As a significant institutional investor within the South African economy, The Eskom Pension and Provident Fund (“EPPF” or “the Fund”), has been closely monitoring the impact of the recent social unrest which has sadly led to a loss of numerous lives and damage to a significant number of properties.
Whilst the South African Government appears to have stabilised the situation in the last few days, below are some of the EPPF’s observations, aimed at understanding the potential impact these events could have on its investment portfolio, and ultimately the financial well-being of its members.
Contrary to what one would have expected, local equity and bond markets have not responded too negatively to the unrest. The South African Rand weakened from approximately 14.20 against the US Dollar on 9 July 2021 to 14.75 on 23 July 2021. In our opinion, this is not to a sharp response in the context of the severity of the unrest. Market participants are most likely observing further developments, and the extent of the losses to the economy, before materially responding.
The relatively muted negative response from investment markets possibly points to two factors, firstly that global trends, like the stronger commodity prices have a longer-term impact and secondly that South African assets have already priced in significant risk premiums, meaning that, events like this one are partially priced in. However, it is difficult to be precise about the economic loss at this point, and so markets will respond with greater accuracy as all the data is factored in.
There is the risk that we may overestimate the immediate loss and impact and underestimate the long-term impact. This needs to be carefully considered with time. The local economy was already in a difficult economic position prior to the COVID-19 pandemic, with a high unemployment rate and near flat Gross Domestic Product (GDP) growth for some time. This situation was exacerbated by the impact of the Covid-19 pandemic, which resulted in higher unemployment and a contraction of the South African economy.
The social unrest therefore takes place against a backdrop of a fragile economic recovery and is likely to further delay the economic recovery within South Africa. Initial estimates of costs are approximately 0.5% to 1.0% of South Africa’s GDP growth rate for 2021. Considering that GDP rate was expected to be around 4.5% for 2021, before the unrest, this cost is significant. In monetary terms, the economic cost is estimated to be in the region of approximately 50 billion.
This is likely to trigger a fiscal response (from Government) as well as a monetary policy response (from the Reserve Bank) that needs to be somewhat coordinated to reverse this trend. The possibility of increased Government spending, coupled with perceptions of additional political risk, are likely to trigger higher bond yields (increased cost of borrowing) on the South African Government’s debts.
In addition, we are also closely watching developments relating to COVID-19 infections worldwide, especially as it pertains to the United States (US) and other key global players. This is likely to have an impact on global economic growth, including that of South Africa. It is key that we accelerate our vaccine rollout programme, which will support the local growth and employment agenda.
Impact on EPPF investments
Some of the affected shopping centres across Gauteng and KwaZulu-Natal, as well some of the affected retailers, are owned by some of the listed companies, in which the EPPF invests in. While the final numbers have not yet been confirmed, below is an indication of the impact of the social unrest on the EPPF portfolio to date.
Impact on listed property in general
The impact on the property market, as of 23 July 2021, in terms of the assets damaged was as follows:
- 161 Malls extensively
- 11 Warehouses
- 8 factories
- 161 Liquor outlets and distributors
Overall, 200 shopping centres were looted and damaged, with approximately 3,000 stores being individually looted. However, the EPPF Property portfolio is only exposed to a significantly smaller portion of these properties that were looted. Understandably, the market reacted negatively to these events, with the severely retail-focused companies share prices falling. The table below provides a snapshot of how the market reacted.
|Share price movement
Impact on EPPF’s listed property portfolio
The EPPF’s listed property portfolio’s value declined by more than 5.00% since Friday, 9 July to this past Friday, 23 July 2021 but this movement cannot all be attributed to the social unrest. A number of property companies are diversified geographically, and some do not have any exposure to the South African market.
At the time of writing this note, the market has not fully recovered but several companies have released updates on the extent of the damages to some of their property. The good news is that most property companies have South African Special Risks Insurance Association (SASRIA) cover. This could cover them for the financial impact of the damage caused.
The ripple effects observed thus far includes but are not limited to:
- Temporary closure of unaffected shopping centres as a precautionary measure;
- Reduced trading hours; and/or
- Disrupted retail supply chain, which poses a risk of shortages of food and basic consumer goods and, ultimately, turnover linked rentals.
The South African Property Owners Association (SAPOA) is yet to publish a full list of the affected malls and extent of the damage. Some of the privately owned affected properties that have been identified include the Brookside Mall, Edendale Mall, Scottsville Mall in Pietermaritzburg.
Overall EPPF investment portfolio
The Fund’s overall assets under management have increased from R166.2 billion to R167.8 billion (from 9 July to 23 July 2021). From a Fund asset’s perspective, if stability returns in the short term, the impact will not be severe, however, as a long-term investor, the Fund will pay close attention to the implications of this incident on its long-term investment outlook and related decision-making.
The EPPF will continue to monitor all risks that could affect the Fund’s performance, sustainability, and operations in the long or short term. We continue to keep you updated should there be any further developments which affect the Fund in this regard.
These are indeed trying times for our country, and we implore you to remain safe and take the necessary precautions to safeguard your health, your safety and that of your loved ones.
We will rise and emerge stronger from this experience. It is up to each one of us to play our part, through small yet frequent acts of kindness, contribution, and patriotism. In this way, we will secure the prosperous future that we envision for our country.
Chief Executive and Principal Officer