President Cyril Ramaphosa announced that South Africa will be entering an adjusted level 4 lockdown on 28 June due to a dramatic rise in cases of the Delta variant of COVID-19 infections. The lockdown is set to be in force for two weeks, but this could be extended when the government re-evaluates the situation on 11 July.
Now, you may wonder how these developments impact your investments.
The most direct casualties of the latest lockdown are businesses operating in the hospitality and entertainment sectors, as well as retailers involved in the sale of alcohol. Restaurants, cinemas, gyms, casinos, nightclubs, and museums are all under strict control and may only operate at significantly reduced capacity, if at all, during this period. Due to the labour-intensive nature of most of these companies, many people will fail to receive income during this time, and this will feed into the negative cycle of lower consumption and higher unemployment in the local economy.
However, when it comes to the JSE, the companies in these sectors represent a relatively small fraction of the market capitalisation of the South African stock universe. The majority of the earnings of South African-listed companies are generated outside the borders of South Africa because the index is dominated by multinational companies with offshore operations such as Naspers, BHP Billiton, Anglo American, and Richemont. This means that the local stock market is not an accurate representation of the domestic economy. Consequently, the earnings profile for the market as a whole is unlikely to be materially affected by this lockdown.
Another factor negating the impact of this lockdown on capital markets is that unlike the lockdowns initiated in early 2020, South Africa is currently one of only a few countries worldwide heading in this direction. According to the latest data, around half of the populations in the United States and United Kingdom have been fully vaccinated, with many more people receiving at least one shot. These countries are opening up their economies and relaxing social distancing measures as the number of active cases decline rapidly. Therefore, this is a much more isolated lockdown than the coordinated global lockdowns of the past year and a half. Again, companies with offshore earnings streams should be well-insulated against the negative effects of tightening social distancing measures in South Africa.
Autus Fund Managers has exposure to broad international markets across its suite of portfolios and is strategically underweight the South African economy. Our approach centres around careful security selection which implies that we will only include South African-facing stocks if the potential rewards outweigh the risks. Examples of these would be the limited exposure to certain South African banks and retailers in our portfolios. Some of these companies have proven their resilience in the face of macroeconomic pressure and can be bought at attractive valuations. Apart from these types of opportunities, most of our capital is deployed in companies with global earnings streams, including a portfolio of high-quality US-listed stocks.
In conclusion, the newly announced adjusted level 4 lockdown in South Africa will substantially affect only a relatively small proportion of investments available to South African investors. The unit trusts managed by Autus Fund Managers are well-placed to benefit from the global reopening and economic recovery despite setbacks in the domestic economy.
- Written by Francois Roux, CFA® – Portfolio Manager – Autus Fund Managers
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