A surprising theme emerged at Old Mutual Corporate’s latest quarterly investment webinar. As Old Mutual Multi-Managers investment strategist Izak Odendaal ran through his presentation, the graphs showed a catastrophic drop in economic growth in 2020, before showing a similarly unprecedented forecast rebound in 2021 and beyond. You knew it was bad in 2020, but you probably didn’t expect it to turn around so quickly in 2021. Does that mean excessive pessimism about the economy is unwarranted?

‘Without getting too Clintonian, it depends on your definition of “it”,’ says Odendaal. ‘People often say that it’s impossible to be optimistic about the economy because unemployment is so high, but it’s not about whether things are good or bad. It’s about whether things are getting better – and getting better relative to expectations.’

If one looks at the economy through that lens, the widespread (and completely justified) pessimism quickly gives way to something many investors haven’t felt in a long time: optimism.

Investment growth versus expectations

‘If you think back to where we were a year ago, one would have expected things to be a lot worse, given the global situation with Covid-19 and with South Africa’s particular set of problems,’ Odendaal points out. ‘Subsequently we’ve had a stronger than expected global recovery (helped by vaccines); and very high commodity prices, which are a huge boost for South Africa’s economy, for the JSE, for the rand, and for continued low interest rates.’

Odendaal began his webinar presentation by showing the IMF’s latest Real Global Growth Estimates, which put global growth at -3.3% in 2020, followed by a projected 6.0% and 4.4% for 2021 and 2022 respectively. South Africa recorded a staggering -7.0% in 2020, but the projected annual percentage change in our country’s real GDP are 3.1% and 2.0% in 2021 and 2022. Those are refreshing – and perhaps surprising – numbers.

‘You’re measuring off a lower base, so the recovery will look a lot better,’ explains Odendaal. ‘But even with that in mind, it’s still better than one would have expected in global terms, and as investors, that’s the world in which we work. We work in the world of growth.’

Slow but steady progress that will boost South Africa’s economy

In that world, investors are seeing low interest rates, strong equities, a relatively strong rand and a recovery in household income. Add the sense that inflation is likely not to follow a long-term upward trajectory, and Odendaal is ‘cautiously optimistic’ about the South African economy.

‘There’s slow but steady progress in fixing some of the things that are holding back the performance of the economy,’ he says. ‘The top issue is electricity supply, and there we’re making progress in stabilising Eskom and allowing for more private participation and private generation. Our transport infrastructure – especially our ports – is also insufficient, but there are reforms in play which will help the private sector to become involved. Broadband is also still expensive, but if more spectrum is released that should help bring prices down.’

The take-out, then, is that despite 2020’s disastrous impact on the global and national economies, investors shouldn’t be unduly pessimistic about the future. But – and it’s a big caveat – Odendaal tempers that optimism with a reminder of how bad things really were in 2020.

‘Here’s another way of thinking about it,’ he suggests. ‘How long will it take us to get back to where we were before Covid? In South Africa’s case, that will probably only be sometime in 2022. But then the other question is, how long will it take to get to where we would or should have been, in the absence of Covid? That will take even longer. So yes, we’re seeing a strong recovery, but we’re not yet back to where we were, and we’re certainly not where we could have been.’

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