Should pension fund trustees be factoring in a (marginally) sunnier prognosis in South Africa?

It’s a question that has arisen in recent days, after a number of economists upgraded their hopes for the stuttering local economy. To put some perspective on this, any upgrade would be off the absolutely basement — the blistering levels of loadshedding earlier in the year meant that many economists had pencilled in just 0.1% GDP growth for South Africa this year.

In recent weeks, however, the International Monetary Fund (IMF) has marginally hiked its GDP growth expectations for South Africa from 0.1% in April to 0.3% in July. While that is a reflection of the Eskom-induced blackouts, the IMF said its projections had been raised “on account of resilience in services activity in the first quarter.”

This echoed the more optimistic note struck by the SA Reserve Bank too in July, which upgraded its GDP growth forecasts to 0.4% this year. “South Africa’s economic conditions appear to have improved,” the bank said, although governor Lesetja Kganyago warned that more interest rate hikes might yet come. “Have interest rates peaked? The answer is a resounding no,” he said. “Is this the end of the hiking cycle? No, it is not. It depends on the data and risks.”

Nonetheless, asset managers appear to have internalised the view that the economy isn’t as fragile as it first appeared earlier this year.

The most recent fund manager survey by Bank of America Global Research, released late August, showed some sprinklings of faith in the local stock market, even if this fell short of a wholesale resurgence of optimism.

Critically, nearly 35% of the 17 asset managers surveyed between August 4th and 10th said they planned to “maintain existing equity positions”, compared to just over 20% a month before. This reflects a greater optimism in the South African stock market, a finding underscored by the finding that fewer asset managers are now sellers of local shares.

Asked “are you bullish or bearish on South African equities” when assessed over a 12-month time frame, the number of optimists (35%) had nearly doubled over a month. Equally, 65% describing the JSE as “undervalued”.

That’s something of a surprise, given that none of the money managers seems to have much faith in President Cyril Ramaphosa’s government implementing any of the much-needed changes to haul the economy back onto the right track. Economic reforms were seen as moving “at the same snail pace” as before, with managers saying South Africa has “a major problem” on this front — poor skills outcomes, wage rigidity, government intervention and service delivery failure are still weighing on the country.

In part, this is why nobody is expecting a rapid recovery. But the upside is, the marginal optimism evident in the IMF view, and that of the SA Reserve Bank, has seeped through. Of the 17 asset managers surveyed, 65% said they either expected the economy to get a “little stronger” or “stay the same”.

Which, at least, is something. And this has implications for asset allocations which need to be taken by pension fund trustees too.

Perhaps most conspicuously, 65% of the asset managers surveyed said they are “underweight” on offshore investments. This overseas allocation is now at 32% of total assets which, the researchers say, is “well-off the regulatory limit [of] 45%”.

This narrative in support of local stocks, weak though it may be, tends to underscore the views of Standard Bank CEO Sim Tshabalala, who said earlier this year that South Africans tend to discount the surprising resilience of companies and workers.

Having battled the elements — the failure of state-owned firms, immense unemployment, and high inflation — for over a decade, local institutions are surprisingly strong. “Of course the load-shedding has caused huge stress in our environment, but we see the numbers from our clients, and it’s less than you’d imagine,” he said.

Tshabalala was speaking before the big power squeeze in the middle of the year. But the fact that firms have come through that, with some even managing to pump out some pretty impressive profits into the bargain, suggests the resilience narrative isn’t wide of the mark. And it’s probably not a coincidence that “resilience” is a word cited by the IMF in its decision to upgrade South Africa’s prospects.