SA economy in V-shaped recession with W-shaped recovery

South Africa is currently in a V-shaped recession, although it is more likely that our recovery will be W-shaped.

A V-shaped economic recession starts with a sharp decline, followed by a strong, fast recovery that is generally fairly quick and describes the shape of the market’s performance. A W-shaped recession and recovery represents a double-dip.

“I have even heard the square root sign being used to describe the recession and recovery. This is all a bit academic when the recovery for most people will be L-shaped. On the other hand, does it really matter when South Africa has such deep-rooted, structural problems?” says Andrew Duvenage, managing director of NFB Private Wealth Management.

He says the JSE All Share Index reached its peak in January 2018, when it went through 61,500.

“This year’s high occurred in January, when the All Share Index reached just over 59,000. The JSE All Share Index is currently trading at 56,000, which is up from two months ago when we were at 54,000. A month ago we were only 2,000 points off the 2020 high (about 4% away). The Covid low was around 40,000 in mid-March.”

Duvenage said it was more relevant to consider how the JSE has done in real-terms and how it has done in hard currency terms, preferably against a trade-weighted basket for the rand.

“In a nutshell, it has done less well in inflation-adjusted terms and much less well in hard currency terms.”

He explains that the market was considered oversold in March and April, resulting in investors buying local equities.

“To some extent we expected the market to return to its pre-lockdown levels, but we would not have guessed that it would take just five months.”

Unfortunately this is no reason for optimism. Duvenage said the JSE was a broad-based, market capitalization index and has been dominated by tech counters such as Naspers and the mines. The ZAR price of gold has been a huge tailwind for gold miners, but domestic property, financials and South African industrial stocks are mostly still down 40-50% from their pre-Covid highs.

However, at a headline level, a higher stock market is probably good for general confidence and confidence begets more confidence, he says. According to Duvenage optimism requires a few precursors, such as:

• convictions for PPE corruption and corruption generally
• a consolidation of political power around President Cyril Ramaphosa
• a global vaccine or meaningful therapeutic treatments for Covid-19
• the withdrawal of excessive liquidity provided by almost all central banks without a temper tantrum like the last time and
• South African interest rates to stay low for longer.

What does this mean for the pockets of the man in the street?

“As long as you live, retire and die in South Africa, a stronger equity market in rand terms is good. Pension fund values will be higher and in all likelihood outpace inflation. However, is the official rate of inflation the same as the man in the street’s rate of inflation? And is the man in the street actually saving enough for retirement anyway?”

Duvenage believes if they are 10% better off on an asset base that is only 10% of what they need. The bigger issue is the amount of savings available and/or being put away regularly rather than the rate it grows at.

Duncan Artus, chief investment officer at Allan Gray agrees that the FTSE/JSE All Share Index is back to pre-pandemic levels in rand terms, with the returns driven by the large dual-listed shares, such as Naspers and Anglos, as well as the precious metal companies.

“More recently, the shares of companies that rely more on the South African economy, such as retailers and financial, have been strong. The market is very much positioned the other way, therefore this trend could continue if just some of the money flows into the domestic businesses.”

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