South Africa has made some progress in tackling the issues that weighed on local sentiment last year, says wealth manager Citadel chief economist Maarten Ackerman.

For example, given government and State-owned entities’ (SOEs’) long-standing record of caving to pressure from labour, South African Airways’ (SAA’s) management team was able to resist trade union demands during the November wage strike.

Instead, Ackerman explains, SAA’s management and unions reached an agreement to limit pay increases to 5.9% rather than the proposed 8%, and further added the caveat that these increases would only be paid if the airline had sufficient funds.

Additionally, SAA was further placed in business rescue, signalling that government is finally taking more of a hard-line stance on poorly performing SOEs.

“Then, the return of load-shedding aside, some progress has finally been made in dealing with the management issues plaguing Eskom with the introduction of CEO Andre de Ruyter, and we should hopefully see more action in terms of the planned unbundling soon.

“That said, 2020 will be make or break for South Africa. If government fails to show real muscle in dealing with key issues of corruption and mismanagement at SOEs, an overinflated public service headcount and a hideously bloated government wage bill by the February Budget speech, then a credit rating downgrade from Moody’s is almost guaranteed,” Ackerman states.

He further cites that a Moody’s downgrade seems likely in any case, as the country’s fiscal picture remains bleak and keeps deteriorating and government is yet to get any real traction in dealing with the structural issues strangling the economy.

A downgrade will push government bonds onto the first step of the sub-investment grade or “junk status” ladder and will represent a major hit to the economy, sending a shockwave through bond markets and likely result in the currency touching R18 to the dollar upon impact.

However, Ackerman says it will not spell the end for the country, as the dollar is likely to run out of steam over the course of this year, and a trade deal will also lift global sentiment and offer some support to emerging markets.

He adds that the rand is more likely to average R16 to the dollar this year.

Meanwhile, the current rebound seen in foreign direct investment (FDI) and in gross fixed capital formation spending reported in the last two gross domestic product prints of 2019 both signal that investments are slowly returning to the country.

“If this trend continues, and if government can finally act on implementing the right policies and reforms, we may see a turnaround within the economy in the next three to five years.”

Nevertheless, Ackerman expects the rand to remain under pressure over the next few months, which, together with a global risk-on rally, should offer JSE-listed multinationals and rand hedge stocks some support.

Unfortunately, locally-facing businesses that generate revenue predominately from within the country’s borders and that are directly tied to the South African economy seem to be in for another tough year.

“Overall, from a valuation perspective, the JSE appears relatively attractive compared with other markets, but given the current difficult environment, investors will need the time and patience to see the positive effects of reforms come through before its value unlocks,” Ackerman says.  

GLOBAL CONTEXT

Ackerman highlights that one of the greatest risks that faced global markets in 2019, and specifically Britain and Europe, was the threat of a highly disruptive no-deal Brexit.

With that possibility off the table, and with Prime Minister Boris Johnson firmly in the driver’s seat after the Conservative Party’s landslide victory in the December elections, “we can finally hope for a conclusion to the Brexit saga in 2020”.

Meanwhile, while the US and China continuously move around in circles in their trade-war tango, the two nations both appear more receptive to a truce compared with January last year.

“And with the signing of the phase one deal scheduled for next week, there has, at last, been some progress in negotiations, which has further shifted some of the uncertainty weighing on global sentiment,” notes Ackerman.

Additionally, 2020 is a US national election year, which typically bodes well for market performance.

Ackerman further explains that where 2018 and the beginning of 2019 saw most central banks tightening monetary policy, about 66% of all central banks began opening the taps and easing monetary policy during the course of last year.

“Combined with China’s recent bout of monetary and fiscal stimulation and the management of its currency, this means that there is a great deal more liquidity in the financial system at the start of this year, which should support financial markets.”

Further, most leading indicators suggest that the softness in global economic growth seen in 2019 is bottoming out.

Together, these factors should pave the way for a rebound in economic activity in the first half of the year, and investors may consequently also see a rebound in risky asset prices.

However, this comes with the footnote that even if this year delivers another positive year for global equities, it is likely to be the last leg of the current bull market.

“We are rapidly approaching the end of the current economic cycle, and while the ten major global recession indicators that Citadel monitors still suggest that a recession is unlikely within the next 12 months, the storm clouds are gathering ahead, and we are preparing for headwinds to pick up over the next few years.

“Investors would, therefore, be wise to avoid being too greedy, or they potentially risk being caught standing when the equity music stops. Instead, consider using 2020 to begin taking profits, de-risking your portfolio and introducing safer alternatives into your investment mix,” Ackerman suggests.