South Africa heading for a turn
South Africa’s economy will likely see a rebound in the next year and a half, outperforming its global counterparts.
According to Investec’s Global Investment Strategy Group’s (GISG) Q4 2024 Global Investment Outlook, the global GDP is expected to slow materially over the next 18 months, while the USA is expected to enter a recession.
The GISG said that earnings are thus expected to be below market consensus and that the US equity market offers little margin of safety.
“Global rates have increased rapidly, and we expect they will only drift down – a headwind for both the economy and the market. The GISG global risk score remains at -0.5,” Investec said.
The picture in South Africa, however, is better than the global average, with a GISG risk of 0.5.
Investec said a cut in South African interest rates is not far away as South African inflation should be within the Reserve Bank’s target of 3% to 6% for the rest of the year.
The South African Reserve Bank is expected not to wait for the US Fed to make its first cut, with 75 basis points worth of cuts predicted for the next year.
The biggest risk to inflation and interest rate cuts is the oil price, but this is unlikely to rise given the predicted global slowdown.
“The South African economy is currently weak, but there is a light at the end of the tunnel,” the experts added.
Certain pieces of economic data are weak, such as vehicle sales, retail sales, credit extension and nominal GDP growth.
That said, inflation has dropped significantly over the last six months, with expected rate cuts to add some relief.
Furthermore, the worst of load shedding is likely behind us due to the large amount of solar imports.
Despite global growth being predicted to slow down over the next year and the nation’s economic issues, the rand should strengthen over the next 18 months.
“Our model estimate of fair value for the rand against the US dollar is around 17.5, even if South Africa is removed from AGOA, and materially stronger if South Africa remains in AGOA.”
South African equities and fixed income are also cheap, and “SA Inc.” companies should see margin expansion and higher volumes as diesel costs decline and rate cuts stimulate the economy.
“While the election next year increases the risk that National Treasury will be less fiscally prudent than normal, we see sufficient margin of safety in South African bonds to retain an overweight position,” Investec added.
Loading ...
