More than two months after the national and provincial elections, President Cyril Ramaphosa’s “new dawn” has become old hat.
As much as markets were hoping for a clear answer to the question of whether South Africa would come together under Ramaphosa’s leadership or continue to fall apart, political uncertainty prevails and the fiscus remains under extreme pressure.
Although the election outcome was as market-friendly as we could expect, his Cabinet and the ANC-dominated parliamentary portfolio committees represent a compromise with the ANC faction that lost at the ANC’s national conference at Nasrec at the end of 2017.
What’s more, the forces of state capture are not leaving the stage quietly, choosing instead to fight the reformists in the ANC via proxies such as the public protector’s office. Meanwhile, the political drama is distracting the country’s leadership from fundamental economic challenges that require decisive action.
With the South African Revenue Service (Sars) missing tax collection targets and expenditure rising, the Budget deficit and government borrowing are ballooning. State-owned enterprises - especially the Eskom behemoth - are kept afloat with extravagant bailouts.
Meanwhile, Ramaphosa is unable to forge ahead with reforms such as the unbundling of Eskom, because he lacks the necessary political support.
The government’s debt to gross domestic product (GDP) ratio is moving towards debt trap status, where the only way to fund increasing interest repayments is to take on more debt. The picture could get even uglier if Moody’s finally downgrades South Africa’s sovereign credit rating to so-called “junk status”, in turn causing borrowing costs to rise.
Rather than adopting much needed reforms, the government could make a bad situation worse by adopting policies such as prescribed assets for retirement funds. This would force fund managers to invest some of the money under their management in state debt and projects. This would lead to inefficient allocation of capital, which would not find favour with the markets.
Market reaction to the political noise and the fiscal risks has so far been lukewarm. The JSE climbed around 12percent between the beginning of the year and July 26, and the rand has remained reasonably resilient. Yet we need to see South Africa’s performance in a global context, with US interest rates and appetite for emerging market assets helping to prop up the rand and the JSE.
During July, for example, we saw the rand strengthen, despite heightened political risk and a deterioration in fundamentals. But we have underperformed relative to emerging market peers, because the rand and South Africa are not seeing the full benefit of “risk-on” when it occurs. We are at the mercy of the Fed, trade wars and other global dynamics.
So what does this all mean for the investor? Let’s start with the rand. We believe that the volatile cocktail of a potential Moody’s downgrade, Eskom’s impact on government finances, tepid GDP growth, and factional wrangles in the governing party spell downside risk for the currency.
For the rand to outperform, the stars would need to align: a decisive resolution to the political drama, a benign resolution to trade disputes between US President Donald Trump and US rivals such as China, and a solution for Eskom that moves some of its debt off the government’s balance sheet. This is not impossible, but it is unlikely.
When it comes to international stock markets, earnings and growth appear to be slowing down and stock prices are extended.
A correction would not be surprising. However, in the run-up to the next US election, policy and politics could be supportive of equity markets. Trump has, after all, defined US stock market performance as his barometer for success.
Closer to home, we believe there could be value in local equities, but only if South Africa’s economic and political platform stabilises. We will also need a catalyst to ignite the local stock market and, right now, it is difficult to imagine what that catalyst could be.
We remain optimistic about South Africa, because the country has endured many challenges and crises over the years. However, while we hope for the best, we remain pragmatic in our planning.
This means remaining committed to diversification from an asset class and geographical exposure perspective. Coming together or falling apart? There is no certain answer, which means protecting your portfolio as best as you can from risk while positioning it for the opportunities of growth.
Andrew Duvenage is the managing director of NFB Private Wealth Management.