Magazine Issues » April 2020

South Africa asset management roundtable: Global rebound on ice

Experts discuss the investment implications of the coronavirus pandemic, a delayed rebound in global growth and dealing with South Africa’s energy issues head on. Chaired by Romil Patel in Cape Town.

South_African_roundtable_2020

Nazmeera Moola (deputy managing director and head of South Africa investments, Ninety One (formerly Investec Asset Management)
Paul Boynton (chief executive, Old Mutual Alternative Investments)
Pallavi Ambekar (portfolio manager, Coronation)

Funds Europe – What is your investment outlook for 2020 and where do you see the key opportunities in Africa, given investors’ need for yield?

Pallavi Ambekar, Coronation – It’s fair to say that the investment outlook for 2020 is changing quite rapidly with current events unfolding. We came into this year expecting a rebound in global growth given that trade tension is easing, interest rates are generally quite low across the globe and the monetary and fiscal stimulus all very much in play. But now, with the impact of the virus spreading in a much more global manner and having the impact of shutdowns in both the US and Europe, and potentially coming here in the southern hemisphere, we will definitely revise the outlook downwards. Global growth will slow down materially this year. Who knows for how long? It all depends on when the impact of this virus starts to fade. 

If there is a temporary slowdown in global growth, then 2021 growth is going to be revised upwards. There’s a lot of pent-up demand, a lot of stimulus has gone into the economy and so I think we are looking forward now to 2021 being a very strong rebound year. 

Funds Europe – Pent-up demand for which type of assets?

Ambekar – It would be pent-up consumption demand and commodities demand. There is some inventory build-up at the moment that will need to be worked through, but as we see things normalising and as inventory is drawn down, you could expect to see some demand acceleration. That’s very much related to the amount of stimulus that’s been put into economies. We have seen China do some level of stimulus, but if you see some of the signs in Europe and the US, it’s going to be very good for consumption going forward.

Paul Boynton, Old Mutual Alternative Investments – I’ll take a slightly less macro perspective. Where we’re seeing opportunity at the moment – and how this plays out in the investment space in Africa – is in the infrastructure space, that’s certainly a yield trading sector and there’s a huge infrastructure deficit within Africa. We think the consumer theme across Africa also remains intact. Some of the other variables that are investment-positive in the African space, broadly over the next year, are the development of the free trade implementation and rolling out of the free trade accord reached last year across the continent. Brexit can have some positive impact on the African investment opportunity, because investment into spaces such as agriculture, viticulture, fruit, sugar, can become less contested as it would into the UK, so there’s opportunity in Africa for that. 

The consequences of the dramatic slowdown in China and the continued runout of the pandemic globally are going to be felt in Africa. At this point the incidence of the disease has been relatively modest in context but one imagines it’s merely a matter of time before it also becomes much more problematic across Africa. Africa does benefit from having a much younger population on average, and there is a huge incidence of fatalities in much older folk generally and people with pre-existing conditions, so although Africa’s infrastructure around healthcare may be deficient and not up to first-world standards, hopefully the impact on the population is less severe as a result. So, we do see opportunity over the next year to be involved in putting capital to work. Lastly the restructuring of Eskom [the South African electricity utility] and some of the impact opportunity spaces across Africa also present opportunities for investment over the next year.

Nazmeera Moola, Ninety One – We came into the year reasonably optimistic about growth. What’s happened with the virus is that it has started to expose some of the underlying weaknesses in the global economy, principally this massive build-up in corporate debt over the last decade. The global financial crisis (GFC) in 2008 had a consumer debt problem. What has happened now, particularly in the developed world, is a corporate debt problem. It wasn’t an issue because it was underwritten by monetary authorities around the world, by massive amounts of quantitative easing and low interest rates, but that firepower is significantly diminished. The eight major developed market central banks in the world had combined interest rates of 41.5% going into the GFC, two weeks ago they had 6% combined rates, and it’s down to around 3% – that’s the issue. Now we are at this point where markets are vomiting daily and they’re starting to disbelieve this underpin of monetary policy. So, it’s a question of what else can be done to support them. Do we see some sort of combined fiscal response? What does that look like? 

The second, which is going to have a much longer-term effect, is what does fiscal response look like in a world where monetary policy has run out of room? That could be really interesting. You could see massive stimulus that is good for commodity prices. 

As Paul said, Africa has a younger population, which should help. In South Africa, the government bond yields are looking really attractive on a longer-term basis. We just need the world to move from this credit freezing space that it’s in, to one where the value in those risk assets can be seen, because people aren’t just looking for places to hide. Unfortunately, even with 5% real interest rates, South African government bonds are viewed as a risk asset, not a safe haven asset. 

Funds Europe – What do you identify as the top investment and/or business risks?

Boynton – Obviously Covid-19 is a very unpredictable outcome at this point. The way that China seems to have got across the issue in a profound way is very encouraging, but the way that other jurisdictions seem to be struggling is more worrying, so we can’t take a lead on where this will land. 

Historically, currency has been identified in the alternative investment area as the biggest risk in Africa, and certainly in terms of our investment process of putting money to work in Africa, it’s a huge focus area for us, both on the exchange rate side – how do we protect ourselves against exchange rates and on the remittability side in terms of can currency be expatriated cost-effectively and time-effectively when needed? 

The other thing about Africa is that with 54 different countries, jurisdictional risk is also a big factor, and certainly understanding the complexity of each country or area of jurisdiction that you are exposed to in any particular investment is a very important part of managing risk in terms of investing across Africa. 

On Covid-19, there are first-order effects, but there are also second-order effects with the value chain dislocation being a big risk this year in terms of businesses being able to step up.

Ambekar – The biggest risk right now is the systemic risk that Eskom presents to the country as well as to businesses, both manufacturing and consumer-facing businesses. We are currently in a phase where Eskom’s operational issues are well known, as well as its financial issues. We think the operational issues are being addressed, we have indications that the right management has at least been put into the entity, however the fix for Eskom will take a number of years, in our opinion. It is the right thing to do to have consistent load-shedding so that maintenance can be caught up in underlying plants, but the implication for South African corporates of a consistent load-shedding regime and environment is actually quite a headwind. So, businesses in South Africa have to understand how they are going to deal and face this problem over the next two to five years, if that’s how long it takes. 

The second risk that we see for South African businesses is this environment of political uncertainty and negative outlook from a political point of view, which we think is stabilising now but has built up over a number of years. This has led to quite high levels of immigration – especially as we see the very highly skilled wealthy population leaving first. This leaves you with a skills vacuum in South Africa. Our education system is not at the levels it needs to be at, and so on a more medium to longer-term view, this is going to be another challenge that confronts South African businesses. 

More widely, not just in South Africa but in Africa as well, policy certainty is another key risk. We have been late here in finalising some key policies and businesses don’t like an uncertain environment, and the direct consequence of that is that they hold back on investment levels. Unfortunately, in this negative spiral if you’re not having certain policy then you’re not going to have the necessary investment to generate the growth that we need.

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