Morgan Stanley Capital International‘s emerging markets index shows that South Africa’s economy underperformed in July relative to other emerging markets.
While emerging market performance was generally flat, South Africa was 1.7 percent below the average performance of large and mid-cap stocks across the 24 emerging markets tracked in the U.S. investment bank’s index for July 2019, according to a Morgan Stanley Research report.
In positive news, the industrials sector was the biggest positive contributor to South Africa’s economic performance, up 1.2 percent over the month and 13 percent year to date.
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Morgan Stanley’s analysis found that “macro momentum in South Africa continues to hobble along at a lackluster pace but the downside risks are accumulating as they see signs that global markets are starting a de-stocking process.”
This means that markets are looking to improve efficiency and reduce costs in response to the global slowdown.
The global slowdown has negative ramifications for a small open economy like South Africa with a large commodity base, while lead indicators for domestic growth remain weak.
An example of this is the slump in approved building plans relative to building plans that were actually completed, with the ratio now close to 25-year lows, suggesting a continued contraction in construction activity.
While the construction sector is small in GDP terms, at only 3.7 percent of the total, it accounts for 8.2 percent of the workforce and therefore has negative implications for consumption.
With regards to the debate over whether to invest in South African bonds or equities, the analysts are clear on their preference.
Morgan Stanley’s global strategists have recently become more cautious on global and emerging market equities.
“For the dedicated South Africa investor, we think there is still better relative returns potential in South African bonds than in South African equities,” the Morgan Stanley said in an emailed report dated Aug. 1.
With global growth slowing, the investment bank suggests investing in media, food staples, gold, and bonds from a South African perspective.
This is because, historically, South African bonds have fared better than equities in previous bouts of slow global growth, with the most resilient sectors proving to be media, consumer staples such as food, and gold, according to the Morgan Stanley Research report.
Bond yields fell in the build-up to and just after the South African Reserve Bank cut interest rates by a quarter of a percent on July 18, but then rose over the last two weeks of the month to end at close to where they began at the end of June.
Considering the declining yields across global bonds in July, the relative yield spread for South Africa has moved up in Morgan Stanley’s view.
