STUART THEOBALD: Pessimistic domestic investors have cause for pause

I am often asked to sense-check SA investors on the outlook for local markets. Domestic investors notoriously suffer irrational pessimism. I often hear foreign investors complain that if they want to get a good sense of how SA is looking, the last person to ask is a local.

We South Africans tend to sport an ingrained cynicism, inflamed and encouraged by those who make their money selling offshore investments. It is also influenced by myopia — the tendency to be overly influenced by what is most obvious, but thereby missing the bigger picture. During load-shedding and water outages it is understandable to think you should don your veldskoens and run.

The problem is that markets are not driven by personal experience. In fact, they are driven by a global picture in which SA is only a small part. And what matters is not what is happening right now, but what the future holds. Markets, after all, are only trying to price the present value of future cash flows — they are not here to bludgeon investors for mishaps of the past.

SA can change nothing and yet still be the beneficiary of international flows if competing markets suddenly look worse. For much of this year, that has worked in SA’s favour. The Ukraine war wrote Russia off the investment map, Brazil under Jair Bolsonaro was looking overheated and volatile, Turkey was caught up in the Ukraine situation, China was facing severe regulatory uncertainty. SA is relatively unaffected by the global energy price crisis given its negligible reliance on gas, and has had good crop output limiting food inflation.

In that scenario, SA has been a relative safe haven and benefited as a result.

The question to ask is whether the outlook is better than currently priced? And of course this must be seen in the global context, recognising what can be said of the other markets competing for the same investment.

Compelling case

On this, again, SA has a compelling case. It was the only notable market in the world that ended the Covid crisis in a better fiscal position than when it started. After a decade of government overspending and reckless debt accumulation under Jacob Zuma, the National Treasury has been rebuilding credibility for fiscal rectitude. It has had some luck — a Covid-related commodity price spike helped fill up the national coffers. But in a global context of weak and worsening national balance sheets, SA is an outlier for trending in the opposite direction.

Then there is the local outlook. Of course, energy insecurity is a huge challenge. Crumbling infrastructure, from water to sewerage, is also negative. The question is whether these issues can be addressed.

On energy, those watching carefully about the future are seeing reason for optimism. Regulatory changes, Eskom restructuring, and global political efforts to support transition in SA mean that significant investment is on the way to build new, renewable energy producers. Large companies now can and are building their own renewable energy plants that will give them more stable and lower-cost electricity than Eskom.

There is also some optimism on other infrastructure: Transnet is being shunted into concessioning parts of port and rail to private operators who can be expected to improve volumes and reliability. That can ease chokeholds on exports of both primary and manufactured goods.

Foreign investors also recognise that SA’s state is struggling to deliver basic services, particularly at municipal level. But there is also recognition that unlike other markets with similar problems, SA is a constitutional democracy with inbuilt political mechanisms to achieve change. It may be slow in coming, but a government that can’t deliver will eventually lose political support, a reality the ANC is seeing happening before its eyes. Investors take that to mean that service delivery failures eventually will be addressed.

The global picture continues to offer relative support. Brazil, after the narrow election of Luiz Inacio Lula da Silva, has rallied and will be a darling in the short run. But China, in particular, is going the other way, with President Xi Jinping having consolidated power and changed term limits, giving foreign investors serious concerns.

SA is also still looking relatively resilient against global inflation and interest-rate trends. The long-term outlook is also supported by an underlying structural trend supporting commodity prices, particularly metals needed for the green revolution, of which SA is a major supplier.

So local investors should pause. Ask whether your expectations of the earnings of SA companies, many of whom earn money abroad, really are going to be worse or better in the future. And then think about how your answers stack up against peers in the rest of the emerging markets.

The answers may not be nearly as gloomy as you think.

 Theobald is the chairman at Intellidex, a SA research-led consulting company. This article first appeared in Business Day.