LIGHT AT THE END OF THE TUNNEL FOR S.A. NOW THAT COVID19 INFECTION RATE HAS PEAKED | AfriTV Online

Many South Africans and businesses would have breathed a sigh of relief after President Cyril Ramaphosa 's declaration that the nation has finally achieved level 1 of government's Covid-19 containment programme. The effect of the pandemic, particular...

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LIGHT AT THE END OF THE TUNNEL FOR S.A. NOW THAT COVID19 INFECTION RATE HAS PEAKED

Published by: O. Elijah
09/22/2020 02:18 PM

Many South Africans and businesses would have breathed a sigh of relief after President Cyril Ramaphosa 's declaration that the nation has finally achieved level 1 of government's Covid-19 containment programme.


The effect of the pandemic, particularly for small-and - medium enterprises and lower income groups across the world, has been well publicized and extremely painful.


Larger publicly traded businesses have also been significantly impacted and many were forced to increase equity (at a considerable expense to shareholders) or postpone dividend payments to either reduce debt and/or create cash reserves in order to trade through what has been one of the worst recessions in history.

While South Africa is not entirely out of the woods, the prospect of recovery is finally within reach.
Similar to what has been seen in other countries, the sequential recovery from a depressed base will be solid, but will, sadly, still leave the economy (in real terms) in a worse state in a year's time than it had been before the Covid-19 crisis.


In addition, corruption remains one of the country's major bugbears, although government debt levels have become unsustainable.
The financing needs of South Africa and the interest bill as a percentage of gross domestic product are among the largest in the emerging market universe.

And if that wasn't enough of a confidence dampener, Eskom announced that power outages would be around for at least another 18 months.
Although the country's largest state-owned company conducts much-needed maintenance work at its power plants and corrects design deficiencies at its Kusile and Medupi power plants, both at considerable expense to taxpayers and electricity consumers.


While the problems facing the country are real, it is important to note that the worst is behind us, as the economy has been given the opportunity to re-open for business, now that the infection rate of Covid-19 has peaked.

Some of the leading economic indicators, such as the Barclays PMI Manufacturing Index, already point to improving outlooks, although financial conditions have also improving, although at low levels.
Pent-up demand, recovery and lower interest rates would provide the required boost to bring the economy out of recession.
In addition , improving foreign trade, manufacturing and good rainfall (agriculture) could result in a better outcome than what is currently being discounted in domestic asset valuations.

 

Domestic bonds and domestic-oriented stocks provide considerable value to long-term investors, and any improvement in the country's growth outlook could easily lead to a re-evaluation as optimism recovers from severely depressed levels.
It was therefore inspiring when President Cyril Ramaposa stood up and asserted his political power over the party and the state when the National Executive Committee of the ruling party, the ANC, gathered at its monthly meeting at the end of last month.
The President has managed to repel his power from internal political threat, and this victory would provide him with a political space to rule without needless distractions.

In addition, when the supplementary budget was presented in June, it was noted that the Cabinet had decided, in principle, to implement crucial reforms to restore this economy, which will be put forward in the Medium-Term Budget Speech next month.
This win would make it easier for the President to be less politically encumbered in these changes.
Although global policymakers remain wary about the growth outlook and are in no mood to withdraw stimulus measures any time soon, risk assets are expected to remain supported.
Investors need to be selective, however, as not all businesses are expected to succeed in the post-Covid19 environment.

Consumer buying habits and actions are likely to shift (maybe permanently) and businesses would be reluctant to invest aggressively after one of the worst recessions in history.
Bloated balance sheets can serve as a limitation on the capacity and willingness of businesses to spend on new acquisitions or to expand their workforce.
Unprecedented support from politicians has been critical, but this, too, will reverse at some point, and only then will the full effect of the crisis be completely exposed.


From an equity viewpoint, we will continue to concentrate on companies with solid balance sheets with secular and structural growth vectors rather than the vagaries associated with economic cycles.

Consumer buying habits and actions are likely to shift (maybe permanently) and businesses would be reluctant to invest aggressively after one of the worst recessions in history.
Bloated balance sheets can serve as a limitation on the capacity and willingness of businesses to spend on new acquisitions or to expand their workforce.
Unprecedented support from politicians has been critical, but this, too, will reverse at some point, and only then will the full effect of the crisis be completely exposed.
From an equity viewpoint, we will continue to concentrate on companies with solid balance sheets with secular and structural growth vectors rather than the vagaries associated with economic cycles.

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