We recently attended the Allan Gray Investment Summit 2019 where we were able to glimpse into the investment minds of prominent local and global fund managers, and walk away with some great insights. One of the presenters was Stanlib chief economist Kevin Lings. Click on the following link for the presentation slides and see below for our take away on the major points he made:
- Although South African equities have underperformed in recent years, especially when compared to US stocks, their performance is actually in line with that of other emerging markets. Much of this has to do with the fact that economic growth in developing countries has struggled to recover since the 2008 financial crisis.
- Economic growth in South Africa has declined from an average rate of 4.2% between 2000 and 2008 to 1.9% from 2010 to 2018. Similarly, growth in Brazil has slipped from an average of 3.8% to 1.4% over the same timeframes while in Nigeria it has more than halved from an average of 8.3% between 2000 and 2008 to 4% from 2010 to 2018.
- South African investors should include new asset classes in their portfolio construction, particularly those that are appropriate for the country’s low growth environment. This is especially important given that the expectation is that South Africa’s economy will expand by no more than 0.7% this year.
- We need to be realistic and not expect an instant turnaround in South Africa’s fortunes. The country’s youth employment rate of 55.2% (which jumps to 69.1% when you include discouraged workers) is worse than the levels experienced in industrialised nations during the Great Depression.
- SA is in the discovery phase – we’re trying to understand how much damage has been done in last nine years.
- Total debt of South Africa’s government, companies and households has surged 106% since 2010, an increase of a massive R3.8 trillion. While government debt currently equates to 58% of GDP, the figure jumps to 75% when the debt owed by state-owned entities is included.
- South African investors will need to work harder to find good opportunities within the broader malaise. Despite the fact that South Africa’s manufacturing industry has slumped from 21% of GDP in 1994 to 12% of GDP last year, there are still bright spots such as the automotive sector as well as food and beverages.
- Domestic investors need to focus more strongly on geographic diversification of their portfolios, a point driven home by the fact that South Africa accounts for just 0.4% of global GDP. In comparison, the US accounts for 24.3% of world GDP followed by the euro-area (15.8%), China (15%) and Japan (6.1%). Even Sub-Saharan Africa as a whole only accounts for 1.9% of the world economy.
- We need to change our perspective and stop comparing ourselves with the likes of the United States or Switzerland. SA is a messy emerging market so we should be comparing ourselves with other messy emerging markets.