The Balanced Perspective: prospects for SA Inc and an emerging market rebound

By Nedgroup Investments

The Balance Perspective is a 15-minute long webinar with our Fund Manager of the Nedgroup Investments Balanced Fund, Iain Power as we discuss the most topical issues of the day.

Today we heard Iain’s views on the prospects for South Africa Inc. given the recent rally of the rand, as well as the outlook for emerging markets. Below is a summary of the conversation.

To watch the recording of the conversation, go to our YouTube channel.

The balanced view
Both these issues are interlinked, especially in light of what we have seen in November. In our last feedback we remarked that a potential COVID-19 vaccine could catalyse a rotation into some of the bombed-out emerging markets and specifically South Africa (SA) Inc. This has certainly come to pass. Indications are that an emerging market recovery is underway and that emerging markets are on track for a better 2021. This will be particularly enjoyed by some of the more defensive, dollar-based assets. The basis for our view on growth assets is largely based on the fact that it seems likely that there are some viable vaccines coming online.

The big issue is the speed and efficiency with which these vaccines can be manufactured and distributed. This will provide a solid runway for the level of economic activity around the world to get back to pre-COVID levels, particularly in some of the countries that have been hardest hit and where tourism plays a major role. We are already starting to see investors position for that by selling some of the defensive-type assets and taking a position in more economically sensitive assets.

The Nedgroup Investments Balanced Fund – well positioned for emerging market recovery
This scenario is what we have been actively positioning the Nedgroup Investments Balanced Fund for over the last few months and we believe the runway to a better 2021 in terms of economic activity looks much more certain.

Of course, there are always risks. For example, the US fiscal stimulus – is there going to be enough? Will republicans and democrats agree? While these are all factors which could introduce short-term noise, by and large it looks like all the classic signs of a recovery are in place.

Economically sensitive stocks, which typically lead the economic recovery, have also had a very good November along with some bounces in the bombed-out emerging market geographies. Therefore, from our point of view, we are well positioned for a recovery in emerging markets. The fund has had a good November and the prospects for emerging markets are certainly looking brighter.

What does this mean for SA Inc?
The structural issues we have been concerned about still reman although there may be some green shoots on the horizon. The combination of the potential vaccine trade (where people are getting  confident about emerging markets together with more positive country-specific news, such a as power production being allowed in terms of IPPs and some activity around corruption being dealt with shows that there is positivity around.

However, the big elephant in the room is obviously the fiscal position. We need to see a sustained earnings recovery for South Africa to truly recover. The problem in not dealing with the fiscal issue means the window of opportunity for South Africa to do well will probably be shorter than other, more sustainable emerging market geographies.

From an SA Inc. perspective we have upweighted some of the higher quality South African names (financials, retailers like Cash Build, Italtile, Woolworths), but we have not changed our view on South Africa’s fiscal position. We are still very concerned about South Africa’s fiscal position, but we are seeing South Africa benefit from some of the flows into emerging markets.

Throughout the year there was a huge exodus of around $ 90bn that flowed out of emerging markets and that money is now starting to come back. South Africa still stands to benefit from this general movement because we are still in the index, albeit not the most preferred destination. This probably bodes well for a decent Q1 and Q2 but not necessarily a sustained recovery in South Africa.

Not all emerging markets are equal
It’s important to note that all emerging markets are not equal. South Africa and Brazil probably sit in the category of the least loved due to their fiscal and structural issues, but the likes of Mexico, Columbia and some of the Asian emerging markets look good and we have been trying to take advantage of the opportunities in these regions. We want to see some significant fiscal cutbacks on the fiscal side to change our position on South Africa.

For more information about the Nedgroup Investments Balanced Fund, click here.