Local Snapshot - SA Stuck in a Rut
Local Macro Snapshot
Like the rest of the world, South Africa will fall into a deep recession in 2020. Unlike the GFC, however, South Africa enters this downturn a lot weaker.
The Moody’s downgrade is now behind us; SA is out the Investment Grade Bond index. We have approached the Bricks Bank, World Bank and IMF for funding. Worryingly the government’s approach to the pandemic from an economic perspective has been nothing short of disastrous – the most worrying aspect been the likelihood of protracted lock-downs.
The economic impact and costs will be severe and unlike places like the US, economic recovery will not be swift.
South African bonds staged a significant comeback with yields for 10-year money, falling from 11.6% to 9.3% at the time of writing. SA credit still has some of the highest credit spreads given our current lowered sub investment grade rating in the world. It is highly unlikely that the government will default on SA debt (they will keep printing money) and we cannot see enormous inflation given a backdrop of extreme excess capacity both locally and abroad (take the low oil price and massive jobless claims by way of example).
Most SA companies have cancelled dividends, pulled guidance, cancelled capex programs, focused on cost reduction and in a growing number of cases look to raise capita to shore up stressed balance sheets.
And given our underlying philosophy of wealth preservation and skewing risk reward in our favour, our single biggest conviction idea in SA remains SA sovereign debt.
As such we go into Q3 2020 with SA government debt, cash and preference shares representing 80% of our portfolio.