2020 is likely to be another volatile investment year, but that should not deter one from achieving above-inflation investment returns. Our views remain similar to our 2019 year-end view, and it is important to understand that most of the SA negativity is already priced into investment markets.
Any positivity will boost investments. Therefore, despite the gloomy economic conditions, the local investment outlook is attractive:
- Local equity valuations are near their all-time low;
- Local, real interest rates (4%) are relatively high and provide lots of room for interest rate cuts, which would be very positive for the economy and investments;
- These high, real interest rates are attractive to global investors where aggregated global real interest rates are currently negative;
- SA is at the bottom of the business cycle, meaning any growth will be very positive for company earnings.
Globally, we continue to be cautious. Developed market (especially the US) valuations are high, while general Emerging Markets (including SA) offer value, in our opinion.
The Rand should remain range bound
Last year we forecast the Rand / Dollar to be range bound between 13.5 and 14.5, which it mostly did, ending 2019 at 14. We do not expect the Rand to weaken materially in 2020, despite the gloomy economic outlook. Most of the negative news is already priced in and improving global emerging markets should support the Rand. Therefore, we expect another volatile range bound year for the Rand between 13.5 and 15.0.
Benefiting from attractive local valuations in the short term is difficult to predict, but over the medium term (+3 years) we are confident that double digit investment growth should be restored.
For most investors, the best returns are realised over the long term and therefore, a long-term view – that would reap the benefits from the current attractive local valuations – should be adopted. However, if one is reliant on a stable income or just cannot tolerate longer periods of slow returns, we recommend adopting a “parking strategy” into our low-risk investment portfolio which has generated a return of 9% to 10%. Once the environment appears more certain, we will recommend moving into more growth assets, which should generate double digit returns.
Prosperity Worldwide Fund poised for another good year
Our Prosperity Fund returned 16.4% in 2019 with a low risk investment strategy. The fund is conservatively managed with an objective to preserve capital as it seeks to generate steady after-tax returns above inflation. Its philosophy is to invest in irrationally priced global asset classes within very strict risk parameters.
Looking back at 2019
2019 was a wild roller-coaster ride for the JSE All Share Index, up as much as 14% and then down at 7%, ending 9.8% up for the year. The Rand /Dollar also fluctuated wildly between 13.3 and 15.5, ending the year at 14.
Bonds, as an asset class, gave the best return with the All Bond Index returning 10.3%. This was despite the fears of a final downgrade to junk status which could lead to a large sell off.
Property had another poor year returning only 1.9% and over two years returning a negative 12.7%. Over the last five years, listed Property returns are nil. This is a sector we have firmly avoided much to the benefit of our clients.
The one real bright area was a recovery in Platinum shares. The index soared 200% with Impala Platinum being the biggest winner, increasing from R37 to R143 a share. We wrote about this enormous opportunity two years ago, titled “Platinum – the Investment of a Generation”
Themes for 2020:
Eskom is a desperate situation, but it will be resolved
2019 did not end well as, once again, we had to deal with load shedding. Eskom remains the biggest negative for the country and it raises so many issues around politics, the economy and the general fabric of the country. We believe that government has recognised the seriousness of the Eskom problem and that it will be solved, albeit at a high cost to the country.
Improving consumer, business and investor confidence
Business confidence in 2019 was the lowest in 35 years. Any improvement in general confidence will be a big boost to the economy, as it will lead to much needed spending across all sectors of the country.
What will improve confidence is government implementing change. We believe these changes are taking place, although at a slow pace: A new Eskom CEO, the NPA intensifying corruption investigations, putting SAA into business rescue and Prasa into administration. But the biggest boost to confidence will be the prosecution of a high-profile corrupt official. Ramaphosa knows he needs to do this.
The battle with the Unions
This is inevitable as the government wage bill must reduce in order to reduce debt and fund growth opportunities. The stumbling block is that Ramaphosa is being accused of betraying the electorate that put him into power. This has slowed the implementation of important changes at Parastatals, but the battle is likely to come to a head as funds run out, as witnessed at SAA.
A likely Moody’s downgrade and a sombre Budget
With another year of low economic growth expected, it is likely Moody’s patience will run out and government debt will be downgraded to junk. This will not be disastrous as it is already priced into our markets and it will remove the negative uncertainty around the event.
We don’t expect any “much-wanted revelations” from the Finance Minister’s budget speech in February. Only a sombre assessment of the economy is expected.
The benefit of high real interest rates and a savvy Governor
SA real interest rates (government bond yield less inflation) of 4% are near a 9-year high and are well above average global rates, near zero. This provides the economy with an important cushion to absorb negative shocks to the economy, such as a recession or our government bonds being downgraded to non-investment grade. Effectively, we still have some “dry powder” to boost the economy by reducing interest rates.
Key is that the Reserve Bank Governor believes that government changes are more important to boost the economy than reducing interest rates. This view is strategically critical as the Reserve Bank will not use our precious “dry powder” to boost the economy and alleviate pressure from government to make the real changes the country needs.
Which side of the fence do you sit on?
Is the country doomed or will we start recovering/growing? 2019 was depressing for most South Africans, despite winning the Rugby World Cup. Economically, 2020 is likely to be another difficult year with low growth of around 1%. But, in our opinion, SA is not doomed if Ramaphosa is our president. Change is taking place in a very complicated political environment and patience is needed.
Offshore, developed markets are expensive
Global (developed market) equity valuations are high. The S&P 500 (comprises 60% of the global stock market) P/E is 24x versus its long-term average of 16x. Coupled with extremely high levels of profitability and extremely low interest rates, this is not good for high valuations.
Combined with high valuations are geopolitical tensions and an uncertain regularity environment. Therefore, we recommend emerging markets over developed markets.