SA’s wild gyrations between optimism and pessimism in the financial markets are remarkable, exhausting and puzzling, all at the same time. The week between the state of the nation address and load shedding was another distinct example of the hyperbolic swings between Ramaphoria and Ramaphobia, which have come to characterise the country’s political discourse over the past year.
Notwithstanding the fact that this is an election year and emotions are running high, there is a risk that the investment community will get caught up in binary rhetoric rather than reality, and consequently miss attractive opportunities. Indeed, the clouds encircling SA may not be as dark as many think, particularly when viewed from a broader emerging-market and global context. In fact, contrary to the sentiments of many, there may in fact be a “bull” case to be made — at least in the sphere of financial markets.
The SARB transparency and independence have been a compelling policy anchor and bastion of institutional integrity.
Left field, perhaps, but there are a number of compelling reasons why. Chief among these is the supportive global backdrop. While we are likely to see an environment of tighter global monetary policy in the coming years as global central banks, particularly the US Federal Reserve, look to normalise (raise) interest rates and shrink their balance sheets, monetary policy will still ultimately remain accommodative for the foreseeable future.
Further, following the large sell-off in global markets in December last year, the Fed has adopted a much more dovish tone, suggesting that it will only resume raising interest rates in the US if the global economic backdrop improves. While a weaker global backdrop may sound negative, a more dovish Fed is good for financial assets that have come to rely on the central bank “morphine” of cheap money.
Indeed, one can sketch out a positive scenario for global and emerging markets even if the Fed is forced to raise interest rates again. First, rate rises in the US will be driven by continued strength in the US economy, particularly the strength in the labour market. Second, a resumption of the US rate hiking cycle will be kickstarted by a recovering global growth backdrop. In this environment, rate hikes are still likely to be shallow and gradual. Thus valuations, particularly in the emerging-market universe, look compelling. Prospects look reasonable, too, for emerging-market investors searching for the carry trade, given the relatively high real yields of many emerging-market bonds (including SA).
In this context, SA does not operate in a vacuum. While South Africans tend to be caught up in the day-to-day machinations of our own politics and economics, the reality is that global capital market flows move the needle. SA equities have underperformed cash and inflation over the past five years, and in dollar terms they have gone nowhere for seven. SA investors have capitulated.
But in a global environment that still favours equities, and particularly emerging-market equities, one needs to be careful of letting the negative local discourse dominate the narrative. If foreigners turn more bullish on emerging markets and global capital markets rotate further into emerging markets, SA markets stand to benefit too.
And within the emerging-market universe, SA might just be “the least dirty shirt on the line”. In an environment where the emerging-market universe is seeing general slippage in governance and policy credibility, SA seems to be bucking the trend, at least directionally. Mexico’s populist pivot to the left has stoked market fears; Russia remains hobbled by sanctions, poor transparency and geopolitical controversy; and Turkey has rapidly regressed both politically and economically amid increasing authoritarianism. India, for so long the emerging-market darling, faces an uncertain election outcome, which could complicate policymaking, while the credibility of its central bank has been eroded by political interference. Meanwhile, the jury is still out on Brazil’s reform agenda amid continued scandals and corruption. So where then do yield-hungry investors put their money?
Investors in SA have noted the political progress but remain sceptical over whether the moribund economy can catch up. Make no mistake, SA is certainly not without its own issues, but in comparison to the extremely populist policies and own-goals of its peers, each plagued by deep economic issues, ours look less fatal.
This is where the case for SA on a relative basis starts to emerge. While the country has displayed mixed fortunes during President Cyril Ramaphosa’s term so far (uncertainty around key policy issues and mixed messaging), there has been a very clear shift, with recognition of the magnitude of the problems faced and appreciation of market concerns and ratings pressures. Moreover, although there are misgivings around the pace of progress, it is clear there are positives both politically and institutionally — a standout feature relative to the peer group.
Most importantly, the SA Reserve Bank’s (SARB) transparency and independence have been a compelling policy anchor and bastion of institutional integrity amid the clamour for more populist policies. Their steadfast approach and policy orthodoxy, in a context of rising economic nationalism globally, has been a huge comfort to financial market investors and has served to differentiate SA from the pack.
But for many, recent developments have simply pulled SA back from the “edge of the cliff” and are not sufficient to affect the long-term impediments to growth. This may be true, but in the short term, this probably won’t dissuade investors. Indeed, in an environment where “neutral is the new good”, SA looks a relatively appealing destination on a risk-reward basis.
Gordon Kerr, fixed-income trader at RMB, offers some insight as to why: “Inflation continues to come in under the SARB’s forecasts and so our real returns are looking increasingly attractive. A credible SARB that is targeting lower inflation and a liquid currency makes SA very attractive for the carry trade.”
This sentiment is echoed by recent conversations with offshore investors, who, nervous about missing out on Ramaphoria 2.0, were keen to look through the noise and assess the merits of this “good news” story. This argument is premised on the prospect of greater policy coherence, a more robust reform agenda and a leaner cabinet with a compelling mandate for Ramaphosa’s ANC after the election, which taken together could lend itself to a bounce in sentiment towards SA. If the ANC plucks some low-hanging fruit after the election and the external environment remains benign, this could see substantial inflows into SA assets.
Again, financial market investors are not naïve. They realise that this is not a silver bullet for growth and that the structural constraints, including the internal ideological battles within the ANC and the complexities in its decision-making process, will not simply disappear. However, the calculation is a simple one — the narrative is dominated by global market flows, which largely hinges on supportive external factors more than on domestic ones. Equally, the failure of the above-mentioned factors to materialise could see a sharp shift in the opposite direction. But as it stands, the risk may be worth the reward.
From an investor standpoint, when asking the proverbial “mirror, mirror on the wall, who’s the fairest emerging market of them all?”, the answer is not entirely clear. The mirror may be tarnished, but SA’s fair reflection is showing glimpses of shining through.
• Gopaldas is a director at Signal Risk and fellow of the Centre for African Management and Markets at GIBS. Hewitson is an investment adviser and strategist at H&G in Johannesburg.
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