On My Mind

– A new voice for a new story

A new beginning certainly seems to be what we’re currently enjoying. Since his election in December as the ruling party’s new leader, Cyril Ramaphosa has done more to improve both the political and the economic climate, and give South Africans renewed hope for the future, than President Jacob Zuma has managed over the past nine years.

We’ve heard the Deputy President commit to rebuilding our nation, urge the National Prosecuting Authority to take decisive action against corruption, and call for a ‘new deal’ for economic growth – including luring back foreign investors, staving off the rating agencies and crucially, restoring the role of state-owned enterprises (SOEs) as drivers of development.

It’s clear that the new ANC leader is speaking a different language to that of his predecessor. Indeed, I’m finding it fascinating to witness how he’s already changed the narrative in such a short space of time, with terms like ‘dignity’ (even in respect of Zuma), ‘rule of law’, ‘policy certainty’ and ‘institutional stability’ becoming entrenched in our discourse. We can but hope that phrases such as ‘state capture’ and ‘white monopoly capital’ will be banished to ‘last year’s language’.

FIRING THE FIRST SALVOS

But Ramaphosa isn’t just talking tough. The past weekend saw him fire the first salvos at the captured SOEs by announcing a new, credible board led by a well-respected chairperson at embattled power utility Eskom, effectively sidelining Public Enterprises Minister Lynne Brown. This is a giant stride in the right direction towards cleaning up the mess at our struggling SOEs – currently the biggest single risk haunting our economy and the fiscus.

The Deputy President hasn’t shied away from controversy, especially relating to land reform. He has insisted, however, that the latter won’t impact negatively on food security. Interestingly, Ramaphosa’s pledges on the land issue, and his (unfortunate) inheritance of Zuma’s promise of free higher education, have effectively taken the sting out of the EFF on these matters.

The ‘Ramaphosa effect’ has resulted in renewed optimism across the political spectrum, buoyed by the prospect of finally ridding South Africa of the corrupt, inept leadership of President Zuma. The rosier outlook has been reflected in positive movements of both our fragile currency and the markets, and an uptick in business confidence. And this can only be good news for our beleaguered economy.

A TOUGH TASK

Ramaphosa is now leading Team SA at the World Economic Forum in Davos, which is on the front foot for a change. The delegation still has a tough task ahead, however, in convincing global investors that South Africa is a sensible investment destination – given the hollow promises of Zuma at previous Davos events that our country is ‘open for business’ while his actions (or rather, lack of them) spoke an entirely different language.

We are, after all, witnessing an unusual period of extended, synchronised global growth, with many investment opportunities elsewhere. Investment bank Goldman Sachs naming South Africa as 2018’s ‘big emerging market story … given the market-friendly ANC leadership … outcome’ has therefore been a decidedly heartening development.

For our country to really come out of the woods, however, Davos will have to be followed by further demonstrable actions to kick-start our economy by Ramaphosa and his team – with getting rid of Zuma at the top of the list. Other heads on the chopping block should include those of Finance Minister Malusi Gigaba, National Director of Public Prosecutions Shaun Abrahams, and South African Revenue Service Commissioner Tom Moyane. Filling these positions with efficient and trustworthy individuals will go a long way towards fulfilling the new leadership’s pledge of economic revival.

Whether delivered by Gigaba or not, the Finance Minister’s upcoming Budget Speech on 21 February – which will no doubt include some tough measures – will provide a good indication of how serious a Ramaphosa government is likely to be about slashing public expenditure and adopting policies that could stimulate growth.

CORPORATE SCANDALS

While events on the political front have engendered fresh hope among South Africans, the same can’t be said for pockets of the private sector. The shock revelations on the failure of corporate governance, transparency and values-based leadership at Steinhoff at the end of last year have reminded us how things can go horribly wrong – even for one of our market darlings – without proper checks and balances.

While the collapse of the Steinhoff share price has had a negative impact on the savings of South Africans across the board, including those of our own clients, it has also had a negative effect on the 2017 investment performance numbers of most asset and wealth managers. Despite this, our clients invested in our best house view equity portfolio will still have received a nominal return of 15% in 2017, handsomely exceeding the inflation rate.

While hindsight is of course always 20/20, there are certain questions that can rightfully be asked after a market event of this magnitude. The crucial question is how investment teams globally, including SPW, failed to pick up on the misrepresentation of the true state of affairs at Steinhoff. And how it is possible that a flamboyant CEO like Markus Jooste could deceive highly talented analysts and auditors for so long. Unfortunately, we probably won’t have answers until the audited financial statements and the results of the forensic audit by PwC as requested by the Steinhoff board become available.

Elsewhere in this publication, our Director of Investments, Alwyn van der Merwe, sets out in detail our own investment philosophy and process, as well as our motivation for including and holding Steinhoff in our portfolios.

DEEP INTROSPECTION

The past few weeks have been extremely challenging for us at SPW, as we’ve always taken our responsibility of protecting and growing the wealth of our clients very seriously. Our success in this regard has been evidenced by an enviable investment track record of outperformance over the long term.

This stellar track record has been dealt a heavy blow by the Steinhoff share price dive. Never before has a single share had such a negative impact on our portfolios and our clients’ investments. Our investment team is therefore not taking this matter lightly, on both professional and personal levels. Deep introspection and debate are currently taking place at various levels in our organisation to determine how we’ll address the questions that have emerged during the Steinhoff experience – as well as the lessons learnt.

This process can, however, only be finalised once we have all the details on what went wrong. Only then will we be in a position to make informed decisions about the investment case for Steinhoff, as well as what steps need to be taken, including potential legal action. Be assured that we remain committed to our role as guardians of our clients’ wealth, and have every intention of again achieving the track record we’ve become known for.

ROLE OF AUDITORS

Another important post-Steinhoff question centres on the task of auditors, and their future role in an ever-changing and complex world where business is done across borders and without boundaries. There’s no doubt the auditing profession is under intense scrutiny, and a broad discussion is required between this industry and business about the scope and nature of audits, the role of auditors and the relationship between auditors and management.

An encouraging development has been the recent appointment of the highly experienced Professor Wiseman Nkuhlu as Chairperson of scandal-ridden auditing firm KPMG – one hopes that he’ll be able to clean house and in so doing set an example to similarly tainted organisations.

Scepticism has also surfaced around certain ‘research houses’ and the ethicality of their behaviour – a case in point is Viceroy Research, the US-based firm that produced an incriminating report on Steinhoff at the time of the share price plunge, and which remained faceless until last week. Viceroy’s report may have been less concerned with exposing the truth than with supporting the firm’s own short position on the stock. We believe that to protect shareholders, this type of behaviour will in future need to be carefully examined by the regulators.