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Despite a historic decline in gross domestic product (GDP) for the second quarter of 2020, economists at the Bureau of Economic Research (BER) have noted an increase in the local equity market, a sign that perhaps investors they believe that the economic environment in South Africa can only improve.
“Despite the horrible impression of South Africa’s GDP, albeit largely as expected, for the second quarter of 2020 the local stock market soared last week,” the group said. “Although it is always difficult to correlate large market movements with a specific event, it is possible that investors looked at the second quarter GDP figure and thought that the environment can only improve from here.”
According to the latest Schroders Global Investor Study 2020, local investors expect an average annual total return of 12.67%, almost 2 percentage points higher than the expected global average return of 10.9%.
Between mid-February and mid-March, world stock markets fell more than 30%. During those weeks, Germany, France, the UK, and most US states closed to limit the spread of the coronavirus.
Although a rebound in the recovery had started in April, when some countries were already reopening aspects of the business, South Africa’s national lockdown only began on March 26, 2020.
Kondi Nkosi, Schroders’ country head in South Africa, said the market turmoil in early 2020 did not appear to have undermined the optimism of South African investors. Expectations of future returns are only slightly lower in 2020 than in 2019, when investors expected an average annual total return of 13.8%.
“It is extremely interesting that despite the impact of Covid-19 and all its dramatic effects on our lives and work, investors still have confidence in generating returns on their savings,” said Nkosi.
“We strongly believe that one of the prevailing future trends will be lowering long-term interest rates, and this was our view long before the pandemic. In the long term, we believe that there will be more disruptive forces at play in the markets and that, in general, it will be more difficult to find returns.
“But we have seen time and again in the years since the financial crisis that certain investments can generate returns even in challenging environments,” he said.
Cautious recovery
However, the BER economists cautioned that ongoing problems at Eskom and the paralysis of government implementation warrant some caution about the pace of recovery from the devastation in the South African economy.
Real GDP plummeted a record 51% qoq (seasonally adjusted, annualized) in the second quarter, according to Stats SA. This followed an upwardly revised quarter-on-quarter decline of 1.8% in the first quarter (from -2%).
Without annualizing the data, the real quarterly decline (seasonally adjusted) in the second quarter was still dramatic at -16.4%, the BER said. The second-quarter GDP contraction means that South Africa’s GDP level has now fallen for four consecutive quarters, further prolonging the technical recession into the second half of 2019.
Despite this, initial incoming data for the third quarter suggests some upside in the first phase of the recovery, the group said, following overall positive indications for the third quarter of the year.
“The global narrative on the dynamics of the GDP of the third quarter is turning more optimistic. Last week, both the Bank of Canada (BoC) and the European Central Bank (ECB) noted strong, and in some cases faster than expected, rebounds in high-frequency data for the third quarter, ”said the BER.
“The caveat is that, in most cases, the level of activity remains below pre-Covid, but it was always going to take time to recover from the dramatic drops in the second quarter,” he said.
Global banks distinguish between a strong initial reopening phase of recovery, followed by a probably longer recovery phase.
This narrative is in line with what economists expected from SA, namely a fairly robust, albeit highly incomplete, rebound in the third quarter, followed by long work back to the (depressed) pre-Covid level of GDP.
“Several factors, including major pre-Covid vulnerabilities, mean that SA may lag behind in global recovery,” the BER said. “On a positive note, data released last week suggests that even in South Africa, the ‘reopening’ quarter (Q3) could be much stronger than initially thought.”
According to Schroders, the prevailing optimism indicates that investors are looking beyond the GDP data.
“You could say that some of these expectations are unrealistic, but you could also say that perhaps investors are realizing that stock market returns are not the same as economic growth,” Nkosi said.
Read: Explaining 51% of South Africa’s GDP, and a ‘swoosh’ recovery
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