This was the message a panel of leading economic and political thinkers conveyed at a series of client events we held in major cities across the country – attended by record numbers of our clients and other guests.
On the political front, we heard from respected political commentator Justice Malala that we are likely to continue experiencing political upheavals, knocks and volatility over the short to medium term leading up to the ANC’s elective conference in December next year.
Over the long term, however, there is much reason for optimism. Our country is moving away from functioning as a one-party dominant democracy toward becoming a competitive, multi-party democracy. After the recent municipal elections – deemed by most observers to have been free and fair – Johannesburg and Pretoria are now run by the opposition. We are evolving into a healthy democracy in which power is contested fairly, which certainly augurs well for our country’s normalisation and future stability.
Justice encouraged investors not to get distracted by daily ups and downs, but to focus instead on the long-term good news and positive developments currently emerging. The right question to ask is whether or not we can have faith in our democratic institutions, and most are in fact independent, credible and strong. A case in point is the Constitutional Court – which earlier this year ordered President Jacob Zuma to pay for some of the upgrades to his Nkandla residence. Institutional strength is one of the leading factors the credit ratings agencies will take into account when deciding at the end of the year whether or not to downgrade us to junk status.
DODGING THE DOWNGRADE
On that prickly subject, top economist Dr Roelof Botha told our clients there were a number of factors supporting a downgrade, including an exceptionally high level of currency volatility, lethargic economic growth, high and rising levels of unemployment, low levels of consumer and investor confidence and a consistent increase in the public debt to GDP ratio (from 26.5% in 2008 to 49.4% currently).
He was confident, however, that South Africa may well be able to dodge a credit downgrade come December. The recovery of the metal and mineral commodity price cycle is certainly counting in our favour, as are the prospects of higher GDP growth in 2017 and 2018. The agricultural sector is recovering after the severe drought. We’ve achieved fundamental fiscal and balance of payments stability, and sustained growth in taxation revenues in real terms. The public debt to GDP ratio is still relatively low and is less than half the US figure.
The momentum being built up by the Save SA movement, as well as the retention until now of the executive team at National Treasury are also highly positive developments. Another good news story is the recently launched youth employment programme developed by the private sector and government, which aims to mobilise R8 billion per year for the next three years to create one million jobs, mainly through paid internships.
PERSPECTIVE, PATTERN AND PRICE
Our own director of investments, Alwyn van der Merwe, highlighted the approach that we at Sanlam Private Wealth (SPW) have always followed in the face of uncertainty. Our investment decisions remain informed by three crucial factors: perspective or macro-economic environment, prices across asset classes, and ultimately price and investor behaviour patterns across asset classes.
Alwyn emphasised that from a macro-economic perspective, we must of course take into consideration the so-called ‘black swan’ or extreme events we’ve been witnessing over the past two years, as well as the political upheavals on the home front. Despite these unpredictable occurrences which have driven market prices across the globe, however, the South African equity market has responded in a very lackluster way. In fact, over the last few years, our equity market has shown a somewhat muted response – and has moved sideways.
This sideways shift in local equity prices is very similar to the market pattern from 1998 to 2003, when share prices showed virtually no capital growth. Periods like these are highly challenging from an emotional perspective, Alwyn told investors, since our portfolio managers and clients are not seeing the returns they became accustomed to in the recent bull phase that commenced from the lows in 2009. But – and this is the lesson to be learnt – if investors had used the period between 1998 and 2003 to accumulate good quality assets, they would have been richly rewarded with spectacular returns in the bull market that followed for the next six years. Similarly, taking a long-term view, our current cycle presents an opportunity to acquire decent quality assets at prices that present excellent prospective returns for long-term investors.
In short, periods of consolidation in equity prices are not uncommon to professional investors. These periods are often testing for clients, as it is only natural to expect consistent, strong nominal returns. SPW understands these emotions, but as professionals we also know that times like these provide good long-term investment opportunities, and that it is in clients’ own long-term financial interest that they ‘stay the distance’ with our investment approach, which has proven its worth through investment cycles. Now is a good time to be reminded of the Buffet saying: “Be fearful when others are greedy, and greedy when others are fearful”.
We also heard from Alwyn that two years ago, the price of financial assets was relatively high and that investors could expect only modest returns from financial markets. The good news is that since the market has moved sideways for around two years now, it is much easier to identify pockets of value and pick good quality shares for our clients.
STATE OF CAPTURE: TROUBLING QUESTIONS
Since our client events came to a close at the end of last week – the fast pace of revelations and developments in South African politics that we have become accustomed to, has continued. This week saw the publication of the ‘State of Capture’ report from the office of the Public Protector – the last report drafted by previous office holder Adv Thuli Madonsela.
The report describes ethical, procedural and possible legal contraventions by a number of cabinet ministers and state-owned enterprises. Coupled with findings on the undue influence exercised by the Gupta family, these potentially politically explosive disclosures must all be deeply embarrassing to the ruling party and President Zuma.
The effect of the report and the judicial enquiry to follow is that the position of the president and his cronies is now even more strained – he and other leaders around him have been seriously tainted and mistrust in them has deepened.
Unless he resigns or is recalled, he will become a lame-duck president hamstrung by lack of credibility as well as power, as he will be kept in check by those in the ANC keen to oust him.
THE BOTTOM LINE
So it seems we are in a period of continued uncertainty, with both headwinds and tailwinds for South African investors. Amid all the doom and gloom, there are certainly positive stories emerging, bringing with them significant opportunities. What is the bottom line for investors? In our view, a cautious approach is still justified.
How long it will take for the current political turmoil to play itself out is unclear – what we do know is that patience is now required, as we experience the profound short-term impact of these events on financial markets. The State of Capture report might just herald in the era of change so desperately desired by most reasonable South Africans. This in itself could be good for restoring confidence and certainty.
Regards
Daniël
