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On My Mind
– Is the populist wave receding?
Former CEO of Sanlam Private Wealth
May 02, 2017
The global surge in populism evidenced mainly by the infamous Brexit vote in June and the election of Donald Trump as US president late last year, was dealt a severe blow when the Dutch voted last month for the continuation of a liberal coalition government rather than bowing to the right wing.
And after the first round of the presidential election in France on 23 April, defenders of a united Europe – especially Germany – must have breathed a sigh of relief as the results placed centrist candidate Emmanuel Macron in the lead. Boosted by Macron’s victory, the European markets traded sharply higher last Monday.
Despite the Macron win, however, it’s clear that support for protectionism and anti-immigration policies hasn’t yet been defeated – his main rival, far-right insurgent Marine Le Pen, still secured 21.5% of the first-round vote against Macron’s 23.8%. A presidential win for Le Pen could put the European Union (EU) in danger of a Frexit, which would have disastrous consequences for not only Europe – the impact of the continent’s second largest economy exiting the EU would have a ripple effect in financial markets across the globe.
Although Macron is widely expected to emerge victorious, election polls cannot be trusted – as we’ve experienced with both Brexit and the US presidential vote. So, along with the rest of the world, we’ll have to wait and see what happens on 7 May when the French cast their ballots in the final run-off between the two candidates.
Meanwhile, in the UK, Prime Minister Theresa May has made an about-turn in announcing an early general election on 8 June, in a bid to secure a strong mandate to negotiate a ‘clean’ Brexit deal with the EU. In our view, this is a brilliant move. May is expected to return to Parliament with a few extra seats, given that the Labour Party is divided under weak leadership. A stronger hand will enable her to reduce the likelihood of a hard Brexit and negotiate an exit strategy appropriate for Britain – without having to take into account a general election in 2020. (An interesting development at the weekend was former Prime Minister Tony Blair’s announcement of his intention to return to politics, albeit in a nonpartisan way – ostensibly to influence the Brexit debate.)
A clear mandate for May to negotiate with the EU on a new trade deal and exit terms will result in greater market certainty – after the snap election announcement, the pound jumped to a six-month high. We believe the UK market will remain volatile until the June elections, but a solid victory for May should lead to increased stability, with positive consequences for business confidence and the markets.
A worrisome development in the international arena over the past few weeks has been the deteriorating North Korean situation, with that country threatening a ‘thermonuclear war at any moment’ and Trump urging North Korean leader Kim Jong-un to ‘behave’. Since we have no idea to what lengths Trump will go to ensure acquiescence to his demand – he did bomb a Syrian government airfield last month – this state of affairs is of grave concern. We can but hope that all parties involved heed the call of Chinese President Xi Jinping – in a recent phone call to Trump – for restraint in relations with North Korea. (In a surprise and controversial move at the weekend, Trump announced his willingness to meet with Kim under the ‘right circumstances’ – whatever that might mean.)
On local shores, we haven’t escaped the populist tide sweeping through large swathes of the world. In fact, it has gathered momentum over the past month as we’ve witnessed protest after protest against President Jacob Zuma, with another march on Freedom Day by the newly formed Freedom Movement – a coalition of opposition parties, civil organisations and labour. And yesterday, a May Day rally by Cosatu in Bloemfontein had to be halted after disruptions by anti-Zuma protestors.
A most encouraging development on the local political front is that Deputy President Cyril Ramaphosa has become more outspoken. In what has been described as the ‘launch’ of his campaign for leadership of the ANC late last month, Ramaphosa criticised President Zuma’s Cabinet reshuffle, and promised to fight ‘the demon of corruption’. He also announced his support for the Public Protector’s recommendation for a judicial commission of inquiry into state capture.
Other excellent news for South Africa is the court ruling by the Western Cape High Court last week against the government’s proposed nuclear energy deal. In a case brought before it by Earthlife Africa and the Southern Africa Faith Communities’ Environmental Institute, the court ruled that the procurement process in the deal between South Africa and Russia was unconstitutional and illegal.
The two NGOs described the ruling as a ‘major victory for democracy’. We agree – the continued independence of our judiciary, and the fact that we have a vibrant and involved civil society committed to ensuring accountable governance, certainly augurs well for the future of our country. As we’ve stated before, the biggest damage Zuma could still inflict on South Africa would be signing off on the nuclear deal, and the High Court verdict has now delayed this process considerably.
On the economic front, we do need to raise the question of how our new Finance Minister, Malusi Gigaba, is faring. Gigaba set off on an investor roadshow in the US late last month, but given his limited experience in Treasury and the financial sector in general, and without the support of either labour or business, it’s doubtful he was able to achieve much success.
During the roadshow, Gigaba claimed a meeting he had with ratings agency Moody’s – which has placed South Africa on review for a downgrade – was ‘constructive’. It remains to be seen whether his input will sway the agency, which is due to send a team to South Africa later in May. It’s telling that Standard & Poor’s – which has already cut our credit rating – has warned that we could get nudged down even further if the current uncertainties delay the structural reforms needed to grow our economy.
What is clear is that the very real divisions in our government have affected policy continuity, and we predict this policy impasse will continue in the run-up to both the ANC policy conference toward mid-year and the party’s elective conference at the end of 2017. The ANC leadership is not expected to make any major policy decisions, which means the current policy uncertainty in key state departments will continue. Under these circumstances, our economy won’t do much more than limp along.
In conclusion, if there’s one thing we’re relatively certain about, it’s uncertainty. The remainder of 2017 is likely to continue to be highly volatile, but it’s a wave we’ll just have to ride out. While we realise it’s hard to remain unemotional in the face of unpredictable turbulence in the geopolitical landscape, from an investment perspective, this is always the most prudent approach. In our experience, uncertainty brings with it good long-term investment opportunities. At SPW we’ll continue to be on the lookout for these to grow our clients’ wealth, while remaining committed to our long-term investment philosophy of protecting our clients’ wealth first and foremost.
Sanlam Private Wealth manages a comprehensive range of multi-asset (balanced) and equity portfolios across different risk categories.
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