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It’s not too late, but we need to act now

Jeremy Gardiner, Investec Asset Management

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Despite our politics, we are still going to grow

As we enter the final quarter of 2017, the crippling impact of state capture on our state-owned enterprises is becoming increasingly apparent. The intense focus on ensuring tenders are rigged in the right direction has resulted in a complete void of sensible management in most of these organisations. How can Comair be profitable, yet SAA bleeds uncontrollably? Until now, foreign investors have continued to support us, largely because our missteps – despite a finance minister switch – paled into insignificance relative to the political madness that is Turkey, Venezuela, Brazil and Russia. However, now as our bad behaviour winds up on the front page of London’s Financial Times and as the corporate collateral damage spreads, these foreign investors are realising that state capture actually means the entities in which they are invested could actually collapse, and they want their money back.

As a country, we have signed guarantees, promising that if necessary, government would pay the money back. In theory this is fine, provided that several of them don’t ask for the money back at the same time. This is what they are doing now, and hence you have the Finance Minister – by hook or by crook – looking for billions and billions of rands.

Fortunately, civil society, big business and a remarkably brave and vigilant press are not taking this lying down. Not a week goes by without some form of state capture looting being blocked in the courts. South Africa is a country where the lawyers, funded by corporate SA, are seen as the good guys.

What is also interesting is that apparently the NDZ17 campaign is floundering a bit, leading to increased anxiety levels in the Presidency and in Saxonwold. The risk with this is that as things currently stand, a CR17 Presidency is for them an unacceptable outcome and could lead to potentially irrational behaviour such as declaring a state of emergency and putting all democratic processes on hold.

Any extreme behaviour will lead not only to the collapse of our economy and currency, but according to analysts also to a split in the ANC. The Party is well aware of this and needs to come up with an exit plan, which could even include immunity from prosecution. It is, however, unlikely that the opposition parties would agree to this. Interesting times indeed!

The good news is that we have six to twelve months of relative economic stability to sort out the issues mentioned above. Despite our politics, we are still going to grow – around 0.6% this year and 1.2% next year, roughly 0.8% less than we would have were it not for the finance minister switch.

More good news is that commodity prices are still rising, supported by global growth and a strengthening oil price, and that will provide support given that we are a commodity economy and currency.

In addition, the drought has broken and we are expecting a record crop this year. This has brought food prices down, and hence inflation and interest rates.

On top of all that, a world hungry for yield should see ongoing support from a flow perspective as investors have to increase their exposure to risky assets to plug developed world pension deficits.

Domestic equities should also perform better going forward. According to RMB Morgan Stanley, our confidence levels are at 40-year lows and apparently we have only been there four times previously. In all four cases there was a significant rise in equities thereafter. In addition, the benign inflation and interest rate environment is generally very positive for equity markets.

On top of that it is worth noting that roughly 60% of the earnings of the JSE come from offshore, so a weaker rand when it happens (not if, if we carry on behaving as we are) should see equities perk up as well.

Assuming the President doesn’t go further rogue (and that is a big assumption), all of these factors should see a happier SA equity market over the next three years than the past. However, we have to start behaving ourselves better in the next six to twelve months, otherwise things are going to start falling apart.

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All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an adviser or in a fiduciary capacity. No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. We endeavour to provide accurate and timely information but we make no representation or warranty, express or implied, with respect to the correctness, accuracy or completeness of the information and opinions. We do not undertake to update, modify or amend the information on a frequent basis or to advise any person if such information subsequently becomes inaccurate. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Any representation or opinion is provided for information purposes only. This is the copyright of Investec and its contents may not be re-used without Investec’s prior permission. Investec Asset Management is an authorised financial services provider. Issued by Investec Asset Management, October 2017.