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corospondent
The Personal Investments Quarterly
SUMMER EDITION
JANUARY 2021
TRUST IS EARNED™ 1
IN THIS ISSUE
C O R O NAT I O N F U N D U P DAT E S
03 17 AND PERFORMANCE
Notes from my inbox Investment analysis
A revival in the life 27 37
05 insurance sector Market review Strategic Income
Insights
The biggest risk is 20 29 40
taking none Bond outlook Key performance Global Equity Select
Deteriorating local fiscal indicators Global Managed
07 dynamics remain a Global Capital Plus
Economic comment
concern
30
Global outlook Balanced Plus 43
24 Equity Optimum Growth
11 Investment analysis Global Emerging
Economic comment
US home improvement
retailers
32 Markets
South African outlook Capital Plus
Balanced Defensive 48
Flagship fund range
34
Market Plus 52
Top 20 Long-term investment
track record
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The value of units may go down as well as up, and is therefore not guaranteed. Past performance is not necessarily an indication of future performance. Unit trusts
are allowed to engage in scrip lending and borrowing. Performance is calculated by Coronation for a lump sum investment with income distributions reinvested.
All underlying price and distribution data is sourced from Morningstar. Performance figures are quoted after the deduction of all costs (including manager fees and
trading costs) incurred within the fund. Note that individual investor performance may differ as a result of the actual investment date, the date of reinvestment of
distributions and dividend withholding tax, where applicable. Annualised performance figures represent the geometric average return earned by the fund over the
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and any gain or loss made on any particular instrument, in most cases the return will merely have the effect of increasing or decreasing the daily yield, but in the case
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Notes from my inbox
“Uncertainty is the only certainty there is. Knowing how to live with insecurity is
the only security.” – Mathematician John Allen Paulos
By P I E T E R K O E K E M O E R
Pieter is Head of HUMAN BEINGS ABHOR uncertainty. In a recent dopamine-rich part of the mid-brain and as a result
Personal Investments
study, subjects played a computer game where is often referred to as the brain’s reward centre. While
they received an electric shock if they overturned dopamine is proven to cause pleasurable sensations,
a rock with a snake underneath. The researchers it is also a precursor to adrenaline, which in turn
varied the probability of encountering the exists to provide us temporarily with more clarity
unpleasant outcome when overturning a specific and energy to deal with life-or-death situations.
rock over time, making it alternately easier or The striatum effectively anticipates good and bad
harder to predict where the snakes are. They found outcomes and creates most stress if the outcome is
that stress levels peaked when the sequence was highly uncertain, when a quick response is most likely
random and the player just did not know what to make a difference to the likelihood of survival.
was coming next, which they equated to irreduc-
ible uncertainty. Study participants were much Unfortunately, this system becomes unhelpful if it
more agitated when they did not know what was is constantly triggered by stressors that are not life
coming than when the level of shocks incurred was threatening and it can certainly impede successful
higher, but more predictable. investment decision-making. As portfolio manager
Neville Chester points out on page 5, the response
This outcome has a lot to do with how we are of many investors to the Covid-19 market shock in
wired. The striatum, an ancient part of the brain, February and March last year was to de-risk their
combines two core functions. It is responsible investment portfolios and move to cash. Given the
for taking action, as it controls movement and strength of the subsequent market recovery, this was
other aspects of cognition. It is also linked to a not a useful reaction.
TRUST IS EARNED™ 3
The magnitude of market movements over 2020 is more conventional administration in the US means
illustrated by the performance of Top 20, our concen- more global alignment in fighting climate change
trated equity fund. By mid-March, when the scale of and a move away from the trade war rhetoric of
the pandemic became clear and a few days before the Trump era. The work-from-anywhere lessons we
the first hard lockdown was announced, the value learnt last year widen the gap between businesses
of the fund declined by a third (measured from the that successfully embrace technology and those
start of 2020). Since then, its unit price increased that do not. All these trends create an environment
by 68%, for a total return at the time of writing in which good stock-picking and portfolio construc-
of 13.2% over the last 12 months. An investor who tion can add significant value.
divested in late March would have missed the subse-
quent recovery, and given the very low (albeit more There may even be better news on the vaccine front
certain) cash returns, would still be nursing a loss of soon. While we currently only have vaccine supply
around 30%. for a fraction of the population, this situation may
change more quickly than generally expected.
Craving certainty is a fool’s errand when you are Most developed countries placed multiple advance
dealing with the future, which is by definition orders for enough doses to cover two to four times
uncertain. Academic literature defines the excess their population. Some of this excess will even-
return expected from equity markets as a risk tually become available to the stragglers, espe-
premium, basically a reward for embracing and cially as more vaccine candidates are proven to
managing uncertainty. work. In addition, if the Johnson & Johnson vaccine
proves to be efficacious, this may also help to accel-
A NEW YEAR, NEW RISKS AND OPPORTUNITIES erate domestic supply. Aspen has the contract and
At the start of 2021, there is, as always, much uncer- capacity to annually manufacture 300 million doses
tainty to stress about. The state of the local economy of this vaccine in Port Elizabeth. It is possible to
is still precarious, and government as yet has no imagine that some of this may become available
clear path to fiscal sustainability. The pandemic locally later this year.
caused inequality to widen further, with job losses
falling more severely on low-paid, often young ALSO IN THIS EDITION
and female, employees in industries such as hospi- Marie Antelme provides a comprehensive review
tality and tourism. Higher taxes on asset owners of the global and economic data and shares our
and companies will be one likely result. Supported macro outlook for 2021. Nicholas Stein provides
by unprecedented levels of fiscal and monetary some colour on how undemanding valuations
support, many equity markets around the world are have become in the local equity market and
trading at record highs. At some point the income sets out the investment case for life insurers and,
support programmes and central bank balance specifically, Momentum Metropolitan Holdings.
sheet expansion will stop, with unclear conse- Home improvement retailers were one of the bene-
quences for markets. Pundits, especially in the US, ficiaries of people spending more time at home.
are debating whether we are in bubble territory or Danie Pretorius sets out the investment case
not. Over time, inflation may make an unwelcome for Home Depot and Lowe’s Companies, the US
return. Locally, vaccine procurement and roll-out market leaders in this sector. We also include Nishan
have not been handled well initially, rendering Maharaj’s regular bond market update, as well as
South Africa one of the worst-supplied countries in detailed fund commentaries from our portfolio
the world, which will delay the exit from pandemic- management team.
related social and economic constraints.
After two consecutive years where investors were
Yet, there are also reasons to be positive. The local rewarded for taking risk, we hope that it becomes a
economic problems are well known and reflected in little easier for our clients to deal with the inevitable
asset valuations. South African government bonds uncertainty that comes with long-term investing.
pay the highest real yield available in the world’s We remain focused on the task of managing uncer-
investable bond markets. Local equity valuations tainty on your behalf, by making sensible security
are very undemanding on an already severely selection and asset allocation decisions in our
depressed earnings base. A small change in investor portfolios. As always, I invite you to contact us via
confidence can lead to significant gains from current clientservice@coronation.com if any aspect of our
levels. Over the longer term, investors can protect delivery to you is unsatisfactory.
themselves against pockets of overvaluation and
inflation by investing in sensibly diversified port- Take care.
folios built from the bottom up, based on the indi-
vidual investment cases from assets sourced from
around the globe. While inequality has increased, a
4 COROSPONDENT
INSIGHTS
The biggest risk is
taking none
Are long-term investors positioned for the future?
By N E V I L L E C H E S T E R
THE SARB’s Covid-19 Money market Current equity Risk assets are
policy response has and income funds valuations trump better positioned to
QUICK shifted the outlook for have lost their history in a low-interest achieve long-term
TAKE asset classes shine environment growth
CASH, AS THE OLD saying goes, is king. And in a could have achieved a return ahead of the official
local equity market where we have had a paucity inflation rate.
of returns, cash and cash-plus funds have certainly
been reigning, both in terms of returns and inflows. The various cash-plus and income funds could then
South Africa, one of the last few countries that has use some duration and opportune credit selection
a truly independent central bank, has maintained, to add an additional 0.5% to 1.0% over and above
Neville is a senior up until now, positive real interest rates. The South this. For the five years up until the end of 2020, the
portfolio manager with
24 years of investment
African Reserve Bank (SARB) believed that, due to average money market fund returned 7.1%, the
experience. South Africa’s loose fiscal policy, it needed to offset average cash-plus fund 8.0% and tactical income
this by running a very tight monetary policy. This funds 7.5%. This compares to an average domestic
has meant that, on a pre-tax basis, cash investors equity fund return of 3.2% over the equivalent period
and 4.4% for the average high-equity balanced fund.
Figure 1
CUMULATIVE FLOWS OF FIXED INCOME AND MULTI-ASSET FUNDS Given the lower risk profile and lower volatility of
R billion returns, it is no wonder that money market and
300
income funds have attracted the lion’s share of flows.
250 For the past five years, R252 billion has flowed into
200 these funds, while equity funds and multi-asset funds
150 with exposure to growth assets have experienced
100 outflows of R150 billion (see Figure 1). What has been
50 surprising, however, is how this trend has continued
0 in 2020, even though the forward-looking opportu-
-50 nities are now very different.
-100
-150
LOWER EXPECTED RETURNS
-200
A money market fund return profile is very different
2016 2017 2018 2019 2020 from that of an equity fund. Where the return for
Fixed income funds Multi-asset and equity funds equities can never be guaranteed and upside in
Sources: Morningstar, Coronation any given year is effectively unlimited, in a money
TRUST IS EARNED™ 5
market fund you have a very good idea of what term money at a cheaper rate than the South
you are going to earn over the next 12 months. African government is able to, meaning the funds
On the day you invest you can easily obtain the can actually earn a negative spread over the
12-month yield, and, barring any surprise interest risk-free rate for lending to a quality company.
rate moves, that is exactly what you’ll earn. Further,
as policy rates are adjusted by only 0.25%-0.5% WHERE TO FROM HERE?
at a time, potential interest rate moves are also This leads to the debate as to what the alternatives
unlikely to result in a significantly different return. for investors are. In 2020, despite the immense
And, given the low duration in money market and impact of the lockdown on the economy, South
income funds, a decline in rates triggers little to African equities managed to return 7.0% for the
no capital gains. year and proved once again how difficult it is to
time equity markets based on macroeconomic
Today, given the poor state of the local economy, factors. And, this was despite the fact that many
the potential return from money market funds and South African companies saw their share prices
income funds is significantly different from those declining significantly (the more South African-
achieved historically. In 2020, the SARB aggres- biased FTSE/JSE Capped Shareholder Weighted
sively cut interest rates to their lowest levels in 50 All Share Index was up only 0.6%).
years. And with rolling lockdowns continuing to
weigh on the economy, rates are unlikely to increase Over the next several years, given the very cheap
in the short term. The SARB has felt comfortable relative levels of the market, we expect equity
cutting rates given that official inflation is solidly markets to continue to deliver solid returns. While
positioned in the Bank’s target range of 3%-6% and there is never guaranteed certainty in equity
they have more confidence in the fiscal prudence market returns, the balance of probabilities is
of the current government (see Figure 2). firmly in favour of equities being able to beat the
return that a money market fund is going to be
This has all been good news for borrowers, but, of able to achieve in the foreseeable future.
course, very bad news for savers. With the Johannes-
burg Interbank Average Rate offering a yield of Similarly, a multi-asset fund that can allocate
3.6% at the moment, the average money market between equities, longer dated bonds, property
fund is going to struggle to offer investors a mean- and alternative assets, all of which offer meaning-
ingful return. This yield is at or below official ful return prospects, stands a far better chance of
inflation (which tends to be below actual inflation), delivering a much more meaningful return than a
meaning that real returns will also be far worse than money market fund.
they have been over the past five years.
In behavioural finance, it is a well-known fact that
A further challenge to income funds being able investors tend to allocate money to funds that
to return a yield ahead of this rate is the fact that have performed well, and away from those that
credit spreads for good quality corporates have have underperformed, even though there are very
tightened significantly over the past few years. In strong rational reasons for why they should be
fact, today a good quality corporate can borrow doing the exact opposite. Today there is a clear
inflection point, and we know, with a high degree
Figure 2
of certainty, that the potential returns from money
SOUTH AFRICAN INFLATION VERSUS INTEREST RATES
market and income funds will be significantly
% lower than those achieved for the last decade.
14
12 At the same time, over the same period, equity
10
markets have derated to the point where the divi-
dend yields alone of most domestic equities are in
8
excess of money market rates, and there is potential
6 for capital appreciation over and above that.
4
For any investor with a long-term investment
2
horizon, allocating funds to the safety of cash
0 is likely to be locking in significant underperfor-
-2 mance relative to equity and multi-asset alter-
natives. The implications of taxation, with capi-
Jan 06
Jan 08
Jan 10
Jan 12
Jan 14
Jan 16
Jan 18
Jan 20
Jan 00
Jan 02
Jan 04
tal gains and dividends taxed at a lower effective
Real repo rate, % Repo, % CPI, % year on year rate than interest income, will only further increase
Sources: Statistics South Africa, South African Reserve Bank this differential. +
6 COROSPONDENT
ECONOMIC COMMENT
Global outlook
Post-pandemic recovery in the balance of vaccines and
a return of confidence
By M A R I E A N T E L M E
THE Good prospects of Vaccines and Fiscal and monetary policy Emerging markets
an H2-21 recovery in confidence will interventions should with pre-pandemic
QUICK global markets despite determine the support economic activity debt burdens will lag
TAKE second lockdowns degree of recovery and restore confidence in recovery
Covid-19 (and the subsequent lockdowns) is the coming to an end, the economic impact may be
most severe exogenous shock to the global economy exaggerated until further support is felt. Despite
in modern history. More akin to a natural disaster this, the prospects for recovery in H2-21 are still
or war than a financial crisis, the supply shock good. Not only is there positive news of a widening
the pandemic imposed on the global economy availability of prioritised vaccines, but the nature
stunned a healthy system into the deepest recession of the crisis, which has seen little financial sector
Marie is an in 70 years. Containment policies, which neces- damage and relatively targeted income and
economist with sarily restricted mobility, were largely to blame employment protection, bodes well for a growth
20 years’ experience
in financial markets.
for the massive loss of output in the first half of recovery in the year ahead. That said, the strength
2020 (H1-20). But unprecedented, broad-based of the recovery will depend on how the balance of
and aggressive policy responses across the globe forces evolves.
were able to cushion the impact of the pandemic
on incomes, financial systems and governments’ Most analysts expect the global economy to see
ability to intervene, assisting in a sharp recovery 2021 growth off a shattered base. However, there is
in the second half of 2020 (H2-20). Given these quite a range of opinion as to how strong and fast
events, the global economy managed to achieve the recovery to pre-pandemic GDP levels, and the
a remarkable, if uneven, recovery during late-2020. trajectory, will be. Two key factors will determine
the strength of the recovery – first, the speed with
The pandemic’s second wave has prompted which effective vaccines are deployed, and second,
renewed lockdowns in Europe, Japan, the UK and the degree to which the impact of breaking the link
the US, as well as in many emerging markets, and between containment and mobility sees a return
will stall some of this recovery momentum into the of confidence to economies that were in relatively
new year. With many earlier relief programmes good shape before the crisis hit.
TRUST IS EARNED™ 7
1) The prospects of a widely available vaccine with commitment by producers to help, there
in 2021 have improved, and many countries should be incremental and accelerating rollout
are already implementing administration globally this year.
programmes. While there is still some friction
between the speed with which vaccines can be 2) The size and nature of policy response to the
produced and how widely and quickly they are pandemic in 2020 were remarkable, and facil-
accepted and can be administered, it seems itated a sharp recovery in H2-2020. Income-
sensible that vaccines that offer protection at targeted policies of a scale not seen before
low risk will be popular. The availability of such accounted for the bulk of fiscal interventions,
vaccines in emerging markets will probably which the IMF estimates added nearly four
take longer than in advanced economies, but percentage points (ppts) to global growth
in 2020. This may become less supportive as
some emergency programmes roll off, and in
economies – largely emerging markets – where
Figure 1 fiscal space is more constrained.
GLOBAL REAL GDP; EMERGING AND DEVELOPED MARKETS
However, there is clear debate globally about
%
140
the need to avoid a ‘fiscal cliff’ prompted by
the premature withdrawal of policy support.
The recently approved US expenditure
130 package is indicative of a change in thinking.
The early withdrawal of fiscal support after
120 the 2008/2009 Global Financial Crisis (GFC)
undoubtedly slowed the economic recovery.
Governments are less likely to enforce the
110
same degree of consolidation in 2021, although
capacity to sustain expansions varies greatly
100 by country, again, with visible constraints in
emerging markets.
90
2019 2020 2021 2022 2023 2024 2025 2025
CENTRAL BANK POLICY AND ACTION ARE
KEY DRIVERS TO RESTORE CONFIDENCE
World Developed markets Emerging markets Asia Emerging Europe
Fiscal support is being underwritten by mone-
Latin America Middle East Sub-Saharan Africa Neutral
tary policies. Central banks in most developed
Source: IMF economies cut policy rates and deployed their
balance sheets in stunning size to support fiscal
sustainability during 2020. Utilising uncon-
ventional policies initiated in the wake of the
Figure 2 financial crisis, developed market central banks
GLOBAL FISCAL POLICY TRACKER (GOVERNMENT DEBT TO GDP) were able to ensure ongoing market liquidity to
fund fiscal policies and ensure overall borrowing
%
costs remain exceptionally low. Some emerging
150
market central banks followed, employing quan-
titative easing strategies and credit policies
140
to limit the impact of lockdowns on financial
130
markets and the spillovers to the real economy.
120
Available data suggest the combined quantita-
tive easing and credit policies of the G4 (Brazil,
110
India, Germany and Japan) central banks
added $8 trillion to their balance sheets in 2020,
100
boosting the size of these by 20ppts – compared
to 7ppts in the aftermath of the GFC. As the
90
recovery stalled in late 2020, the large central
2019 2020 2021 2022 2023 2024 2025 banks have committed to ongoing monetary
accommodation, which should provide support
Developed markets Emerging markets Asia Emerging Europe
for fiscal policies in developed economies, as
Latin America Middle East Sub-Saharan Africa
well as emerging markets, as investors seek yield
Source: UBS/IMF in a low-yield world.
8 COROSPONDENT
Figure 3
general sentiment. All the factors discussed
CENTRAL BANK ASSETS, % GDP
above provide the basis for a growth recovery
% of some strength in 2021. But, critical to the
70 140 economic recovery prospects for this year will
be the degree to which these interventions
60 120
combine to restore consumer and business
50 100 confidence. For the recovery to be complete –
for global GDP to return to pre-pandemic levels
40 80 – employment and investment need to recover
to the same degree.
30 60
LINGERING EFFECTS
20 40
One area where recovery will undoubtedly lag
10 20 is the services sector, notably travel and tourism,
but also parts of retail and business services.
0 0
With inter-regional mobility constrained in most
Mar 06 Mar 08 Mar 10 Mar 12 Mar 14 Mar 16 Mar 18 Mar 20
parts of the world until a vaccine is widely and
European Central Bank US Federal Reserve Board Bank of Japan (RHS) compellingly implemented, a full employment
Source: Haver recovery in these critical sectors is unlikely. Cross-
border restrictions are also likely to continue
even as vaccines are rolled out.
Figure 4
US BUSINESS AND CONSUMER CONFIDENCE The labour market may be ‘scarred’ for some
% time. A slow recovery will undermine the pace
160 110 of employment growth, and long periods of
under-employment tend to be reinforcing. That
140
105 said, the impact on incomes and domestic
120
demand is less negative. Data from the US and
Europe (and South Africa) suggest that a large
100
100 proportion of job losses have been in lower-
income occupations (mostly in the services
80 95 sectors). Fewer high-income jobs have been lost
(unlike during the GFC) and ongoing income
60
90 support for these households should cushion the
40 economic impact of employment loss for some
time. Importantly, savings rates have surged,
85
20 presenting a large potential source of demand
Mar 10 Sep 11 Mar 13 Sep 14 Mar 16 Sep 17 Mar 19 Sep 20
on recovery.
US Conference Board CCI US Small Business Optimism Index (RHS)
Source: Haver
DEBT WEIGHS ON EMERGING MARKETS
It isn’t clear cut how emerging markets will fare
in the year ahead, as large imbalances have
EASING OF GEOPOLITICAL TENSIONS been exposed and have worsened during the
Geopolitical uncertainty should also diminish crisis, with striking intra-country variance.
in the year ahead, creating a more construc- There are good prospects for growth to recover,
tive political narrative. The transition to a new, even if at a lag, as vaccines become effective.
more conciliatory and cooperative US admini- Global tailwinds will also provide an important
stration should ease the tension brought on boost to emerging markets. However, fiscal
by the uncertainty of the past four years, help fault lines may become more fragile in the
reduce aggravated trade risks and see tradi- year ahead. Many emerging markets entered
tional allegiances strengthened, rather than the crisis with persistent deficits, already-
weakened. The conclusion of a Brexit deal large stocks of debt and limited fiscal head-
eliminates the risk of a ‘hard’ no-deal, even room to support an economic recovery. Neces-
if the economic cost to the UK of full with- sary fiscal provision and revenue losses have
drawal is likely to linger. Overall, however, pushed these economies into uncertain fiscal
this should be positive for global trade and positions, with doubtful sustainability.
TRUST IS EARNED™ 9
Figure 5 However, some emerging markets will have to
consolidate last year’s fiscal largesse, and this
MAJOR EMERGING MARKET DEBT (% GDP)
may be an offsetting drag on growth, possibly
%
reinforcing areas of fiscal and political instability.
100
90 RECOVERY MARKERS
Consensus seems to lie in a cautious recovery
80
outlook, with an incomplete recovery as the base-
70 line for 2021. On balance, we are more positive
about the prospects for a close-to-full global
60
recovery in 2021, notwithstanding the plethora
50 of tightening lockdowns currently under way.
40
Ultimately, what will drive ‘completion’ is a suffi-
30
cient recovery in business and consumer confidence
20 based largely on credible fiscal and monetary
policy support to propel new investment and
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020e
2021e
2022e re-employment. Here we see advanced economies,
South Africa India Brazil Mexico Emerging markets Asia and China, as being best able to capitalise on the
Emerging markets Europe, the Middle East and Africa Emerging markets ex China current levels of policy support, for longer.
Source: UBS
INFLATION SURPRISES ARE NOT FAR-FETCHED
While the G20 has recognised the dire It is also worth highlighting that, while there is
position of many emerging markets and clearly some debate about the strength of a global
implemented the Debt Service Suspension recovery this year, there is less debate about the
Initiative (DSSI) for 73 qualifying countries risk of higher inflation. If GDP fails to recover to
(the DSSI does not cover middle-income pre-pandemic levels, the implied global output
countries like South Africa), appeals to gap should persist, and demand pressure is likely
private creditors to do the same have been to remain low. This scenario certainly currently
unsuccessful. underpins the monetary policy positioning and
communication of most global central banks.
The Institute for International Finance
estimates that nearly $7 trillion in emerging However, a stronger recovery built on massive
market debt will fall due in 2021 – three times policy support, especially for incomes, and with
the amount owed in 2020. While low interest a foundation of relatively healthy household
rates globally have been a considerable balance sheets, supported by a robust financial
support for emerging market government system and healthy credit pathways amidst strong
yields and will certainly continue to contribute growth in transaction money, could certainly see
to easier financing conditions, this may not be inflation pick up ahead of current expectations.
enough in 2021.
A number of additional drivers are also possible,
Several factors will determine these countries’ including shifting supply chains in the wake of
fiscal prospects. These include the strength of the pandemic and retreating globalisation, a less
pandemic management, the starting fiscal constrained regulatory environment, the active
position, the pace of recovery – supported by promotion of credit extension, and central banks
domestic growth strategies and policy imple- explicitly targeting higher inflation.
mentation – and each country’s ability to
leverage global demand. The US reflationary The unexpected can happen. Markets and analysts
policy stance should boost emerging market are less focused on this risk than on a weaker
exports, and the ongoing recovery in China global recovery, despite its greater potential to
should be positive for commodity producers. disrupt financial and asset markets. +
10 COROSPONDENTECONOMIC COMMENT
South African outlook
Good intentions and a renewed commitment to growth are not
enough to make government's financial position sustainable
By M A R I E A N T E L M E
THE Procuring and SA's fiscal position Increased confidence is the Global growth and
distributing a Covid-19 was already critical elixir for boosting growth; China recovery should
QUICK vaccine are crucial; going into the government policy action provide a welcome
TAKE supply deficit weighs pandemic is a key factor too tailwind; debt a drag
THE MOST IMMEDIATE challenge facing South that many vaccines currently under development
Africa is to effectively manage the Covid-19 pan- may prove effective and become regulated in the
demic crisis. The country’s path to recovery will be coming months.
dictated by its ability to vaccinate enough people
to restore mobility and open sectors that are Expert opinion is that we will land enough vaccines
currently restricted. News on this front is sobering. to cover about 10% of the population by the end
Marie is an South Africa has not been able to procure a large of the year, starting in April in variable lots. This
economist with enough vaccine pipeline to adequately inoculate implies that the population will still face addi-
20 years’ experience
most of the population. Under the COVAX initia- tional waves of infection throughout the year, with
in financial markets.
tive, we have a commitment to receive enough the next likely to hit during the vulnerable winter
vaccine to cover 20% of the population as supply months. Even though the ANC’s National Executive
becomes available. Committee has mercifully ruled out another hard
lockdown, this still exposes the economy to varying
In addition to this, government has managed and ongoing degrees of restriction, with a poten-
to expedite an additional 1.5 million doses of tially devastating impact on the vulnerable
the Oxford University-AstraZeneca vaccine for services sector and the fiscus.
frontline workers, which is due in January and
February. Beyond this, the outlook is uncertain. The failure to have adequate pipeline supply
Gross global supply has been allocated, and South and a credible rollout strategy in place poses a
Africa cannot procure additional doses through serious and prolonged risk to the economy. Some
bilateral agreements with producers unless it is at hope comes from the mobilisation of considerable
the expense of another country. Expanding supply private sector resources to administer vaccines, but
is difficult and will take time, although it is likely supply remains a constraint. While encouraging
TRUST IS EARNED™ 11areas of economic resilience emerged at the end Companies and households have had limited
of 2020, and global tailwinds are potential sources ability to invest and spend in a weak economy.
of upside support for growth, domestic health and Both economic and political constraints have
containment risks are firmly to the downside. also compromised their willingness to do so. Weak
economic policy delivery (‘over promise’ fatigue)
A PRÉCIS OF THE YEAR IN REAR VIEW and uncertainty related to critical aspects of the
The Covid-19 crisis came at a bad time for South economy’s regulatory framework combined to
Africa. Growth in 2019 was just 0.1%, and in the render very weak investment activity and associ-
first quarter of 2020 (Q1-20), the economy was ated low productivity.
already in recession, deeply constrained by inade-
quate electricity supply, as well as a range of opera- When the pandemic hit and government imple-
tional and organisational challenges at Eskom. mented an early and hard lockdown, compliance
was good, and there was a general support for the
The unemployment rate was 29.1%, and the initiative. The central bank acted swiftly, cutting
employment rate had fallen in annual terms the repo rate cumulatively by 300 basis points
in the second half of 2019 (H2-19). Per capita (bps), reducing borrowing costs to the lowest level
real GDP had declined every year since 2015 since the 1960s and, after some stalling, intervened
and was -1.3% lower in 2019 than in 2018. to ensure financial stability and the smooth func-
Combined, these factors have undermined busi- tioning of the money and rates markets, with regu-
ness and consumer confidence. latory support for the banks.
Figure 1 The National Treasury, already constrained by
REAL PER CAPITA GDP, % Y/Y a weak fiscal position, tabled an Amendment
%, y/y Budget in June. The total relief package was billed
5 at R500 billion, but R130 billion was repriori-
tised from the Budget. Adding this to an antici-
4
pated loss in revenue implied a deficit of -14.6%
3 of GDP, with debt likely to step up 18.3 percentage
2 points (ppts) of GDP, from 63.5% to 81.8%, and
expected to rise further over the medium term.
1
0 Playing in the background of the economic crisis,
-1
the ebb and flow of factional politics continued
in 2020. There were notable successes at the rein-
-2
forced National Prosecuting Agency, but this was
-3 tempered by the ruling party’s failure to credibly
2000 2003 2006 2009 2012 2015 2018 address corruption and restore confidence.
Real per capita GDP, % y/y Average Ongoing delays in the implementation of economic
Source: South African Reserve Bank strategies, such as the release of spectrum,
remained sources of frustration and criticism.
Figure 2
Attempts to address both the capacity of the
REAL GDP BY EXPENDITURE COMPONENT, Q1-2015 = 100
State and to get things done, nonetheless, had
110 some successes as the economic crisis helped focus
political attention on reviving the economy and
the government’s financial position. Despite this,
100 ongoing fiscal support for insolvent State-owned
enterprises (SOEs) remained a critical and conten-
tious drain on limited resources.
90
The lockdown in Q2-20 saw GDP collapse by
80
51.7% quarter on quarter (q/q) seasonally adjusted
and annualised (-17.5% year on year [y/y]), with
2.2 million associated job losses. This was the big-
70 gest loss of output in South Africa’s recorded GDP
Mar 15 Dec 15 Sep 16 Jun 17 Mar 18 Dec 18 Sep 19 Jun 20 history. But the Q3-20 recovery in activity was much
Total Private consumption expenditure better than expected, with GDP rebounding 66.1%
Government consumption expenditure Gross fixed capital formation q/q, seasonally adjusted average, and accompa-
Source: Statistics South Africa nied by a partial recovery in employment.
12 COROSPONDENTA closer look at the real economy showed some 2021: A MIXED BAG OF OPPORTUNITY AND
recovery in incomes and stronger household RISK, THREATENED BY THE FAMILIAR PATH
balance sheets, as well as corporate profits. OF POLICY COMPROMISE
Household real net disposable income recovered Against this weak but improving economic
from a fall of 15.7% y/y to -3.9% y/y. The household backdrop, the outlook for 2021 hangs in the
debt burden reduced to 75.7% of disposable balance between domestic economic resilience
income, from a spike to 86.5% in Q2-20 and an underpinning domestic demand and a combina-
average level of 73% in 2019. Importantly, debt tion of the impact of the second wave and
servicing costs benefited from materially lower the risk posed by existing areas of weakness,
interest rates and, at 7.5% of disposable income, is including weak policy implementation, electri-
at a multi-decade low. Credit availability remains city constraints, poor public sector capacity and a
good, but is constrained by the limited appetite for fragile fiscal foundation. Global recovery factors
additional debt. Household savings rose, with both also count, with the possibility that these may
the inability to spend and rising precaution contrib- provide a significant tailwind to the South African
uting to the increase. Given the improvement economy. Government’s growth strategy and
in key household metrics, with growth momen- commitment to fiscal sustainability – with critical
tum into Q4-20, we forecast a collapse in real GDP focus on actual implementation – will dictate the
in 2020 of -7.2%. shape of the economic outcome.
WEAK VACCINE STRATEGY
Figure 3 The most immediate obstacle to recovery is a
HOUSEHOLD DEBT AND COST OF SERVICE currently weak vaccine strategy. Some news of
%
additional vaccine procurement is positive but
90 15 inadequate. Importantly, government is not
14
expected to implement another economically
85 damaging hard lockdown, but a combination of
13
partial restrictions, ongoing uncertainty and slow
80 12 vaccine progress will continue to weigh heavily on
11 the services sector, particularly tourism and recre-
75
10
ation, with a likely increase in long-term scarring.
Foreign tourism will also not recover until South
70 9
Africa is deemed a safe destination with respect
8
65
to Covid-19.
7
60 6
OUTLOOK FOR GROWTH RECOVERY
Mar 07 Mar 09 Mar 11 Mar 13 Mar 15 Mar 17 Mar 19 Looking at the drivers of expenditure-side GDP
Debt to disposable income (LHS) Debt service costs (RHS) growth, a recovery in consumption expendi-
Sources: Statistics South Africa, Coronation
ture has mixed potential. Private consumption
expenditure (PCE) accounts for about 60% of
GDP and, in Q3-20, contributed 43.8ppts to the
Figure 4 surging recovery. PCE is driven by a combination
PUBLIC AND PRIVATE EMPLOYMENT of employment growth, real income growth, and
million the availability of credit and consumer confi-
7.60 2.85 dence – people’s ability and willingness to spend.
2.80
7.40
After the sharp fall in employment, there has been
2.75
7.20 only a partial recovery, and formal employment
2.70 is still 6.3% below the pre-crisis level. Although
7.00 2.65 marginal, President Ramaphosa’s Employment
2.60 Stimulus Programme update in November
6.80
detailed good progress on this front too.
2.55
6.60
2.50
Incomes remain constrained but also experien-
6.40
2.45 ced a strong recovery in the third quarter as mobi-
6.20 2.40 lity constraints eased. Net disposable income
Mar 15 Mar 16 Mar 17 Mar 18 Mar 19 Mar 20 is down -3.2% year to date in nominal terms –
Formal, private non-agricultural employment after a 13.6% y/y collapse in Q2-20 – while total
Community employment (RHS, QES) compensation is down 1.6%, including the Q3-20
Source: Statistics South Africa Quarterly Employment Survey data recovery, after falling 7.2% in Q2-20.
TRUST IS EARNED™ 13In real terms, these are down -6.3% and -4.8%, Figure 5
respectively, year to date, but with solid positive HOUSEHOLD SAVINGS, % DISPOSABLE INCOME
momentum. For households that derive a signifi- %
cant proportion of their income/wealth from 1.0
financial assets, the loss of dividend income has
0.5
hurt, but the positive financial market perfor-
mance should provide a fillip. 0
-0.5
Savings balances (which represent residual cash)
-1.0
have surged. Measured as a proportion of disposa-
ble income, savings were 0.7%, the highest since -1.5
early 2005. This is likely a reflection of a combina-
-2.0
tion of an inability to spend and greater precau-
tions taken. But it also creates the potential for a -2.5
recovery in spending, while low interest rates and -3.0
reasonably healthy balance sheets provide the Mar 05 Mar 07 Mar 09 Mar 11 Mar 13 Mar 15 Mar 17 Mar 19
opportunity for stronger credit growth as incomes Source: South African Reserve Bank
and confidence improve.
We forecast a modest increase in disposable
Figure 6
income as employment in hard-hit sectors, such as
REAL ANNUAL GROWTH BY COMPONENT, YEAR TO DATE
manufacturing, construction and parts of business
services, improves. We see little prospect yet for %
increased employment in the trade sectors, and Net trade 92.0
this remains a drag. With a forecast of real income Government consumption
0.5
growth of 1%, and a small contribution from expenditure
increased credit utilisation, ongoing low interest Personal consumption
-6.8
expenditure
rates and some improvement in confidence, we
forecast real growth in private consumption of Total -7.9
2.7% in 2021, and 2.5% in 2022. Gross fixed capital -17.6
formation
-40 -20 0 20 40 60 80 100
There is a more positive tilt to the outlook for
gross fixed capital formation; but, again, pan- Source: Statistics South Africa
demic, regulatory and capacity constraints per-
sist. Private sector investment may get a fillip
from the expansion of renewables within the new We expect the economy to grow 3.1% in 2021,
energy framework, and investment in machinery with uncertain lockdown restrictions a considera-
and equipment could be supported by ongoing ble downside risk, while income recovery and
adjustments to working from home. However, with net trade should provide a meaningful fillip.
profitability under pressure and poor prospects for This is a below-consensus forecast. Our forecasts
State-funded investment, we expect gross fixed assume that capital expenditure will remain a
capital formation to remain weak and detract drag on growth in the year ahead, although a
from growth momentum in the year ahead. more meaningful implementation of energy-
Visible progress in reducing the constraint the related investment could see this number improve.
State places on the economy by engaging more Massive inventory drawdowns were a significant
with the private sector has the potential to boost detractor from growth in 2020; a more modest
confidence – the magic ingredient for growth. drawdown in 2021 will add positively to growth
momentum. We do not assume – given power
Net trade was a considerable tailwind for growth constraints – any meaningful inventory accumu-
in Q3-20, contributing an annualised 38.3ppts lation over the forecast period.
to the recovery. Both mining and manufacturing
export volumes recovered strongly from the hard Importantly, this recovery profile does not see GDP
stop of Q2-20, and agricultural exports contributed levels return to pre-pandemic levels until 2023.
further. While terms of trade remain elevated and This weak recovery implies that the output gap
domestic demand – notably investment – remains will remain negative, with little demand-related
depressed, the recovery in global growth and inflation pressure expected to emerge. Overall
trade volumes should provide a welcome tailwind headline CPI is forecast to remain below the central
to growth into 2021. There is also further potential point of the South African Reserve Bank’s (SARB)
uplift for export value from a recovering China. target range in 2021 and 2022, before rising above
14 COROSPONDENTit in 2023. We expect monetary policy to remain and improving the outlook, but South Africa’s fiscal
accommodative and see room for the SARB to weaknesses extend beyond this. There are three
cut the repo rate again to 3.25% in early 2021, as interrelated challenges:
growth falters once more. At current levels, policy
rates are at levels not seen since the late 1960s. 1. Weak and disappointing revenue growth, partly
owing to weak nominal GDP growth and partly
FINANCIAL DEFICIT A HEAVY DRAG due to the collapse of the tax collection infra-
Government finances were the biggest casualty of structure. Over-estimating revenues upon which
last year’s crisis and remained a significant source multi-year expenditure is allocated has led to a
of domestic economic fragility. Of course, better decade of persistently large deficits.
growth would go a long way to boosting revenues
2. The composition and size of expenditure,
notably the public-sector wage bill, and there-
Figure 7 fore the rising debt service burden, must change.
GDP FORECASTS, CONTRIBUTIONS BY COMPONENT SERIES Decisions related to the size of government
were taken as long ago as 2007/2008 when
% public-sector salary structures were expanded
6 to protect and attract scarce skills in health and
4
education. Several generous multi-year agree-
2.8 3.1
3.0
2.5 2.4 2.1
ments, coupled with aggressive State employ-
2.9 1.7 2.0
2 2.5 1.3
1.1 0.7 ment growth saw the consolidated public-sector
0.6 0.1
wage bill expand from 33% of expenditure to
0
36%. While efforts have been made to limit
-2 its expansion through headcount limitation,
this has had little effect, as wage growth has
-4
outpaced both inflation and GDP growth.
-6
3. Ongoing decisions to bail out SOEs have
-8 -7.2
undermined much of the fiscal discipline
-10
imposed elsewhere over the past five years.
2010 2013 2016 2019 2022f 2025f Since 2008/2009, Eskom, SAA, the SABC and
the Land Bank combined have cost taxpayers
Private consumption Government expenditure Fixed investment
R229 billion. This is no longer affordable.
Net exports Stocks GDP
Sources: Statistics South Africa, Coronation
These fiscal vulnerabilities are well known. Conse-
cutive budgets, and finance ministers, have attemp-
ted to right-size the large expenditure commit-
Figure 8 ments – especially the wage bill – but successive
HEADLINE CPI AND REPO RATE (INCLUDING FORECAST) crises, mostly related to SOEs, amidst very weak
growth, have systematically worsened an already
%
weak position.
12
The December ruling in favour of the National
10
Treasury in its dispute with public sector unions
8 over the suspension of the final year of its wage
agreement in 2019/2020 will go a long way to
6 improve the starting position for right-sizing wages
within expenditure. Assuming the full R38 billion is
4 saved, the consolidated public-sector compensa-
tion budget should return to 33% of expenditure
2
in 2020/2021. While this is clearly a ‘win’ for the
National Treasury, much still hinges on the forth-
0
coming wage agreement and the wider govern-
-2 ment backing of a painful consolidation plan.
Jan 09 Jan 11 Jan 13 Jan 15 Jan 17 Jan 19 Jan 21
Real repo, one-year forward CPI, % year on year Repo
Even with some consolidation in our numbers, fiscal
Lower Upper Core, % year on year
metrics remain very weak. With a modest improve-
ment in GDP growth, a slightly more robust rate of
Sources: Statistics South Africa, Coronation
GDP inflation (boosted by terms of trade), gains in
TRUST IS EARNED™ 15revenue somewhat ahead of initial expectations, position required to stabilise debt dynamics –
and relatively contained expenditure, the main seems economically and politically unlikely. South
budget deficit is still set to be -14.3% of GDP in the Africa also does not enjoy the happy balance of
current fiscal year. Excluding interest costs, this is nominal growth rates that exceed the average
still a primary deficit of -9.6% of GDP. nominal cost of servicing government debt. In the
absence of both, debt will continue to accumulate.
A recovery in revenues and improved GDP growth
should see this narrow to -10.2% and -5% of GDP, DEBT MANAGEMENT CRITICAL
respectively, in the coming year, assuming the Rising debt is economically costly; it lowers invest-
new wage agreement limits annual increases to ment and productivity, and undermines growth
below inflation (we assume 3% nominal). But this through time. It also implies that as debt is accu-
deficit is large, and the fiscal adjustment required mulated, government is forced to issue more,
to push the deficit to a balance – or the surplus not only to fund expenditure but also to pay off
maturing debt in an endless cycle.
Figure 9 This reinforces the dynamics that compound the
RELATIVE EXPENDITURE GROWTH BY COMPONENT, INDEX problem and may accelerate a crisis. Ultimately,
this will become unsustainable. The IMF defines
%
1 500
debt as sustainable when a government can
meet all current and future payment obligations
without exceptional financial assistance or going
1 250 into default.
1 000 History tells us that sovereigns are poor at mitiga-
ting the risk of looming debt crises, and financial
markets, in a world of extremely low global rates,
750
may not impose adequate discipline early enough.
500
Our own economic history is littered with many
sensible plans and good intentions, but, at best,
extremely weak public policy execution. Even with
250
the best intentions and a renewed commitment
2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
to a sensible growth strategy, the road to fiscal
Main budget expenditure, ex-debt, wages and SOEs sustainability for South Africa is likely to remain
Compensation Debt SOEs very challenging.+
Source: National Treasury
Figure 10
GOVERNMENT DEBT AND THE PRIMARY BALANCE, % GDP
%
6 100
4 3.4 3.4
90
3.0
2.8 2.93.0 2.7 2.7
2 1.8 1.8 80
1.5
1.2
70
0
-0.5 -0.5
60
-1.0 -1.0 -1.0 -1.1
-2 -1.3
-2.0
-1.6 -5.0 50
-3.1
-4 -3.3 -2.6
-4.1 40
-5.0
-6
30
-8 20
-10 -9.6 10
-12 0
1994 1999 2004 2009 2014 2019 2024f
Primary balance, % GDP Gross debt, % GDP (RHS)
Sources: South African Reserve Bank, National Treasury, Coronation
16 COROSPONDENTI N V E S T M E N T A N A LY S I S
A revival in the life
insurance sector
Growth potential at MMH undervalued
By N I C H O L A S S T E I N
THE Pandemic-induced With drag factors MMH’s current discount New management
headwinds to still-cheap accounted for, a 2021 to embedded value and a re-energised
QUICK life companies are short earnings recovery is does not reflect positive distribution channel
TAKE term likely to be robust future prospects bolster growth potential
CORONATION OWNS STAKES in both Sanlam in-force books of business that generate on-
and Momentum Metropolitan Holdings (MMH) going fees, often based on asset levels (which
on behalf of clients. Sanlam has long been a share are driven by stock market levels). This makes
we wanted to own, but its persistent premium to them a bit more defensive.
embedded value (a measure of a life company’s • Tied to this, we believe the JSE offers compel-
intrinsic value) left little margin of safety. The ling value at the moment. A strong stock market
Nicholas Stein is an Covid-19-induced selloff in March hit high-quality lifts the asset levels on which fees are earned.
equity analyst with
11 years’ investment
and low-quality businesses indiscriminately and • Above-average returns on equity through the
experience. provided us with a good entry point to acquire cycle.
shares in Sanlam below its embedded value. We • Very strong capital positions designed to with-
suspect, however, that readers will find our Sanlam stand 1-in-200-year stress tests. Companies that
purchase uncontroversial and may be more inter- are inadequately capitalised are often forced
ested in the thought process behind our MMH into sub-optimal decisions at wrong points in
stake. the cycle.
LIFE COMPANY ATTRIBUTES And yet, while the share prices of many domestic
Life companies may be considered mature and shares have recovered meaningfully from their
boring, but they have attributes that contribute March lows, most life insurers are not trading far
to their desirability: off them (see Figure 1 overleaf). We suspect there
are two main reasons for this:
• Extensive distribution networks of advisers that
are complex to manage and costly to replicate. • Life companies’ earnings (and to some extent
• A number of companies faced existential embedded values) were hit very hard this year.
threats from Covid-19, for example, restau- • A dividend mainstay as life companies ceased
rants and landlords. Life companies have large dividend payments.
TRUST IS EARNED™ 17Yet these reasons are short term. When the life knock to embedded value and a R1 billion knock
insurance companies reported their June results to reported earnings. However, by taking the pain
this year, markets had not fully recovered. Credit upfront, life companies should see 2021 earnings
spreads also widened materially. Both factors rebound quicker than the typical company.
impact earnings meaningfully (negatively to June),
but have already started reversing. Perhaps more We would also expect most companies in this
importantly, life companies ‘front-end loaded’ sector to resume dividend payments when they
the earnings pain caused by Covid-19 by raising report in February and March 2021.
provisions for the expected financial impact and
expensing them through their income statements. MMH
For example, MMH assumed its share of 40 000 MMH trades at a record 40% discount to embed-
Covid-19-related deaths and expensed this. The ded value (Figure 2). We find this surprising for
company also assumed that 50% of policyholders three reasons:
requesting premium holidays would lapse, and
up to 10% of all other policyholders, too. MMH • The Covid-19 provision has resulted in a more
also expensed this. This resulted in a R1.3 billion conservatively stated embedded value.
• Over the last few years, management has
Figure 1
made the life and non-life valuations within
LIFE INSURANCE INDEX VERSUS BROADER MARKET INDEX FROM the embedded value more conservative (effec-
COVID-19 ONSET TO PRESENT tively using a lower price earnings/discounted
% cash flow to value their own business).
110 • The new management team under Hillie Meyer,
Jeanette Marais and Risto Ketola has done a
100 good job in turning around the operating perfor-
mance of the group.
90
As such, the 40% discount to embedded value is
80
even starker than it first appears, given that the
70
embedded value is far more credible and conser-
vative than it was previously, and the company’s
60 business prospects are brighter.
50 NEW BROOM UNDERESTIMATED
The last point on the new management team
Dec 19
Jan 20
Feb 20
Mar 20
Apr 20
May 19
Jun 19
Jul 19
Aug 19
Sep 19
Oct 20
Nov 20
Dec 20
and the operational turnaround warrants further
JSE Life Insurance Index FTSE/JSE Capped SWIX All Share Index discussion. New management has been in place
Source: IRES since early 2018. In our view, the market is not
recognising the turnaround currently under
way and is adopting a wait-and-see approach.
Figure 2 Turnarounds often take time to fully manifest in
LIFE COMPANIES’ PRICE TO EMBEDDED VALUE HISTORY reported numbers, but we believe there are some
% very encouraging signs that the market isn’t
100 attaching sufficient weight to.
80
Some divisions within MMH, such as Employee Bene-
60 fits and Guardrisk, have historically performed
40 well versus their peers. However, there are also
signs that previously lagging divisions are turning
20 12
around. A driving force behind these improve-
0
-6
ments is the reintroduction of divisional profit
-20
and loss statements, which has boosted divisional
management accountability.
-40 -41
-49
-60
-55
• Both Metropolitan and Momentum have been
2004 2007 2010 2013 2016 2019 growing their tied agency forces ahead of
Old Mutual Liberty Holdings Sanlam the broader market, suggesting life insurance
Discovery* Momentum Metropolitan Holdings agents are starting to view them as attractive
*Embedded value excludes emerging and startup entities
places to work. Improved product offerings and
Sources: Company data, Bloomberg, Avior Capital Markets service levels to agents support this.
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