<\/p>\n
This interview was recorded in Afrikaans. The transcript below has been\u00a0translated into English.<\/p>\n
You can also listen to this podcast on iono.fm here.<\/p>\n
TINUS DE JAGER: Earlier I spoke with Melville du Plessis, portfolio manager at Ninety\u00a0One. Ninety\u00a0One is an investment manager with an international focus. It aims to create long-term value for clients by investing in opportunities that benefit both people and the environment.<\/p>\n
We are taking a look at developments in South Africa\u2019s financial markets, from economic sentiment to rating agencies\u2019 outlooks, interest rates, and where value opportunities lie for investments.<\/p>\n
Melville, good evening and welcome. [National] Treasury says South Africa\u2019s equity market upgraded the country even before the Fitch and Moody\u2019s decisions arrived. What lies behind this development in the market?<\/p>\n
MELVILLE DU PLESSIS: Thank you, Tinus. Indeed. We\u2019ve seen South Africa\u2019s 10-year bond yield fall to just under 8.5% recently. That\u2019s a remarkable strengthening from even the levels of above 12% that we recently saw in 2023 and early 2024.<\/p>\n
I also think what is almost more noteworthy is the difference in the yield spread between South Africa and the US, for example \u2013 in this case between the two countries\u2019 10-year yields; that has almost halved to currently under 400 basis points, from around what we saw as recently as 2024.<\/p>\n
The markets are essentially running a bit ahead of Fitch and Moody\u2019s, who both hold a positive outlook for South Africa, and who are both expected to perhaps move fairly soon.<\/p>\n
So I think it\u2019s a clear sign that, so far, the fiscal recovery story of the past few years is actually being taken seriously by the market \u2013 not just by rating analysts.<\/p>\n
Our debt-to-GDP ratio in South Africa is projected to stabilise and peak just under 80% this fiscal year. That\u2019s the first time in about 17 years that South Africa\u2019s debt levels are expected to stabilise a little.<\/p>\n
TINUS DE JAGER: What then is it that\u2019s driving this improvement? Is it a commodity cycle or, as you now say, is there something more structural at play here?<\/p>\n
MELVILLE DU PLESSIS: We hope it\u2019s a bit of both. June\u2019s figures recently showed a main budget surplus of just over R80\u00a0billion, which was better than predicted.<\/p>\n
It\u2019s very similar to the 2021\/22 period, with higher commodity prices boosting mining and resource companies\u2019 profits. But we think it can also be seen as real structural discipline.<\/p>\n
We\u2019ve seen a primary surplus for three consecutive years, and that means the government is now spending less than it collects \u2013 before interest costs, of course.<\/p>\n
So, in our opinion, it\u2019s the combination of a bit of a cyclical tailwind and a credible consolidation path that allows the market to look a little past the usual sceptical view of South Africa\u2019s fiscal figures.<\/p>\n
TINUS DE JAGER: Yes, sometimes a bit of scepticism is necessary, but you also mentioned that rating agencies are moving behind the market. Where do Moody\u2019s, S&P and Fitch stand with South Africa, and what will be needed for an upgrade rather than just a change in outlook?<\/p>\n
MELVILLE DU PLESSIS: S&P moved first and upgraded SA to two levels below investment grade, but with a positive outlook. And then Moody\u2019s of course followed in May, changing the outlook from stable to positive.<\/p>\n
I think that\u2019s remarkable, despite the Iran-driven oil crisis that we experienced, and it says something about how much weight rating companies place on the fiscal consolidation path over and above the near-term noise.<\/p>\n
So Fitch and Moody\u2019s are both expected to act, given that debt stabilisation was the main driver behind the recent decisions.<\/p>\n
The path to an actual upgrade rests on the same types of factors as those that drove the outlook changes: continued primary surpluses, a debt ratio that peaks and then declines, and expenditure control that remains stable even as commodity lumps dissipate.<\/p>\n
So the major risk is then also directly related to that. If commodity prices slump and income declines, that consolidation story might be tested a bit.<\/p>\n
TINUS DE JAGER: Melville, the Reserve Bank raised interest rates in May, but then left them unchanged in July \u2013 even with inflation still relatively the focus, if one can put it like that. How should investors interpret these decisions?<\/p>\n
MELVILLE DU PLESSIS: I think investors should look a bit past the short term. So, yes, indeed, the inflation rate in South Africa in June came in at exactly 5%, with core inflation at 4.1%. Both are above the South African Reserve Bank\u2019s new target of 3% to 3% plus or minus one percentage point on either side.<\/p>\n
The inflation was mainly due to Middle East oil price pressure that filtered through to fuel and food costs. But the Sarb [South African Reserve Bank] raised the policy rate to 7% at their scheduled meeting in May, increasing it from 6.75%, specifically to guard against second-round effects.<\/p>\n
But then in July they kept it at 7%, which caught the market a bit off guard with their commentary around it.<\/p>\n
So the real interest rate \u2013 which remains the difference between the rate and current inflation \u2013 is meaningfully positive, with inflation expectations over two years still anchored in the mid-30s.<\/p>\n
That gives the bank a little more room to play than the current inflation figure would suggest.<\/p>\n
So far basically equities support that combination \u2013 in other words, the controller expects things together with a narrower deficit potentially still keeping South African bonds continuing to perform, even while inflation currently appears uncomfortably high in the short term.<\/p>\n
We also think the rand\u2019s stability through all of this has helped with strong gold, platinum and coal prices also helping to prevent imported inflation from worsening more than it otherwise might have.<\/p>\n
TINUS DE JAGER: We stand in a massive international market, where capital markets are integrated but where local factors sometimes also play a role. How do South Africa\u2019s valuations look within this context across asset classes, and where do you see opportunities for investors at the moment?<\/p>\n
MELVILLE DU PLESSIS: We see South African assets within this context as very interesting. So South African equities as well as bonds look indeed interesting.<\/p>\n
We have the equity market trading on a price-earnings basis of under 10\u00a0times, compared to international indices trading around 18\u00a0times.<\/p>\n
So that makes South Africa, by that measure, one of the cheaper markets in the world. And we also have higher dividend yields compared to the rest of the world.<\/p>\n
We\u2019re looking at 4.5% compared to under 2% for global equities, while earnings growth is also expected to be stronger \u2013 expected to be around 26% for 2026.<\/p>\n
What\u2019s interesting is the combination of cheap \u2013 or relatively cheap \u2013 higher yields and underlying growth; that\u2019s a bit unusual.<\/p>\n
Normally people have to compromise between these three.<\/p>\n
Then if we look at cash and variable asset rates in South Africa \u2013 which are naturally a large component of the fixed-interest types of portfolios we manage, this also looks attractively priced, with both nominal and real policy rates at above-average levels if you look at the past 15 years or so.<\/p>\n
So we\u2019re looking, as previously mentioned, local bond markets still looking fairly well priced, despite the strong rally we\u2019ve seen over the past two calendar years. They might not be quite as cheap as they were two years ago, but we are still very constructive on local bonds.<\/p>\n
As mentioned, cash is also a much better starting point than it was four or five years ago, and the equity market also looks extremely interesting.<\/p>\n
So, to summarise, the South African story still looks very positive in our opinion, and indeed a good place to start building portfolios.<\/p>\n
TINUS DE JAGER: That was Melville du Plessis, portfolio manager at Ninety One.<\/p>\n
Brought to you by Ninety One.<\/p>\n
Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.<\/p>\n
#SAs #market #outdoes #rating #agencies #outlook<\/p>\n","protected":false},"excerpt":{"rendered":"
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