At the turn of the cycle, position for multiple outcomes

Erik Nel, Co-portfolio manager of the Amplify SCI* Strategic Income Fund

As the world starts to turn the corner to economic recovery, South Africa needs to make changes to take part in the growth in emerging markets, which is set to outstrip that of developed markets.

South Africa’s economy, however, remains at a crossroads, and requires reform to put it on the road to redemption, says Eric Nel – co-portfolio manager of the Amplify SCI* Strategic Income Fund and chief investment officer at Terebinth Capital.

He also cautions investors that at the turn of a new economic cycle, markets tend to go back and forth, so it is important not to position for a single outcome.

Painting a global picture, Nel says the last five years under the Trump administration have been terrible, globally, but especially for emerging markets. Over the last year or two, markets have collapsed, and it is only thanks to a massive stimulus, fiscal and monetary, that there may be evidence of a move from the Trump years to “the roaring 20s”, evident in a gradual pickup in demand, notably for commodities.

There is a slow and steady shift back towards emerging markets, where yields are high. South Africa’s fiscal situation, however, is moving in the wrong direction, and it has a debt and leadership problem, which present significant risks which could affect equity markets and the rand.

South Africa is attractively priced for current circumstances, but what it needs is reform. “We need to start doing the right thing,” Nel says. “Including being prudent in policy decisions and having strong institutions.” He points out that National Treasury used to be highly rated, but is now losing some key staff members. “Treasury needs to stand up in Cabinet and defend its budget against politicians that have another agenda” and South Africa needs to close the increasing gap between revenue and expenditure. Other challenges to overcome include spectrum, fixing SOEs, land reform and fixing poverty, unemployment and education.

A rise in sentiment, reform, fiscal prudence and strong policy and institutions will flow through to increased public private partnerships.

Nel sees the beginning of positive change at Eskom, and says that business confidence is starting to rise. Now the fund wants to see economic conditions of such a nature that fixed capital formation starts to happen.

While the bulk of the Amplify SCI* Strategic Income Fund portfolio is positioned for recovery, “the counterbalance is to have a hedge offering some protection if something goes wrong locally or globally”.  The fund had been “early on the theme” of inflation going to start surprising on the upside, and has been building its exposure to inflation-linked bonds.

He remains bullish on emerging markets, but warns this is a long-term perspective which remains positive based on growing populations, relatively low debt, excessive outflows during coronavirus and superior growth that is expected.

In South Africa, some institutions are expecting tax surprises, based on revenue data already seen, Treasury having been conservative in its assumptions, increased mining production and the lag between companies spending and the fruits of their investment, which are now starting to become evident, indicating the start of the economic recovery. “If we can get costs down at the same time as growth, this will be a very different economy,” Nel says.

Treasury will “need to stay strong on capping public sector wages”. But that is all treating symptoms. To fix the economy, South Africa needs to fix growth.

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*Sanlam Collective Investments

Disclaimer:

Amplify Investment Partners (Pty) Ltd is a wholly-owned subsidiary of Sanlam Investment Holdings and an authorised Financial Services Provider. Sanlam Collective Investments (RF) (Pty) Ltd is a registered Manager in terms of the Collective Investment Schemes in Securities. A schedule of fees can be obtained from the Manager. Maximum fund charges include (incl. VAT): Manager initial fee (max.): 0.00; Manager annual fee (max.): 0.58%; Total Expense Ratio (TER): 0.65%. The Manager retains full legal responsibility of the third-party portfolio. The registered name of the fund is Amplify Sanlam Collective Investments Strategic Income Fund.