Portfolios are ignoring the risks to the upside in SA

There could be a lot of pain if South Africa does a little better than expected.
Among the risks is the chance that government might execute some of its policies. Image: Moneyweb

On Tuesday, Statistics SA announced that the country’s GDP had fallen by 51% in the second quarter of this year. This was slightly below expectations and for many would have confirmed the consensus view that investors need to be highly aware of, and insure their portfolios against, significant local risks.

Greg Hopkins, CIO at PSG Asset Management, pointed out that typically that is happening in three ways at the moment.

‘People are buying a lot of local cash,’ he said. ‘We have seen a large move from risky assets into local cash.

‘Offshore technology is another example. People think that there are better growth prospects there and are trying to hedge against the rand. And gold is another one that has made its way into many portfolios.’

This shows that the risks that investors are clearly focusing on are poor government execution on a recovery strategy, the low-growth environment, and rand weakness.

Risks being ignored

‘However, what’s interesting to us,’ said Hopkins, ‘is that there are risks that the market is not trying to insure against. Those are that there is some chance that the government might execute on some of its policies, that the South African economy might recover, or that the rand might be a little stronger than the consensus view is.’

This is reflected in investors crowding into local rand hedges, and the beaten-up nature of SA Inc counters.

‘The way that local stocks are currently priced, the market is giving an almost zero change that the government will execute on its policies in the future,’ said Hopkins. ‘When we take a step back, we don’t know what the odds are of government execution, we don’t know whether they will or they won’t and over what time frame, but we don’t think the odds are zero.

‘And what’s interesting here is there is a group of SA Inc shares which would provide very cheap insurance against this happening.’


Currently 39% of the PSG Equity fund is held in SA Inc stocks. Significant holdings include AECI, Discovery, the JSE, Shoprite and Remgro. As Hopkins pointed out, these are quality companies with historical return-on-equity well above the market average.

This, he argued, makes them cheap insurance against risks to the upside in South Africa. And there are reasons to believe that these should not be discounted.

‘Interest rates are currently at 55-year lows,’ said Hopkins. ‘This is something that sometimes the market misses. In the past, at this point in a crisis, our central bank would typically be raising rates because they would be protecting the rand and future inflation. These low rates, we think, could set the foundation for future growth in the economy.

‘The yield curve on government bonds is also very steep.

Generally, when you see a steep yield curve it precedes economic growth.

Now, we don’t know what the precise odds are of economic growth in South Africa improving in the future, but we certainly don’t think it’s zero.’

Commodity prices have also been improving, which means that South Africa’s terms of trade have benefitted.

‘This could also provide the foundations for rand strength in the future,’ said Hopkins. ‘We don’t know what the odds are with any precision for what the rand will do in the future, but the chances of it strengthening are certainly not zero.’


Companies have also had the opportunity in the Covid-19 crisis to right-size and restructure their assets and operations. This restructuring creates the opportunity for future earnings growth.

‘We don’t know with any precision, once again, what the odds are of significant earnings growth in the future,’ said Hopkins. ‘But the possibility is certainly not zero.’

Finally, there is the possibility of investment returning to emerging markets.

‘Capital outflows from emerging markets in the first quarter of this year were the highest we’ve seen on record,’ said Hopkins.

‘There is a chance that the herd could come back,’ he added.

‘The weakness in the dollar and recent strength in emerging market currencies could be a harbinger of some of this money returning.

‘If it does, it generally lifts local asset prices and improves the currency. Once again, we don’t know what the odds are with any precision, but we don’t think that they are zero.’

This informs PSG Asset Management’s view that there is value in insuring against the possibility of the South African economy, the rand, and local company earnings surprising to the upside.

‘There is a very strong consensus view in the country that we should be sitting anywhere other than SA Inc,’ said Hopkins. ‘And there could be a lot of pain if South Africa is a little less bad than we expect, and if government just executes a little on its policies.

“And, right now, you can get cheap insurance against that outcome.’

Patrick Cairns is South Africa editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.


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“The way that local stocks are currently priced, the market is giving an almost zero change that the government will execute on its policies in the future.”

Sounds about right to me.

Then you have to factor in the value destruction arising from government policies such as BBEEE, Land Redistribution etc so I think most investors who hold a medium term perspective are right to look somewhere other than SA Inc.

This argument or article makes allot of sense, however I’m not that certain the Rand will move from 16.50 to 10 to the USD to give me an immense amount of Pain!

Only the very naive will bet on this governments ability to fix anything !! Never mind the economy !!!!

When everyone is crowding into USD assets out of ZAR, then there is an opportunity to make short term profits going long ZAR. It just needs to disappoint less than expected for it to work…

Oh yes, and Zimbabwe might recover as well

The reason I and many others have been in bonds for years is precisely that there are too many “don’t knows”. So instead of holding stocks that have plummeted, I have had a steady 7.5% return.

Of we all know that if something is cheap, there’s a good reason why it is cheap. A nibble here and there but to bet on the ANC to drag us out of this mess is asking a lot.

Beach-bum and others – also be very wary of investments in Rand denominated S.A. bond funds (inclusive of local income funds). When the interest rates came down during 2020, there were some capital gain made. Those who jumped in after interest rates came down can expect capital losses during 2021 and 2022 as interest rates are forced higher again. Going forward, the government will have to offer rich interest rates on its junk bonds to be able to attract any meaningful investments to cover its over-exposed obligation to service the high levels of debt and of course to fund their budget shortfalls. Be wary of this downside risk.

I still have my place in the sun ….

There are some other important odds author should consider.

Odds of African country turning to failed state with revolutionary socialist party in power: 100%

Odds of electorate revoting in socialist party again for next 10 years: 100%

Odds of Eskom not delivering stable electricity for years to come: 100%

Go buy upside ‘insurance’ through long dated options if you will, but all the other long term smart money has moved on years ago.

Odds of a pandemic wiping out the world’s economy (calculated in 2019): 5%.

Says someone who ignored all the downside risks the past year. PSG Balanced fund performance of -19.2% compared with benchmark (-1920bps alpha) was number 35 out of 35 balanced funds over the past 12 months (to 31 July) according to SA Global Manager Watch Survey. And with significant exposure left to Discovery and Remgro, more pain is to come.

Discovery has come back strongly – Far better management than other insurers…

I’ve lost my trust in the Discovery brand since their shenanigans around Covid19 claims that I had personal experience with. Very dodgy dealings going on there.

Hahaha. Did you see their headline earnings for this half year? Worse than any other insurer by some margin. And that’s on top of a terrible half year result. Unfortunately their clients (affluent / middle class) are no longer affluent or middle class (those still left in SA) which make it slightly harder to rip them off

I have never seen so many insurance share prices drop so horribly.
Most of them are not paying dividends, don’t they have money?

Some banks are doing the same, most are not paying dividends.
Don’t they have money?

Once again the faithful investor gets punished for investing.

Seems that the retailers and resources companies still pay dividends.

I do not trust analysts as they are most times backward looking and very loud about the past and silent about the future. They abhor a term called being ‘forward looking’. In fact it’s forbidden to be forward looking. Yet these same guys are supposed to help Saffers with the future value of investments.

My first investment was with Stanlib. I paid fees but never achieved capital growth for about one and a half years.

So I bacame a speculator who buys into volatility. When there is blood and organs on the street in some blue chip that’s too big to fail I let out my mating call with the markets. I find my strategy fulfilling and I have had success. Wealth to me is also an emotional thing.

So all that analysis is for media and cissies who do not want to be responsible for their loss or multiplication of their wealth. And can afford the fees for wealth stagnation if not destruction.

So, you are betting on;
1. The ANC Government will deliver.
2. The cadres will stop stealing
3. Escom will keep the lights on and their debt will disappear.
4. Municipalities will flourish. The Vaal dam will be full of clean water and roads and potholes will be rehabilitated.
5. Foreigners will pour money into S A. They will build factories and stimulate manufacturing capacity by 1 000 %.
Yeah right@

Zero change of South Africa outperforming world markets in the long term.

Only fools would believe that SA could under ANC (or their EFF child’s) governance.

The biggest risk by far is remaining invested with SA asset managers who will always take their fees for their big houses and luxury cars – even when they make losses for you in real terms.

The JSE has been completely flat in Rand terms for the past 5 years. The Rand has weakened by 20% this year.

What have your investments done in dollar terms over the past 5 years?

Ace Magashule, Jesse Duarte, Gwede Mantashe, and NDZ determine economic policy, so the downside is much more than the upside. I will change my mind when these people are moved from Luthuli House staight to Pollsmoor Prison.

Those betting on a SA recovery need to check those expiry dates on the beers they just drank, they seriously off. SA is a basketcase, no economy or business in the world can be productive and go forward with the electricity cut for 4 hours a day. 4thIR and we “open for busines” they say? How when theres no power?

The thing is the SA market and international markets are synchronized but when international markets go do the value of the rand drops providing protection for SA investors. Obviously if the markets go up the rand improves but like all African currencies it is biased towards downwards movements. That is the downs are more than the ups no matter what.

Risks to the upside only matter to vanilla fund managers who are benchmarked against (or chase) index returns. Most of the asset gatherers fall into this space.

Family offices, hedge funds, long term investors can afford to miss a blip if they are not risk-adjusted.

Good luck in your investing.

End of comments.



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