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Stephán Engelbrecht is the lead portfolio manager of Anchor's SA-focused suite of hedge funds and heads up the SA equity research process.
2020 was an extremely difficult year for economies around the world and for the South African (SA) economy, which was already in a recession before the Covid-19 pandemic. Globally, almost all economies (except for China) will have experienced a decline in GDP growth last year.
Fortunately, monetary authorities acted swiftly across the globe, cutting interest rates aggressively and, in more developed markets, central banks restarted quantitative easing by buying financial assets on the open markets.
Governments have also stepped up and, where possible, increased the social net by announcing various fiscal spending projects and income-protection schemes.
As such, equity markets (which are usually forward-looking), had a far better year than the various countries’ underlying economies, with the FTSE/JSE Cap SWIX Index ending the year with a 0.6% rand return and other major global markets performing even better.
The challenge for global investors is to balance the potential earnings recovery that we expect to happen in 2021 with the lofty valuations at which some assets are trading.
However, to a large extent, SA equities and other local asset classes do not have this concern of high valuations. In fact, forward-looking valuation metrics for the local market are still at below our longer-term average. So, with this in mind here are a few domestic sectors we believe will perform well in 2021.
Construction
A new economic blueprint for SA, the Economic Reconstruction and Recovery Plan, was unveiled by President Cyril Ramaphosa in October 2020. Although this plan did not provide any new ideas to grow the economy, we believe that it may be far more successful than its predecessors as it did not give a wish list of grand ideas, but instead prioritised certain projects and, as far as possible, gave measurable outputs that must be achieved.
And infrastructure investment is priority number one of the government’s new plan.
Infrastructure investment is an exceptionally good path to pull an economy out of a slump. Not only is it labour intensive, which will assist in reducing the unemployment rate, but it should also facilitate future economic growth. The proviso is that the investment is made into projects which the economy needs to grow. We can all probably agree that soccer stadiums did not meet that proviso.
But can the government implement all these ambitious projects?
Speaking to industry participants, the feedback is encouraging. On a conference call with bankers preparing the documentation for Renewable Energy Bid Window 5 (which will be larger than all previous bid windows combined), they were very complimentary about government’s willingness to engage with the private sector and turning from the driver of these projects to the enabler.
On another call with the management of listed construction company, Raubex, we noted that they were optimistic that scheduled projects will indeed come to realisation. Raubex’s management confirmed the improved engagements between the government and the private sector, noting that contracts are finally being awarded by most of the government agencies with which they engage. Recently, Raubex announced that Sanral has awarded it two multi-billion-rand contracts.
It is still early days, and much can still happen to upset the apple cart, but if this investment drive comes to fruition it can be a real boon for the SA economy and, particularly, the local construction sector.
Discretionary retail
The Covid-19 pandemic and the various government instituted lockdowns had harsh consequences for discretionary retailers. Not only were SA consumers severely affected by the economic slump, but some retailers were not allowed to trade for long periods. We commend the management teams of the SA retailers as they have managed an exceptionally difficult set of circumstances far better than we, and the market, had anticipated.
Hopefully, 2021 will be kinder to them, which should, combined with the surprising resilience of the SA consumer and the low base effect, provide retailers with the ability to report much improved earnings numbers. Many local retailers were also opportunistic and made some value-accretive acquisitions during tough times, which should aid their earnings growth even more in 2021.
Private education
We believe the closure of schools and the resulting challenges of home-schooling have increased the desirability of private education and smaller class sizes. Although we agree that the SA consumer is under pressure, we are also of the view that a good education has become even more important as the pandemic highlighted (and hastened) the fourth industrial revolution.
The listed education providers may not have the same pricing power as they had in the past and bad debts may be a concern over the short term, but in our view the demand for their product will increase, which should bode well for utilisation rates and a strong earnings recovery.
Resources
The resource sector was the star performer of 2020, as accommodative monetary policy and a depreciating US dollar increased the attractiveness of precious metals and commodity counters as investment destinations. Despite this, we expect that the stars are aligning to make 2021 an even better year for the sector. Our preference is for iron ore and platinum group metal miners, but in the current macro-economic climate, most commodities should benefit.
Stephán Engelbrecht is the lead portfolio manager of Anchor's SA-focused suite of hedge funds and heads up the SA equity research process.
