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2019 Investment Views

SA’s ship is turning

28 November 2018
Authors: Jeremy Gardiner, Nazmeera MoolaHead of SA Investments

Jeremy Gardiner and Nazmeera Moola look at South Africa’s potential in 2019.


Jeremy: 2018 started so well and I think we were just so relieved. There was a new leader of the ANC and then a new President of the country and finally we had a leader we could be proud of in any situation. I mean not everyone can say that. The Americans aren’t happy with their leader. They were absolutely petrified when he went to Davos that he was going to alienate the entire planet with one speech. The Brits haven’t been happy with their leader for a while. The Germans aren’t happy with Angela Merkel. So this really is our turn.

Nazmeera: It was great coming into this year. Then having Jacob Zuma resign as a Valentine’s Day present-

Jeremy: Exactly.

Nazmeera: -11.00 p.m. on 14 February and then there was this huge feeling that we were all going to get put on track within the course of days because Cyril Ramaphosa was President.

Jeremy: It was a level of euphoria we actually haven’t seen since the World Cup.

Nazmeera: Completely.

Jeremy: Suddenly everybody was excited again after being so miserable in the fourth quarter of last year.

Nazmeera: And it was overdone. It was naïve because the problems that South Africa was facing after a decade of Jacob Zuma and his cronies in power, we are not going to be sorted out overnight.

Jeremy: I think you are right. I think people had underestimated the extent of the damage that had been done to this country in the past 8 years and now, through the State Capture Commission, we are starting to get a grip on exactly what was going on.

Nazmeera: Exactly and I think what happens is, by the time you got to June, the realisation had set in that this was going to be a bit of a long, hard slog and we went from the heights of Ramaphoria to a little bit of a depression.

Jeremy: Completely. I mean, as you say, from that unrealistic, almost naïve, euphoria through to dark depression again, emigration, everything in April/May and I think the interesting thing for me was how most South Africans immediately just blamed the country and says well, it’s our politics that has made the rand collapse, transport prices go up, food prices go up, economy contracts when, in actual fact, 50% of it was what was happening in America – tariff war, strong dollar, etc.

Nazmeera: What is happening in America, the sell-off in emerging markets, you have had emerging currencies weakening. So South Africa was vulnerable to what was happening globally.

Jeremy: Because I am right to say this was happening across emerging markets. We weren’t unique.

Nazmeera: Completely. So 2017 we had an awful local environment and we were buoyed by a very favourable global environment. That is why, when Pravin Gordhan was removed as Finance Minister, it didn’t matter as much for the rand because you had this $14 billion of inflows into the South African bond markets across 2017. This year we have seen significant net outflows. It has been completely the opposite global environment. So even though the local has gotten better, the global has been much more problematic.

Jeremy: And the foreigners haven’t picked up on that local getting better yet, have they? So there is still a chance that that could turn positive.

Nazmeera: There was an initial euphoria from foreigners so a big rush of money, particularly from equity investors, in March and then, when it became apparent that growth was going to be negative in the first half of the year, when it was going to take a bit of time, the money went out again and I think now we are getting to a point where South Africa is looking relatively more attractive to other emerging markets and you are starting to see emerging market investors look at South Africa more seriously. They are not quite ready to jump in. They want to see growth actually come through.

Jeremy: What do you think will bring them back? I mean, okay, so obviously the tariff war calming down would help a lot and I think that is going to start happening. I mean he is meeting with Xi Jinping beginning of December and apparently the Chinese are coming with a whole raft of new proposals that, hopefully – including switching their oil from Iran to America, their oil purchases and, hopefully, that works for President Trump and then we can calm down the tariff war.

Nazmeera: Jeremy, I am hopeful. I don’t have any expectations though. I think it plays to Trump’s base to be hawkish on China and, until you see the impact on the US economy from the war with China, I don’t think you are going to see Trump back off in any permanent manner.

Jeremy: Okay. So looking into 2019, you see tariff war continuing. Is there not a risk then that he pushes the world into a global recession?

Nazmeera: Yes.

Jeremy: But surely he is let’s say smart enough to know that and in 2 years’ time he has got re-election and it won’t really suit him if the global economy and, by default, the Americans are in recession.

Nazmeera: The American economy is too strong right now for that to be a serious contention in Donald Trump’s mind.

Jeremy: Oh, okay.

Nazmeera: Your storyline that you painted, which I think is a real risk, I think it is too far away and too theoretical for Donald Trump.

Jeremy: Okay because I keep hoping that he will – we always see him go in hard and then he retreats. That seems to be his style and I am just hoping that he has done that with the tariffs because it’s not wrong to go at the Chinese (there’s a huge imbalance) but I just keep hoping that he softens come December, come a whole list of new things they are going to buy from the Americans and then the tariff war subsides and investors focus on economic fundamentals, which means they start coming back to emerging markets.

Nazmeera: I think that if the Chinese come with some serious offers on the table, I would hope that the Americans consider it seriously. I would hope that Trump himself sees that he can take a large win out of this but let’s see.

Jeremy: Okay because then I mean a lot of analysts are saying the dollar has peaked plus interest rates aren’t going to go up much more than expected next year because growth will be slowed a bit by the split house, it will be slowed a bit by the tariff war, slowed a bit by the tax cuts being diluted shall we say. So, hopefully, then we won’t see interest rates too high and all of those three factors combined will see them coming back to us and then, as you said, South Africa is looking like one of the better ones.

Nazmeera: South Africa, there is a lot of persistent improvement that we have seen on the ground. It has been slow, slower than a lot of people would have liked, but I think you have actually seen some concrete steps take place over the course of this year that could result in better growth next year and certainly much better growth in 2020.

Jeremy: What are you looking at for next year?

Nazmeera: So I have got 1.8 for next year-

Jeremy: 1.8, okay, that is significantly up on this year.

Nazmeera: -which is reasonably optimistic but remember a lot of the subtraction from growth this year is agriculture.

Jeremy: Okay.

Nazmeera: So last year was boosted by this amazing maize crop we had. The rest of us didn’t feel any of the benefits but it was boosted by that. This year there is probably about 0.5% being subtracted from growth from the normalisation in that maize crop.

Jeremy: Yeah, okay, so 1.8 is a good number. I mean that is exciting.

Nazmeera: It is possible. I mean we need to see continuous progress on things like spectrum sales, the visa regulations they are talking about, this continuing instilment of confidence between business and government that leads to fixed investment spending needs to perpetuate through next year in order to get there.

Jeremy: Well, let’s hope. I think the other thing to stress as far as emerging markets go is that we are also looking great because the competition is all over the place. I mean huge political upheaval in Mexico and Brazil. Turkey, Russia, Venezuela, Argentina all disastrous plus our currency is cheap and our assets are cheap. So let’s hope they come back. I think also just from my side the other thing that we have got to get out of the way in this country is the elections.

Nazmeera: Yeah, agreed.

Jeremy: I think the amount of rhetoric, investor unfriendly rhetoric, that is going to be thrown around before then that is going to make people anxious, we need to get them out of the way. Hopefully, the President gets a strong mandate so that he can start providing the policy changes we need to see.

Nazmeera: I think that is exactly right. I think you need to see Cyril Ramaphosa receive a mandate to take some substantive change. You need to see the size of the cabinet cut. I think that will be a great first step but one of the positive stories for me that I have come across recently is it is reporting season so lots of companies are coming through our office, sitting in our boardroom and you have a CEO explaining his recent results to us and the number of companies talking about how they are partnering with government in various areas in quite significant ways is quite heartening. That is a change.

So we had Vodacom come in yesterday and Shameel, who is the CEO, is talking about the fact that all the text books have been digitised and they are busy looking at rolling out a tablet programme to all students, getting it subsidised through various aspects and Vodacom would then provide free data for text books. You need to buy data if you wanted to do anything else. That is how they monetize it but free data for text books.

Jeremy: That is amazing.

Nazmeera: That is amazing!

Jeremy: I think what is also amazing to me is I think you are starting to see companies speaking about the Ramaphosa effect in their results, which is also very heartening. What is also great is to see, after the President’s Investment Summit, $20 billion being committed by South African businesses, which is great because the locals have to lead. I mean we have had about $40 billion committed from the foreigners. So once all of that starts coming through, it really is going to help with growth and jobs.

Nazmeera: I think it will help. I think we will start to see the effects as we get into next year but I do think there is a lot more work that needs to be done and, fortunately, the government seems to understand it right now. My concern would be if they start taking the foot off the pedal, as they did for a period between April and August.

Jeremy: Correct.

Nazmeera: It almost took that second…

Jeremy: The first quarter was more than the most optimistic analysts were expecting and then, as you say, it slowed.

Nazmeera: Yeah and it almost took the second negative GDP print to confirm the recession to get the momentum going again.

Jeremy: Yeah. I think it is also just important to stress what has been done because there is so much being done. On a weekly basis, we make more progress. So I mean, just looking at it, Gupta assets and houses raided by the Hawks – that is impressive in itself. The President and his son both being charged and winding up in court. We have got a new business-friendly Mining Charter, an extradition agreement with the UAE so we can get people back.

Nazmeera: Very important, a very important extradition agreement. You have got a [change in size] and you are talking to – if you talk to people in the Treasury, they talk about the information flow as being completely chalk and cheese.

Jeremy: Really?

Nazmeera: The relationship between them and the Revenue Service is now vastly improved. They are able to actually coordinate policy. They are able to plan far better whereas a year ago that was not possible.

Jeremy: And that is happening across State-owned enterprises, isn’t it?

Nazmeera: Well, State-owned enterprises, you have seen boards changed of a number of key entities, you have seen CEOs changed in a number of areas. Eskom has a new CEO. Transnet, the previous CEO is now being fired and they are now searching for a permanent replacement. So you are seeing a lot of progress at State-owned enterprises.

Jeremy: Even though some of them are going 5-10 years to fix, at least we have stopped the rot, you put proper management in place and we are moving forward.

Nazmeera: I think what we need to remember is markets react to the delta. They react to the change. They don’t react to the absolute level. So we have had this reflection of the gradual degradation of the last 8 years in bond yields, in the rand and, as it improves, you will see the improvement in those variables as well.

Jeremy: Okay. Ten Zupta ministers fired, I mean that was also a big thing in itself.

Nazmeera: A lot of Zupta ministers fired and I think there will be more of that. I think right now the President has to be cautious in terms of not creating more enemies than he needs to.

Jeremy: Sure, which is wise. He has got to be very wary of that as well. So I think, in summary, what we are saying is that 2019 looks like you may see a combination of factors that make South Africans much happier in 2019 than they were in 2018. I suppose the last thing, all we have got to try and do now is win the Cricket and Rugby World Cups in the same year and then everyone will be happy again.

Nazmeera: I bow out when it comes to too much sport knowledge. My sport knowledge is too shallow for that.

Jeremy: Okay, thank you.

Jeremy Gardiner
Jeremy Gardiner
Nazmeera Moola
Nazmeera Moola Head of SA Investments

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