South Africa: not so fragile now
Market insights and outlook
Author: Regina Chi
June 22, 2021
In a country of 60 million people, only about one million people have received at least one dose of COVID-19 vaccine – less than 2% of the population, according to the African Center for Disease Control and Prevention. Stimulated by a variant of the disease that is likely to originate there, the number of cases has increased again and recently reached its highest level in four months. In short, South Africa – Africa’s second-largest economy, and one of the most developed – is far from putting the COVID-19 pandemic behind it.
Yet one might not be able to deduce this from the performance of one’s stock market. In fact, despite recent weakness due to falling commodity prices and a stronger US dollar in recent times, it is one of the best performing emerging markets (EMs) in the world this year, with the MSCI South Africa index climbing around 10.% year-to-date, according to Bloomberg data. This is all the more remarkable given that the country was once considered one of the “fragile five”, a term coined by Morgan Stanley in 2013, during the original “taper tantrum”, to describe capital-dependent economies. foreigners and therefore very sensitive to interest rates. But not this year: The South African stock market has outperformed other emerging markets despite rising global bond yields. Perhaps even more counterintuitive in a rising rate environment, the rand has been strong, appreciating just over 2% against the US dollar so far this year, Bloomberg also shows.
Why the change? South Africa has benefited in part – and it is in large part – from the resurgence in commodity prices, especially metals, and mining accounts for nearly 10% of the country’s gross domestic product, according to the Organization for Economic Co-operation and Development (OECD). However, the market’s outperformance this year could also be linked to less cyclical factors. Among them, South Africa under President Cyril Ramaphosa has pledged a broad program of economic reform. His government’s plan for economic reconstruction and stimulus is an ambitious agenda, in our view, and while the history of reform promises in emerging markets is uneven to say the least, there is reason to be optimistic in the case of South Africa. One of them is Ramaphosa’s campaign to tackle political corruption – an issue that has long complicated the country’s political landscape and reputation with investors, despite successive governments’ promises to tackle it. But this time, there are signs that Ramaphosa really thinks so.
Ramaphosa’s reform agenda includes strategies to create jobs, reduce dependence on food imports, revive the domestic auto industry, expand power generation and renewables, and restore health financial and operational business of the besieged state-owned Eskom. Achieving all of this will be a tall order, but at least the government is operating from a position of relative external strength – often a good guide to the behavior of asset markets over the medium term. According to Bloomberg, the country recorded a substantial current account surplus of 5.9% of GDP in the third quarter of 2020 and 3.7% of GDP in the fourth quarter, due to a combination of tight domestic demand and positive terms of trade created by rising metal prices. Despite the decline in GDP over the past year, the core economy has been more resilient than expected, with GDP increasing in the third (+ 13.7%) and fourth (+ 1.5%) quarters, according to Statistics South Africa. At 3.3%, inflation in 2020 was at its lowest rate in over 15 years. And while employment remains a significant challenge – the official unemployment rate for the first quarter was 32.6 – average wages have returned to pre-pandemic levels. If the global commodity recovery continues, high metal prices could continue to support the economy.
Recent political developments have been very positive, including growing evidence of the success of Ramaphosa’s tough stance on corruption. One example is the legal and political entanglement of Ace Magashule, the recently suspended secretary general of the African National Congress (ANC). A powerful figure in South Africa, Magashule effectively shares control of the ANC with Ramaphosa, but according to Bloomberg, he and 15 co-defendants now face 74 counts of corruption, fraud, theft and money laundering.
The charges put Magashule on the wrong side of a feature of Ramaphosa’s anti-corruption campaign: the so-called “opt-out” rule, according to which any member of the government accused of corruption or other serious criminal offenses must quit their post in the process. 30 days or risk suspension. Magashule, who denies any wrongdoing, refused to step down – and Ramaphosa quickly suspended him from his ANC post. It was widely seen as a victory for Ramaphosa, and it could have significant political ramifications ahead of local elections later this year. For global investors, this suggests that anti-corruption promises in South Africa may actually have some bite – and their application against a figure as powerful as Magashule could help Ramaphosa strengthen government control as he undertakes new ones. reforms.
One of them is Eskom’s restructuring project, the state-owned company that supplies South Africa with 90% of its electricity. Struggling with declining facilities and an urgent need for a capital injection, Eskom is a lifelong money loser that has accumulated tens of billions of dollars in net debt, and the lack of reliable electricity supply remains a problem for the South African economy. In 2019, Ramaphosa proposed to split Eskom’s transmission, generation and distribution units into three separate companies, partly to encourage competition and partly to facilitate Eskom’s access to capital markets. The process has been slow and hesitant, but Eskom – who now has a professional management team – says it is now on track to divest its transmission unit by the end of 2021, production activities and distribution to follow in 2022.
Of course, especially in emerging markets, promises of reform tend to come and go – and often with little concrete impact. This reality should rightly make investors hesitate to proclaim “it’s different this time”, but healthy skepticism should not be immune from the evidence. Other countries, such as India and Brazil, have carried out productive economic reforms in recent years; although there are no guarantees, South Africa could be next to do so. At the very least, signs so far suggest that Ramaphosa could lay the groundwork for meaningful change in a country in desperate need of better management.
Regina Chi is Vice President and Portfolio Manager at AGF Investments Inc. She is a regular contributor to AGF Perspectives.
To learn more about our core capabilities, please Click here.
The comments contained in this document are provided as a general source of information based on information available as of June 10, 2021 and should not be construed as investment advice or an offer or solicitation to buy and / or sale of securities. Every effort has been made to ensure the accuracy of these comments at the time of posting, however, the accuracy cannot be guaranteed. Market conditions may modify investment decisions resulting from the use of or reliance on the information contained in this document. Investors are expected to get professional investment advice.
The views expressed in this blog are those of the author and do not necessarily represent the views of AGF, its subsidiaries or any of its affiliates, funds or investment strategies.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisers in the United States AGFI is registered as a portfolio manager with the Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that make up AGF Investments manage a variety of mandates comprised of equities, fixed income securities and balanced assets. TM The “AGF” logo is a registered trademark of AGF Management Limited and used under license.
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diversified asset management company. AGF takes a disciplined approach to delivering investment management excellence through its fundamental, quantitative, alternative and high net worth businesses focused on delivering exceptional customer experiences. AGF’s portfolio of investment solutions extends globally to a wide range of clients, from financial advisers and individual investors to institutional investors, including pension plans, corporate plans, funds sovereigns and foundations and foundations.
For more information, please visit AGF.com.
© 2021 AGF Management Limited. All rights reserved.