IN-DEPTH: A financial survival guide for 2018

Brace yourself for a tough 2018 characterised by higher taxes, interest rates, petrol and electricity prices, low growth, further credit rating downgrades, and a difficult job market – regardless of who is the ANC’s next president. 

On the upside, the local economy will receive support from strong global growth and low interest rates in the US, Europe, Japan and China; which contributes to the “risk-on” investor appetite for equities and emerging-market assets that has been providing support to the rand and local bond and equity markets, economists and fund managers tell finweek.

In addition, South Africa is benefitting from a recovery in commodity prices and the agricultural sector, which can expect above-average rainfall next year.

While local investors are likely to benefit from a continued rally in equity markets, from a consumer perspective “it’s going to be a multi-year difficult economy”, warns Warren Ingram, executive director at Galileo Capital.

“This may be as good as it gets for the next year or two economically.” 

Moody’s is predicting a marginal improvement in economic growth from the expected 0.7% in 2017 to 1.2% next year and 1.7% in 2019, but growth will remain negative on a per capita basis.

SA will also continue to significantly underperform global growth (3.2% in 2018; 3.1% in 2019) and emerging-market growth (5.4% in 2018; 5.3% in 2019, according to Moody’s).  

“In such a situation, sticking to the basics makes all the sense in the world. You need to be very aggressively paying down your debts, especially your shorter-term, more expensive debt like credit cards and personal loans.

And you need to be planning for real shocks to come through the system, like a rise in the oil price and a weakening rand, that will just deliver additional pain to consumers,” Ingram advises.  

“Plan to live on 20% to 30% less money than what you’re earning, and use that to aggressively get yourself debt-free, if at all possible.

Certainly don’t embrace new debt with the view that maybe in 12 months’ time you’ll find a way to repay it – that would be a huge mistake.” 

Jason Muscat, senior industry analyst at FNB, agrees. “The best thing to do is to continue not buying goods unnecessarily. And hang on to your job – that’s probably the best advice I could give anybody. Regardless of how skilled you are, it is going to be very difficult to find work.” 

The key developments in the coming months that are expected to have a significant impact on the local economy include:

• The ANC’s elective conference, where the party’s new leadership will be elected;

• The president’s State of the Nation address in early February, for signals around economic policy, particularly around the planned nuclear build programme and government support to state-owned enterprises (SOEs);

• The National Budget in late February, where finance minister Malusi Gigaba will need to explain how he plans to plug a R50.8bn revenue shortfall. Clarity should also be given around the civil service wage bill, tax hikes, possible expenditure cuts and the outlook on government debt and guarantees to SOEs; and

• A credit rating decision by Moody’s shortly after the National Budget, with the market expecting a downgrade. This would leave SA’s local currency debt at sub-investment grade and lead to its removal from Citigroup’s World Government Bond Index, which is expected to trigger outflows of $10bn.

Global risks 

Any developments upsetting the global growth apple cart could also have a significant impact on SA, the experts warn. Key risks include: 

• Rising geopolitical tensions, particularly concerning the US and North Korea;

• A correction or crash in US equity markets;

• Debt levels and economic growth in China;

• The pace by which major central banks raise interest rates and tighten monetary policy (so-called QExit); and

• Political risk in Europe and Brexit. 

Where to invest in 2018 

So how should investors position themselves for all these likely outcomes? 

For now, global growth seems to be “sufficiently self-reinforcing”, says Hannes van den Berg, portfolio manager at Investec Asset Management.

“There’s a good backdrop growth-wise, inflation is still low, interest rates are still accommodative; there is positive global economic momentum at this stage. That should enable solid revenue and profit growth for companies.”

Galileo Capital’s Ingram says “a good dose of common sense” is needed: given the high valuations of US equity markets, for example, it wouldn’t make sense to have all your eggs in the US market.

“People who like index investing should consider reducing their exposure to the US markets and increase exposure to the better-value markets around Europe, and potentially some of the emerging markets as well,” he says.

South Africans should have at least 25% of their assets invested outside the country, and an exchange rate of around R13.50 against the dollar in 2018 is a good level to consider sending money out, he advises.

Be careful of some of the “overhyped” sectors like technology stocks, and rather look at some of the more unloved, old-fashioned industrial sectors, he says.

“I think either do your stock-picking very carefully and maybe consider using value managers in the year ahead, because I think they will deliver returns for investors. Or if you're going to do passive investing, avoid the overexposed expensive sectors,” Ingram says.

Delphine Govender, chief investment officer and co-founder of Perpetua Investment Managers, also believes there are a number of unloved stocks that offer great potential.

Instead of trying to predict macro outcomes, Perpetua is trying to find opportunities at stock-specific levels, “where the business is still going to exist irrespective of who the president is going to be.

And you can currently buy some sound businesses at pretty attractive prices, because the near-term visibility is poor,” says Govender.

The search for value

In recent years, the winning trade has been non-resource, large-cap industrial rand-hedge stocks – like Naspers*, Richemont and British American Tobacco (BAT).

“I would say you’ve done phenomenally well from this trade, to the extent where I’m concerned that the market is not more worried that they should not be taking more profit. I would not be putting more money into that trade,” says Govender.

“I would be using the opportunity to take profit and switch into solid companies that have instead underperformed because the stability of their earnings stream has deteriorated for several reasons, whether consumers are under pressure; whether they were potentially high-growth and overvalued and they’ve become ex-growth, but they are still solid businesses.”

The “relatively decent quality mid-cap stocks” that have underperformed and may now be oversold include the likes of Life Healthcare, Sun International, Telkom, Famous Brands, Brait, Oceana and Pioneer Foods, she says.

“Perhaps the growth didn’t come through quite as expected, or there was self-inflicted pain like Woolworths who went out to buy assets at the top of the market, but the businesses are fundamentally intact. The recovery is just taking a bit longer.

But those shares are down 30%, 40%, 50% in a year. We are finding opportunities in quite a few unrecognised or previously darling stocks,” says Govender. “We like to find growth stocks that have lost their lustre – fallen angels we call them.”

Woolies, for example, will still be around with a decent food and clothing market share irrespective of who wins in December. “You can now buy it at R58 and there are few buyers; yet about two years ago the whole market was obsessed with it at about R100,” she says.  

Globally, Perpetua applies the same investing principles, and has invested in fashion retailer Michael Kors, branded jewellery group Pandora and biopharmaceutical group Gilead Sciences, Govender says. 

Politics and profits 

Market commentators have cautioned that the outlook for 2019 will hinge to a large extent on the outcome of the ANC elective conference, and whether the new leaders can implement quick reforms and a turnaround in the local economy.

While the change in leadership may have significant market implications in the first and second quarter, the reality is that it would be difficult to implement significant market-friendly reforms in a short space of time, particularly in the run-up to the 2018 elections, various commentators tells finweek.

“I won’t be surprised if our rand is more or less at the same level where it is now 12 to 18 months from now, because our local economy, our currency, our interest rates and commodity prices we have exposure to, are driven by what happens globally,” Investec Asset Management’s Van den Berg says.

“There’s an old saying that you shouldn’t manage money on politics – that it’s just noise in the short term; you should always be conscious of and take into account what’s happening globally. The global environment is constructive, and that should be good for equity markets in general,” he says.