Joe Biden’s presidential victory and a clean Democratic sweep of Congress and the White House are hanging in the balance as tense vote counting continues; however – while not as stabilising as a Biden win – Trump’s re-election should see increased market stability and a stronger rand, off the back of the likelihood of a weaker dollar, strengthened by a large fiscal package that Trump promised post-elections and combined with a dovish Fed. That said, a divided congress could make this fiscal package challenging to approve.

This is according to Old Mutual Investment Group Chief Economist, Johann Els, presenting at the asset manager’s quarterly media investment update, who says that while the stability of the rand is likely to be determined by global issues in the short term, in the medium term, policy change and the growth outlook will be key. He highlights that a Trump victory shouldn’t have an adverse on our local economy, and a more positive global growth environment will be supportive for SA growth, but keeping SA out of a debt trap will need more significant policy reform and actual implementation of Government’s plans.

“South Africa’s single biggest problem is a lack of growth,” Els said. “And the most significant question is where is medium-term growth heading after the Covid-19 interruption? Ignore 2020 and 2021; the focus should be on where growth is heading from 2022 onwards.”

Els believes that elements of Government’s Economic Reconstruction and Recovery plan are commendable enough, but are far from the ‘whatever it takes’ approach that is needed to reduce the risks that could lead to SA falling off the looming fiscal cliff. “In the current environment, there are existing factors that could help us reach 1.5 to 2 percent growth, however they are not going to get us to a 2.5%+ sustainable growth path over the medium term,” he warned.

“Existing factors that are showing promise include a global growth uptick and the Fed’s expansionary policy; further easing of Covid-19 infections and lockdowns in SA and a vaccine expected by late 2021; slow, but continued fiscal consolidation despite some slippage in the Medium-term Budget; Eskom progress, with unbundling gathering some momentum; and some long-awaited serious headway being made with regard to the corruption fight, following some significant arrests as the NPA ramps up active court cases.

“But we could see improvement on other policy measures already in place such as the modernising of ports and rail infrastructure and licensing spectrum; lowering of the price of doing business; the introduction of more market-friendly changes to South Africa’s investment regulations to finance vital infrastructure development; more support for sectors with high job creation potential such as the agriculture and tourism sectors; the reduction of the skills deficit by attracting skilled immigrants, revamping of the skills framework and a range of reforms in basic education; and facilitating regional trade,” he listed.

But in order to achieve growth of 2.5 percent and above, Els believes that we need to see significant transformation of SOEs – including privatisation – strong commitment and implementation of the National Development plan or the like, labour market deregulation, and a strong social compact between Government, labour and business – perhaps also including the SARB in this.

“More drastic reform is needed to save us from our current trajectory,” said Els. “Policy reform needs to be real, structural and substantial, but extra Government spending is the wrong way to go about it. Ultimately, policy change needs to focus on confidence and growth-enhancing measures and implementation is critical to this.”

Also presenting at the event, Meryl Pick, Head of Equity Research at Old Mutual Investment Group, echoed these sentiments, pointing out that fiscal issues are top of mind when looking at the markets currently, with the Medium-term Budget Policy Statement (MTBPS) having had a mixed outcome. “The Covid-19 pandemic is really a side-show. Over the medium term, we are seeing better growth off a low base, but with continued low inflation and interest rates,” she added.

Pick believes there is plenty of value to be found. “When considering SA Inc, companies are adapting to not only survive, but also to thrive,” she said. “And if you look at the banking sector, the last time banks offered this much value was just after the Rubicon speech, when the Presidency of Nelson Mandela was still years away. SA banks are inefficient by Emerging Markets standards so there are cost savings to deliver. They have last traded at similar price to book ratios in the eighties and have entered this environment with better capital levels than they had going into Global Financial Crisis. Essentially, they are in a sound position to handle the crisis.”

Pick stressed the importance of looking at company and industry dynamics as well as the macroeconomic environment when making investment decisions. “Keep the macro concerns in perspective,” she said. “In the midst of crisis there are South African companies innovating and consolidating market share. These will emerge from the crisis stronger and are great investment opportunities.”