Regina Chi is the Vice President and Portfolio Manager of AGF Investments Inc.
In a country of 60 million people, only about one million people in South Africa have received at least one dose of the COVID-19 vaccine – less than 2% of the population, according to the Africa Center for Disease Control and Prevention. Spurred on by a variant of the disease that probably originated there, the number of cases has risen again and recently reached the highest level in four months. In short, South Africa – the second largest economy in Africa and one of the most developed – is far from leaving the COVID-19 pandemic behind.
However, this may not be inferred from the development of the stock market. In fact, despite recent weakness from lower commodity prices and a recent stronger US dollar, it’s one of the top performing emerging markets (EM) in the world this year, with the MSCI South Africa Index up around 10% year-on-year, 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 economies that rely on foreign capital and are therefore very vulnerable for higher interest rates. But not this year: The South African stock market has outperformed other emerging markets despite rising global bond yields. In an environment of rising interest rates, the rand was perhaps even more counter-intuitive: the rand has been just over 2% strong against the US dollar so far this year, as Bloomberg shows.
Why the change? In part – and it is a large part – South Africa has benefited from recovering commodity prices, especially for metals, and mining accounts for nearly 10% of the country’s gross domestic product, according to the Organization for Economic Cooperation and Development (OECD). . That, in turn, has boosted names like Anglo American plc, the UK-listed mining multi based in Johannesburg, but the market’s outperformance this year could also be related to less cyclical factors. Among them, South Africa under President Cyril Ramaphosa has promised a far-reaching program of economic reforms. The plan for economic reconstruction and rebuilding his government is an ambitious program, in our opinion, and while the history of reform promises in emerging economies is sketchy to say the least, in the case of South Africa there is cause for optimism. One of these is Ramaphosa’s campaign to fight political corruption – an issue that has long hampered the country’s political landscape and reputation with investors, despite several governments promising to address it. But this time around, there are signs that Ramaphosa is really serious.
Ramaphosa’s reform program includes strategies to create jobs, reduce reliance on food imports, revitalize the domestic auto industry, expand power generation and renewables, and restore the ailing state utility Eskom’s financial and operational health. Achieving all of this will be a major challenge, but at least the government is acting from a relatively strong position in relation to its external position – often a good guide to the medium-term behavior of asset markets. According to Bloomberg, the country recorded a significant 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 restrained domestic demand and positive trade conditions from rising metal prices. Despite the decline in GDP last year, the core economy was more resilient than expected. GDP rose in the third (+ 13.7%) and fourth (+ 1.5%) quarters, as Statistics South Africa shows. At 3.3%, inflation in 2020 was at its lowest level in more than 15 years. And while employment remains a major challenge – the official unemployment rate for the first quarter was 32.6 – average salaries have returned to pre-pandemic levels. If the global commodity rally continues, high metal prices could continue to support the economy.
Recent political developments have been extremely positive, including increasing evidence of the success of Ramaphosa’s tough stance on corruption. Case in point is the legal and political mess of Ace Magashule, the recently suspended Secretary General of the African National Congress (ANC). Magashule, a powerful figure in South Africa, effectively shares control of the ANC with Ramaphosa, but he is now facing 74 corruption, fraud, theft and money laundering charges along with 15 co-defendants, according to Bloomberg.
The allegations put Magashule on the wrong side of one of the hallmarks of Ramaphosa’s anti-corruption campaign: the so-called “Step-Aside” rule, according to which any member of the government charged with corruption or other serious crimes must leave or risk his or her post within 30 days Suspension. Magashule, who denies any wrongdoing, refused to step aside – and Ramaphosa immediately suspended him from his ANC post. This was widely viewed as a victory for Ramaphosa and could have a significant political impact ahead of the local elections later this year. For global investors, it suggests that anti-corruption promises may indeed have teeth in South Africa – and using them against a figure as powerful as Magashule could help Ramaphosa consolidate control of the government as he embarks on further reforms.
One of them is the planned restructuring of Eskom, the state-owned utility that supplies South Africa with 90% of its electricity. Supported by shrinking facilities and much-needed capital injection, Eskom is a perpetual money loser with tens of billions of dollars in net debt, and the lack of reliable electricity supplies remains a pain point for the South African economy. In 2019, Ramaphosa proposed splitting 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 sluggish, but Eskom – which now has a professional management team – says it is now well on the way to outsourcing its transmission unit by the end of 2021, with the generation and distribution businesses to follow in 2022.
Of course, reform promises come and go, especially in the emerging markets – often without any concrete effect. That reality should rightly make investors hesitate to say it will be different this time around, but healthy skepticism should not be immune to the evidence. Other countries such as India and Brazil have implemented productive economic reforms in recent years; While there are no guarantees, South Africa could do this next. At least the evidence so far suggests that Ramaphosa may lay the foundation for meaningful change in a country that is desperately in need of better management.
AGF owns shares in Anglo American plc.
The views expressed are those of the author and do not necessarily reflect the opinions of AGF, its subsidiaries or any of its affiliates, funds or investment strategies. References to specific securities should not be construed as investment advice or advice.
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source https://dailyhealthynews.ca/why-south-africa-stands-out-among-emerging-markets-for-investor-returns/
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