South African investors expect better returns – despite economic shock

Despite a historic decline in gross domestic product (GDP) for the second quarter of 2020, economists at the Bureau for Economic Research (BER) have noted a spike in the local equities market – a sign that perhaps investors believe South Africa’s economic environment can only improve.

“Despite the horrible, albeit largely as expected, SA GDP print for 2020Q2, the local equity market shot to life last week,” the group said. “Although it is always hard to correlate large market moves to any specific event, it may be that investors saw the Q2 GDP figure and thought that the environment can only get better from here.”

According to the latest Schroders Global Investor Study 2020, local investors expect to make an average annual total return of 12.67% – almost 2 percentage points higher than the global average predicted returns of 10.9%.

Between mid-February and mid-March, global stock markets fell by over 30%. During those weeks Germany, France, the UK and the majority of US states shut down to limit the coronavirus’s spread.

Although a recovery rally had begun by April – when some countries were already re-opening aspects of business – South Africa’s national lockdown only began on 26 March 2020.

Kondi Nkosi, Schroders country head in South Africa, said that the market turbulence in early 2020 appears not to have dented South African investors’ optimism. Expectations for future returns are only slightly lower in 2020 than in 2019, when investors expected to make an average annual total return of 13.8%.

“It’s extremely interesting that despite the impact of Covid-19 – and all of its dramatic effects on our lives and work – investors still have confidence in generating returns from their savings,” Nkosi said.

“We strongly believe that one of the prevailing future trends will be lower long-term interest rates, and this was our view well before the pandemic. Longer-term, we think there will be more disruptive forces at play in markets and that it will become harder overall to find returns.

“But we have seen again and again in the years since the financial crisis that certain investments can deliver returns even in challenging environments,” he said.

Cautious recovery

However, BER’s economists warned that ongoing problems at Eskom and government implementation paralysis warrant some caution on the pace of the recovery from the devastation in South Africa’s economy.

Real GDP plunged by a record 51% quarter-on-quarter (seasonally adjusted, annualised) in Q2, according to Stats SA. This followed an upwardly revised 1.8% q-o-q decline in Q1 (from -2%).

Without annualising the data, the actual real (seasonally adjusted) quarterly decline in Q2 was still dramatic at -16.4%, the BER said. The Q2 GDP contraction means that the level of SA GDP has now fallen for four consecutive quarters, further prolonging the technical recession in the second half of 2019.

Despite this, initial incoming data for the third quarter suggests some upside to the first phase of the recovery, the group said, tracking positive global indications for the third quarter of the year.

“The global narrative on third quarter GDP dynamics is turning more upbeat. Last week, both the Bank of Canada (BoC) and the European Central Bank (ECB) noted strong, and in some cases faster-than-expected, rebounds in the high-frequency data for Q3,” the BER said.

“The caveat is that in most cases, the level of activity remains below pre-Covid, but it was always going to take time to recoup the dramatic Q2 declines,” it said.

The global banks distinguish between a robust initial reopening phase of the recovery, followed by a likely more prolonged recuperation phase.

This narrative is in line with what the economists have been expecting for SA, i.e. a fairly robust, albeit very incomplete, bounce in Q3, to be followed by a long slog back to the (depressed) pre-Covid level of GDP.

“A number of factors, including major pre-Covid vulnerabilities, mean SA may lag the global recovery,” the BER said. “On a positive note, data released last week suggests that even in SA, the ‘reopening’ quarter (Q3) could potentially be much stronger than initially thought.”

According to Schroders, the prevailing optimism indicates that investors are looking beyond just GDP data.

“You might say that some of these expectations are unrealistic, but you could also say that perhaps investors are realising that stock market returns are not the same as economic growth,” Nkosi said.