“The storm is upon us,” says South African president Cyril Ramaphosa. Already in recession before the pandemic hit, South Africa has been the fifth-worst hit country in the world measured by the number of coronavirus cases. Last week the International Monetary Fund approved an emergency $4.3bn loan to Pretoria, its biggest pandemic-related disbursement yet.
South Africa’s prompt April lockdown ushered in a period of “Ramaphoria”, says Ivan Fallon in The Times, but there is “widespread disillusion” as a worsening situation has forced new curbs. The first confinement proved economically ruinous, with three million job losses, thanks in part to the closure of the tourism industry, the economy’s biggest employer. The economy is forecast to contract by 12% this year. To top it all, new problems at electricity monopoly Eskom have brought yet more power cuts.
There was widespread hope that Ramaphosa would prove a reformist breath of fresh air after years of serious corruption under his predecessor, Jacob Zuma. South Africa has been badly served by its leaders of late; real GDP per person has fallen every year since 2015, says The Economist. Rigid labour markets and government debt are pressing concerns, but Ramaphosa is increasingly siding with the statist camp inside his own party, which talks of launching a government bank and pharmaceutical company. “More than a fifth of the budget” will go on paying debt interest this year. The OECD recently warned that the debt could exceed 100% of GDP by 2022 without consolidation, a dangerously high level for an emerging market.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Dodging the fallout
The local stockmarket has so far dodged the worst of the fallout. The benchmark FTSE/JSE Top 40 is up by 2% this year. The country’s leading companies are insulated from the wider economy for a number of reasons. Firstly, over-regulation means that large, oligopolistic companies enjoy significant pricing power, cushioning them from the economic pain. Secondly, as Heather Jackson writes for News24.com, “more than 60% of the JSE’s Top 40 derives its revenue offshore”, leaving local portfolios “relatively underexposed to our real economy”.
Above all, a recent rally has been juiced by soaring commodity prices, says Adelaide Changole on Bloomberg Quint. The materials sector accounts for one-fifth of the MSCI South Africa index, twice as much as on the equivalent UK index.
On a cyclically-adjusted price/earnings ratio of 15.6 South African stocks are currently dearer than the British market. Yet local companies will not be able to avoid their country’s worsening economic problems forever. Investors should fasten their seatbelts.
-
Divorce financial settlement fights surge – why it pays to agree terms earlyLawyers expect more court battles as tax rises and sharp falls in asset values make divorcing financially more difficult.
-
Emotional investing: what is it and how you can avoid itAre you an emotional investor? Your feelings could be damaging your long-term investments, but here's how to stay rational when the markets are turbulent.
-
Who’s driving Tesla?As Elon Musk steps back from government with his eyes on the stars, investors ask if he’s still behind the wheel at his electric-car maker.
-
Investment opportunities in the world of Coca-ColaThere is far more to Coca-Cola than just one giant firm. The companies that bottle and distribute the ubiquitous soft drink are promising investments in their own right.
-
Streaming services are the new magic money tree for investors – but for how long?Opinion Streaming services are in full bloom and laden with profits, but beware – winter is coming, warns Matthew Lynn
-
'Pension funds shouldn't be pushed into private equity sector'Opinion The private-equity party is over, so don't push pension funds into the sector, says Merryn Somerset Webb.
-
A fund that looks past the short term in AsiaGrowth should remain strong, but successful managers also need to focus on governance. Here's how to find active opportunities in Asian markets.
-
Greg Abel: Warren Buffett’s heir takes the throneGreg Abel is considered a safe pair of hands as he takes centre stage at Berkshire Hathaway. But he arrives after one of the hardest acts to follow in investment history, Warren Buffett. Can he thrive?
-
Who will be the next Warren Buffett?Opinion There won’t be another Warren Buffett. Times have changed, and the opportunities are no longer there, says Matthew Lynn.
-
Will Comstock crash – or soar?Opinion The upside for Comstock, a solar panel-recycling and biomass-refining group, dwarfs the downside, says Dominic Frisby.
