Real Talk: South Africa’s Investment Outlook

2020 has been a LOT. With panic and uncertainty resulting from a global pandemic, now is the perfect time to talk openly about the future. It’s time for a little reality check to help set the tone for 2021. What are we talking about today? Investing for the future. Is it worth investing in South Africa? Should we be investing more offshore? Is the Rand a plummeting one-way bet on a downer? How long is South Africa’s interest rate going to remain this low?

 

Offshore Investment South Africa

Investing in South Africa: the bigger picture

The average annual growth rate for the South African economy over the last 10 years has been just over 1%. Last year we saw 0.15% growth and now in 2020 we’re facing an estimated economic contraction of 10%. It’s hard to be positive about numbers like that, but by taking a step back and looking at the bigger picture, we can get the perspective we need in order to determine our next move. 

When times get tough, the tough must keep going. As much as it sounds like a motivational quote, the only way out is through and so we must face facts to prepare as best we can for the future. Even though things might appear bleak at first glance, there’s a bright side or a silver lining to be found if we look hard enough. It’s all about positioning the investments correctly. It’s about investing in those sectors that service our needs as human beings, with a focus on sustainability, technology and societal development. It’s about identifying those industries and organisations that continue to flourish in spite of the economic reality.

In South Africa, these areas include communication, education, healthcare and those sectors that are required for people to eat and live. No matter how tough times may seem, consumers still need to eat, clothe themselves and travel, so it makes sense to continue to invest in these.  Even in the midst of a global pandemic, life must go on.

While offshore investments perform an important function in portfolios, these must be informed by the wide choice available across both industries and sectors. Furthermore, tactical portfolio management requires expenses to be matched by income in the same currency and this is because of the Rand itself. It’s not safe to assume that the Rand is going to continue to weaken. Why? The Rand is capable of surprising in either direction when least expected. This makes it necessary to keep our focus firmly on local companies with the highest potential of earnings growth and dividend generation despite our lower GDP scenario.

 

The ZAR: going one way only?

In theory, one currency should weaken against another by the difference in inflation between the two countries. In reality, the daily fluctuations in exchange rates is the result of countless external factors –  like imports and exports, other currency flows, speculators, politics and so on. However, it seems that South Africans have come to expect that the Rand will simply continue to weaken steadily over time. Is this a justified expectation? Not necessarily.

Although investors would do well to rethink their stance on whether the Rand is a one-way pony, this is not to say that the Rand is likely to strengthen, given that it has yet to recover from crisis-induced weakness. Instead, this is simply an observation to caution against being overconfident in projecting current trends too far into the future. The Rand is capable of swan-diving spectacularly and then gradually clawing its way back in the years that follow. While we can expect the unexpected, when it comes to the Rand, we can’t always assume the worst.

 

How long will the interest rate remain low in South Africa?

While we can’t put an exact timeframe on answering this question, we can take a look at periods of low interest rates in the past. Globally, the 1987 stock market crash and ensuing periods of turbulence in the market provides much insight.

Consider that:

• Global interest rates remained low for 27 months after the 1987 crash – just over two years.
• A 40-month period of low interest rates followed from the DOT.COM crash in 2000 when IT stocks caused markets to plummet. 
• The longest lasting low interest rates period in contemporary history occurred after the Global Financial Crisis, and rates remained low for eight years (96 months).
• The duration of the current cycle of easing is now 13 months, as interest rate cuts began in mid-2019 and were lowered even more aggressively in response to the Covid-19 pandemic.

Across the world it is expected that rates will remain low for as long as necessary to deal with the economic fallout from 2020. This means that globally low interest rates are here to stay and will remain the weapon of choice to get consumers to spend again.

Locally, to get a feel for how long the interest rate is likely to remain low, we can look back at the long-term nature of interest rates. Over the last few years, South Africa has begun to feel the positives of targeted inflation. Because the Reserve Bank has the flexibility to lower rates to stimulate the economy and with inflation dampened by  a weakening economy made weaker by Covid-19, the repo rate is now at 3.5% – the lowest in over twenty years. It is highly likely that South Africa can expect a prolonged period of low interest rates, with further talk of inflation being maintained at around 4.5% which would mean that interest rates could remain low well into 2022 – good news for those with debt, but a worry for those South African savers reliant on interest income.

 

FinGlobal: cross-border financial services for South Africans

If you’re concerned about your finances and looking to move your money out of the country, we’re ready to present you with options. Whether you’re investigating offshore investment platforms and you’re considering using your foreign investment allowance, or you’re looking to make a permanent transition through financial emigration, FinGlobal can help with a tailored financial solution that fits your exact requirements.

To get started, leave your contact details and we’ll call you back to discuss your individual portfolio with a personal assessment that is completely confidential and obligation-free.