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On My Mind

– A tale of two leaders

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Daniël Kriel

Former CEO of Sanlam Private Wealth

Following global equity markets’ good performance during 2017, the first quarter of 2018 was marked by immense volatility and negative returns. While global growth is expected to continue, it’s clear that markets are reacting to geopolitical risks spooking investors, not least of which US President Donald Trump’s trade war with China. Back home, South Africans are still in an exuberant mood as a result of policy shifts as well as progress on an African trade deal. While Trump’s actions are causing panic, the ‘Cyril effect’ has renewed hope for economic recovery. However, we can’t ignore the biggest risks still facing our economy: structural shortcomings and an unsustainable fiscal position.

The synchronised economic recovery across geographic regions that resulted in global markets returning 23% in 2017 faced a series of significant hiccups in the first quarter of this year. With the scores of most major indices down since January, global equities in general experienced their first quarterly drop in two years. One of the main culprits has been the tech sector, with privacy scandals sending Facebook into decline and threats by Trump against Amazon causing that company’s stocks to plummet.

Despite emerging market stocks performing better than those of the developed world in the first quarter, our own market performance has been nothing to gloat over. The JSE All Share Index (ALSI) is down 7.8% year-to-date, thanks in no small part to an uninspiring contribution by rand hedge stalwart Naspers, which has lost 16.49% since January.


The biggest current risk to global market stability is the escalating trade tension between the world’s two largest economies. The game of brinkmanship between Trump and his Chinese counterpart, Xi Jinping, with the two leaders slapping tariffs on each other’s exports, is sending jitters through global markets – including our own.

Trump is of the opinion that ‘trade wars are good, and easy to win’ (his own tweet). Most market watchers agree, however, that there’s never been a full-scale trade war in history that hasn’t had unintended negative consequences. A recent article by The Economist Intelligence Unit points out that in a trade-war scenario between the US and China, the costs will be steep – particularly for US consumers, who will bear the brunt in the form of inflation. As Xi himself has said, it’s a lose-lose situation.

Interestingly, we may not only be witnessing the start of a global trade war, but also the re-emergence of a Cold War between the West, led by the UK, and Russia. There’s been a distinct chill in relations between Russian President Vladimir Putin and his western counterparts after the expulsion of than 100 Russian diplomats from several western countries accusing Moscow of being behind the poisoning of a former Russian spy and his daughter in the UK.


While Trump doesn’t appear hell-bent on making new friends, our own new president is proving his commitment to greater co-operation between South Africa and other African nations to boost our economy. Although Ramaphosa didn’t sign the agreement by 44 African states at the African Union’s Extraordinary Summit on the African Continental Free Trade Area (AfCFTA) in Kigali in March, he did sign the declaration on the establishment of the free trade area, committing to put his name to the actual agreement, pending the necessary approvals from Parliament.

In fact, Ramaphosa stated at the event that the trade deal is ‘what Nelson Mandela wanted to see realised. It’s truly a new dawn for Africa’. In contrast, the other non-signatory to the agreement, Nigeria, skipped the summit at the last minute, ostensibly bowing to pressure from trade unions in that country.

The continental free trade agreement is not without its detractors within our own borders, with some arguing that it may lead to immigration of more people from poorer countries. Most economists seem to agree, however, that greater intra-African trade has the potential to transform our economy. It will be especially good for the export of manufactured goods, which will translate to increased job creation. Importantly, rating agency Moody’s has stated that a successful African free trade area could improve the region’s credit profile.


On that note, in the same week as the Kigali summit, Moody’s affirmed South Africa’s investment-grade sovereign credit rating – one notch above junk – and lifted its outlook from negative to stable. This was a welcome reprieve, since a downgrade would have resulted in South Africa being excluded from Citi’s World Government Bond Index, potentially leading to outflows of around R100 billion.

The rating agency said in a media statement that the ‘previous weakening of South Africa’s institutions will gradually reverse under a more transparent and predictable policy framework… [which] will gradually support a corresponding recovery in its economy’.

South Africa’s new administration would face significant hurdles, however, with Moody’s further stating that ‘the political, policy and practical challenges of meeting diverse economic, social and fiscal objectives cannot be underestimated. Failure, at least [as] perceived by investors…, could lead to a further cycle of eroding economic, fiscal and institutional strength’.

We couldn’t agree more. Moody’s decision was a sensible one, but the structural shortcomings of our economy and the obvious fiscal risks remain a stark reminder that Ramaphosa’s promises of a ‘new dawn’ now need to be accompanied by meaningful action if we want to turn around our struggling economy.


Where does all this leave risk-weary investors? During and in the wake of the Zuma regime, South African shares were sold off significantly, in many cases undeservedly. In our view, the prospects for the average South African-listed counter are certainly rosier than investors would appear to believe. In fact, we’re of the view that from a low base, many now offer decent medium-term prospects.

This is in contrast with the global picture – in the international arena markedly increased volatility has prompted fears that the second longest bull run in equities since World War II may be coming to an end. We’re currently in an advanced stage of the economic cycle, and it remains to be seen how resilient markets can remain in the face of policy errors, such as aggressive monetary policy or ill-considered trade wars. When the cycle starts tiring, it’s highly susceptible to shocks, which Trump seems intent on providing.


I’d like to conclude by contrasting Trump and Ramaphosa: the former the leader of the world’s largest economy, the latter heading up an African economic powerhouse. Two leaders, two vastly different approaches. Both are successful businessmen – perhaps questionable in the case of Trump – but that’s just about the only parallel to be drawn. Whereas one is, well, completely unpredictable, the other is expected to usher in a new era of stability. While one is determined to pursue protectionist policies, the other is seemingly committed to free trade. The words and deeds of one are giving rise to global investor anxiety. The other is so far giving investors hope. Now we just need to translate this positive story into action to get our economy moving again.

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