There are solid investment opportunities in SA equities even with a volatile outlook, asset manager Ninety One says, after the stock market staged a strong recovery from the riots in July that destroyed property and tarnished the country’s image as a safe, friendly place for domestic and foreign capital.
In the wake of the civil unrest in Gauteng and KwaZulu-Natal in July, which erupted after the imprisonment of former president Jacob Zuma, SA suffered significant economic disruption. Shopping centres and warehouses were attacked and looted, with damage estimated at R20bn.
Despite an initial fall in the JSE all share index as the country watched helplessly as businesses were destroyed, with retailers, food producers and banks being the worst hit, prices have recovered remarkably. By Friday’s close the all share index had regained just about all of its losses since Zuma’s imprisonment on July 8.
The riots have demonstrated that the key problem facing SA is growth, said Ninety One’s head of SA quality, Duane Cable.
“Given the extent of the divide in terms of equality, wealth levels and unemployment, until we deal with structural growth impediments and get us to higher levels of trend growth than the current 1.5% to 2% I think some of these challenges will remain and, therefore, investors should expect continued volatility when it comes to the outlook for SA equities.”
Trend growth refers to a country’s potential growth rate.
Kuben Naidoo, SA Reserve Bank deputy governor, recently pointed out that without the riots, the Bank’s GDP growth forecast for 2021 would have been lifted from 4.6% to above 5%. Even with that loss, however, it is still a fairly decent rate of recovery, said Ninety One.
Speaking on commodities, Ninety One head of SA investments Nazmeera Moola said that though commodity prices are off their highs, they have provided some underpin to the SA economy and “we are seeing this reflected in the macro and revenue numbers, and, more generally. Ninety One’s 4Factor team is taking advantage of this across the market”.
In the retail sector, which was the worst hit by the unrest, investors should look at what retailers put out in terms of the stores that were damaged, said Achumile Mashalaba, the company’s SA equity and multi-asset analyst. He said Pepkor, owner of Incredible Connection and Ackermans, had the highest proportion of stores that were damaged, at about 9%, which is largely due to the fact that it has the highest footprint across the country.
“If you think about how their store footprint works, they have a big allocation to furniture and appliances, close to 16% of their portfolio and, obviously, those stores were the worst affected.”
“Speaking to the management team, however, they said they are well covered in terms of insurance for both stock theft and business interruption. So I think, in terms of earnings impact, I am not too concerned with Pepkor,” said Mashalaba.
Retailers have made a strong recovery since the riots, which may suggest that investors expect SA’s economic recovery to gain momentum.
The property sector, which goes hand in hand with retail, also suffered the effects of the riots just when it was recovering from the effects of Covid-19.
Ninety One portfolio manager Ann-Maree Tippoo believes that fundamentals in the property sector remain weak due to the effects of the virus and, to a degree, the riots.
“What is key to understand is that the market has in some instances grossly exaggerated the impact that Covid-19 would have on both the retail and office sectors,” said Tippoo. “Property has not recovered to mirror or to show value commensurate with the fundamental situation. There is, and remains, a lot of value in the sector, with metrics such as price to net asset value and net asset value ratios remaining attractive.”
Despite weak fundamentals in property stocks, “they are starting to show signs of troughing”, said Tippoo. “In terms of looking forward, we believe that there are opportunities within the retail property space.”
While there have been positive signs in economic and investment progress in the country, Moola said a lot more still needed to be done in order to see solid structural reforms. “Ultimately, SA is on a more stable footing going forward and we can deal with the longer-term structural growth challenges that we have been facing over the past five years.”
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