Rand 10 610.0 0.07% 1.19% 14.49% 43.77%
JSE Capped SWIX Capped SWIX (Total Return) Rand 26 345.0 0.00% 0.91% 13.63% 41.46%
TOP 40/Large Caps Top 40 Rand 9 659.0 -0.08% 1.08% 14.42% 43.99%
Mid Caps Mid Cap Rand 16 827.0 0.90% 1.45% 10.94% 34.61%
Small Companies Small Cap Rand 21 405.0 1.86% 2.83% 24.66% 65.01%
Resources Resource 20 Rand 4 994.0 2.53% 2.92% 22.21% 73.48%
Industrials Industrial 25 Rand 17 745.0 -1.98% 0.29% 12.72% 31.71%
Financials Financial 15 Rand 7 668.0 0.14% -0.69% 1.60% 22.00%
Listed Property SA Listed Property Rand 1 345.1 2.30% 2.84% 9.36% 21.07%
FIXED INTEREST - GLOBAL
DESCRIPTION INDEX CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR
US Aggregate Bond Index Bloomberg Barclays US$ 537.5 0.60% 0.69% -3.81% 4.88%
FIXED INTEREST - SOUTH AFRICA
DESCRIPTION INDEX CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR
All Bond BESA ALBI Rand 760.2 2.21% 1.94% 0.16% 18.02%
Government Bonds BESA GOVI Rand 751.1 2.16% 1.89% 0.15% 18.03%
Inflation Linked Bonds BESA CILI Rand 283.2 0.25% -0.06% 4.50% 11.59%
Cash STEFI Composite Rand 469.2 0.07% 0.09% 0.99% 4.49%
COMMODITIES
DESCRIPTION INDEX CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR
Brent Crude Oil Brent Crude ICE US$ 63.0 -2.94% -0.08% 21.06% 103.06%
Gold Gold Spot US$ 1 756.0 2.87% 4.21% -7.29% 5.85%
Platinum Platinum Spot US$ 1 234.0 3.96% 6.56% 15.33% 67.21%
CURRENCIES
DESCRIPTION INDEX CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR
ZAR/Dollar ZAR/USD Rand 14.61 0.36% 1.16% 0.57% 23.37%
ZAR/Pound ZAR/GBP Rand 20.02 1.25% 1.75% 0.30% 12.24%
ZAR/Euro ZAR/EUR Rand 17.39 -0.79% -0.33% 3.24% 13.24%
Dollar/Euro USD/EUR US$ 1.19 -0.84% -1.43% 2.69% -8.40%
Dollar/Pound USD/GBP US$ 1.37 0.92% 0.69% -0.04% -8.80%
Dollar/Yen USD/JPY US$ 0.01 -0.93% -0.95% 6.14% 1.07%
Source: I-Net, figures as at 9 April 2021
The Old Mutual Wealth Investment Note is published on a weekly basis to keep our clients and financial planners informed of what is happening in financial
markets and the economy and to share our insights. Markets are often very volatile in the short term and similarly, economic data releases or central bank actions
may cause concerns for investors. This does not mean that investors should take action based on the most recent events. It is better to be disciplined and remain
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