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Taking Stock Spring 2019

It's now or never

18 November 2019
Author: Jeremy Gardiner

Reading time: 4 minutes

At a glance:

  • Despite South Africa’s issues, the SA bond and equity markets have strengthened year to date.
  • Finance Minister Tito Mboweni’s economic plan is good, but now we need to see it implemented.
  • A benign global environment could give our president some much-needed tailwinds to assist with growth.
  • The case for emerging markets will remain intact, depending on global factors such as trade, the stability of the dollar and the US interest rate environment

Finally, some great news! And my goodness, did South Africa need it. Mind you, most South Africans confidently expected our team to successfully “Brexit” their English counterparts, but few expected the result to be as comprehensive as it was. The big surprise, it appears, was for the English, with one commentator on Sky News asking, “how it was possible for a team not expected to make the semi-finals, to beat England in the finals.”

Many have written about the hard work, grit, determination and tough choices that both coach and team had to make along the way to get there, with many parallels being drawn with our country. Watching the president lift the trophy along with captain Siya Kolisi was magnificent and by far the most published photo. Hopefully, on the long flight back from Japan, the president reflected on the tough decisions and hard work that lie ahead for us as a country.

Because, as Finance Minister Tito Mboweni said recently, it’s “now or never.” For a year, analysts have been saying we need to make some hard policy decisions to get growth going. We also need a comprehensive plan for Eskom “sooner rather than later”. Well, it didn’t happen “sooner”, and it is now “later”.

The question is how much longer we have before Moody’s runs out of patience. Until now, the ratings agency has been like an overly permissive parent constantly forgiving an errant child. An outlook downgrade means that we now find ourselves precariously balanced on the edge of the cliff. Theoretically, it gives us 12-18 months of breathing space, but in reality, it’s only two to three months. Tito Mboweni has to get his way by the time he delivers the national budget in February, or else.

His “We are broke” speech during the medium-term budget policy statement, has hopefully introduced some level of economic reality and understanding in the minds of those who are hostile. Government and the unions need to sit down together and hammer out a workable solution. We are running out of options. Succeed, and we will survive February. Fail, and then we’re pretty much done.

Despite all of the above, the SA equity market this year has finally managed to produce a reasonable performance. During our first Taking Stock event of the year, we put up a chart predicting a 15% return from both SA and international equities. At the time, after five years of flat SA equity markets, this was a bold call, and many described it as way too optimistic, given the potential risks of Eskom and junk downgrades, among others.

And this is the dilemma South African investors face, as they try to keep their investment noses above the political water. The fact that despite all our issues, the SA bond and equity markets have strengthened year to date.

We also said in the August edition of Taking Stock that South Africa was struggling with a crisis of confidence, and in order for confidence to return, we would need certain circumstances to bounce in our favour.

  • Firstly, from an international perspective, we needed global trade wars not to worsen. We felt this was a reasonable expectation given that Trump has elections in November next year and needs a strong US economy and stock market if he’s to have any chance of re-election. This has finally eventuated, and it looks like some sort of US-China deal is imminent.
  • We also cautioned that a no-deal Brexit would result in a risk-off environment, damaging us collectively as an emerging market, and individually from a fixed direct investment perspective. Fortunately, a no-deal Brexit is off the table, and a smooth, managed exit is now the most likely Brexit outcome.
  • We said declining US interest rates would help. We’ve seen several cuts so far, and although now officially on hold, there may still be more to come.
  • We need a stable dollar, which is currently the prediction from most analysts.
  • If all of the above conspire favourably, the case for emerging markets remains intact.
  • Domestically, the picture is less pretty, and we had been expecting more progress by now.
  • Consistent policy progress, to encourage investment and get growth going, is sorely needed. Mboweni’s plan is good and what we need, but now we need to see it implemented, and there’s a fight coming which he may or may not win.
  • Several high-profile arrests are needed in order to restore confidence. The lack of progress is understandable given how the crime-fighting agencies were hollowed out under the previous administration. However, the media has already done a lot of the work. In addition, the National Prosecuting Authority has enlisted four of the country’s top legal minds and received a significant cash injection (R1.3 billion) from government. Expect results soon.

A benign global environment, as potentially illustrated above, could give our president some much needed tailwinds to assist with growth, as opposed to the Trump-induced headwinds he’s had to face thus far. Any resultant rand strength also goes a long way to restoring South Africans’ confidence in the country.

And then finally, at the first Taking Stock event of the year, I mentioned the factors needed to restore confidence. For good measure, I ended by saying all we needed to do was to win the Cricket and Rugby World Cups. So, we only managed to get half of that right, but still, the odds then would have been good. We’re a pretty up-and-down nation when it comes to confidence, and the victory in Japan will go a long way!

Jeremy Gardiner
Jeremy Gardiner

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