Despite the poor economic growth locally, South Africa is likely to see growth on the back of a more balanced global market, says Keith Wade, chief economist at global asset manager Schroders.
Wade said that the current global economic outlook could be described as a “Goldilocks” economy, because economic growth is ‘not too hot and not too cold’.
“Typically, when growth picks up sharply or is ‘too hot’, economists tend to get quite worried about the impact this will have on inflation; whereas when growth is too weak or ‘too cold’, the worry is about possible deflation,” he said.
“At the moment, the growth exhibited in the global economy seems to be just right, which means investors are able to benefit from earnings growth and profits, without having to worry too much about inflation picking up or interest rates rising too sharply.”
Speaking specifically on South Africa, Wade said that while political uncertainty is obviously still a major factor at play, the levels of real interest rates are currently quite attractive for foreign investors.
“Looking at South Africa from a global perspective, we see a currency that has fallen quite a long way – perhaps, a little bit too far – and we also see an economy with fairly high real interest rates, but interest rates that are beginning to come down.
“This is something that automatically attracts interest from investors, even though the economy itself may have not yet responded,” he said.
Wade said that he sees a similar story playing out in the bond market, with South African likely to outperform developed market bonds, due to their higher risk premium.
While the possibility of further credit downgrades is a valid investment risk, ratings agencies generally tend to be very backwards looking, said Wade.
“Yes, there are some concerns about the fiscal side of things in South Africa, and this is something that needs to be addressed.
“As such, there is still a risk that South Africa’s sovereign credit rating could be downgraded further; however, we have seen this play out in other markets and investors are always looking to get in right at the beginning of the turning point.
“Furthermore, in terms of the local stock market, it is important to remember that a large portion of earnings is actually taking place elsewhere in the global economy, which could play a key role in turning around the South African stock market’s earnings growth,” he said.
However, Wade warned that it was unlikely that the South African stock market itself would offer strong returns, especially when compared with offshore investments such as Asian equities, in particular, on a seven-year return basis.
“It is therefore not just about South African GDP, but also about global GDP – which is currently seeing a synchronised upswing,” he said.
“While we are currently increasing our exposure to South Africa through emerging market debt – as we do view this as quite an attractive opportunity today in real terms – we are also taking all applicable risks into account and diversifying appropriately.”