By Nazmeera Moola
Nazmeera Moola provides her views on recent events at the ANC Elective Conference and their role in South Africa's wider political story.
Concrete steps from new ANC leaders required to make the recent rally sustainable
In a remarkably close election, Cyril Ramaphosa became the new President of the ANC, beating out Nkosazana Dlamini-Zuma by 179 votes on 18 December 2017. While the rand, equity markets and the local South African bond market rallied ahead of the election, the currency retraced some of its gains when the announcement was made. The rally looks to be done for now. For further positive momentum, concrete signs of progress are needed.
This will not be easy. Part of the reason for that will be the divided top 6 of the ANC. The top 6 are evenly split between three members of the Ramaphosa slate (President: Cyril Ramaphosa, Chairman: Gwede Mantashe, Treasurer-General: Paul Mashatile) and three members of the Dlamini-Zuma slate (Deputy-President: David Mabuza, Secretary General: Ace Magashule and Deputy Secretary-General: Jessie Duarte).
After a dispute over the missing 68 votes, the top 6 remained unchanged when the conference closed. Given the divisions in the top 6, the composition of the National Executive Committee (NEC) was always going to be key. The result is quite divided, though on balance, it appears more supportive of Cyril Ramaphosa. Of the 80 members of the NEC, 42 appeared on the last version of the CR17 campaign list that we have seen. While they did not appear on either list, a further two members of the NEC are clearly sympathetic to Cyril Ramaphosa. In addition, at least six members who appeared on Nkosazana Dlamini-Zuma’s list are pragmatic members of the ANC, and they are very aware of the need to stabilise both South Africa’s economy and the ANC in order to ensure the party remains in the majority in 2019. The concern is that a number of questionable members who have a poor history of policy-making and execution were re-elected to the NEC.
Given the divisions, developments going forward will be closely watched. As Cyril Ramaphosa said in his closing address: “Our people will judge this Conference not only by what we have done here over these five days, but – perhaps most importantly – by what we do next. The people of South Africa want action. They do not want words.”
Cyril Ramphosa’s speech had many good words that promoted unity of both the ANC and the country as a whole. It also delivered a strong message against corruption and ‘accounting irregularities’ in the private and public sectors and the need to improve governance of state-owned entities – notably Eskom. Unfortunately, interwoven into his speech was the evidence of the ANC’s need to find middle ground on key areas, notably land expropriation and nationalisation.
After a decade of sub-par growth and excessive government spending, South Africa needs growth to rebound to 2.5% in the coming year to stabilise the debt-to-GDP ratio in the next three years. This stable debt profile is needed for South Africa to hang onto the Moody’s investment-grade local currency rating.
The pick-up in growth is only possible if consumer confidence returns followed by business confidence. Household cash balances at commercial banks as a percentage of GDP have risen sharply in recent years, and are currently 3.5 percentage points of GDP above the long-term average. This translates into roughly R160bn extra sitting in cash or cash-like instruments that could be spent.
If consumers enter 2018 feeling more optimistic, this is certainly possible. However, any spending buoyancy will be offset by tax hikes, including limited relief for inflation and potentially VAT on fuel and property rates. Therefore, a significant boost to confidence is required to overcome this. A change in the President of South Africa in early 2018 could go a long way to generate such confidence.
Beyond the consumer, corporates need to start investing. The relationship between business and Cyril Ramaphosa is far stronger than it was between business and Jacob Zuma. This has often been used as a criticism against Ramaphosa in the ANC leadership race. However, this should turn from a hindrance to a help in 2018, as the higher degree of trust encourages business to start thinking about investing.
In order to realise a long-term boost to investment, the regulatory environment needs to improve. Policy uncertainty has been a key reason for the lack of investment. For example, mining volumes have contracted in South Africa through 2017, despite the pick-up in commodity prices. Mining companies are not investing and a good portion of the blame is the disastrous process around the Mining Charter. There are several other examples such as this.
The concern around the divided top 6 and NEC is that their ability and commitment to implement such measures will be limited. Key areas to watch in the first two months of 2018 are:
- The release of the NEC statement on 13 January, which will expand on the key decisions of the National Conference. Specific focus is required around three main issues:
- The expropriation of land without compensation. This was explicitly supported with a caveat: “It has also resolved that in determining the mechanisms of implementation, we must ensure that we do not undermine the economy, agricultural production and food security.” Since the biggest stumbling block to land redistribution is the inefficiency of the bureaucracy and not the acquisition of land, this is not likely to achieve much. Unfortunately, this grey area is likely to sit uneasily with rating agencies, foreign investors and farmers looking to expand production.
- The decision to nationalise the South African Reserve Bank (SARB). While this may be largely symbolic, it has the potential to get messy and cause unnecessary noise, particularly after previous moves by the Public Protector to impinge on the SARB’s independence. Shareholders have no say in the running of the central bank and receive a minimal dividend. However, the mechanism where the value of the shares is calculated is likely to prove very contentious. Therefore, the value of the move is limited, with large potential downside.
- The handling of President Zuma’s promise of free higher education for most students. This is unaffordable, unless severe cutbacks are implemented in other areas.
- Developments at the National Treasury and Department of Finance. After the erosion in 2017 of their institutional capability and credibility, the shoring up of these two closely related entities is key – both for South Africa’s remaining investment-grade credit rating and the sustainability of the country’s finances in the long term.
- The 2018 Budget on 21 February 2018. This will be a difficult juggling act – whoever is Finance Minister at that point.
- The durability of President Zuma’s presidency. If he steps aside in early 2018, that will help lay the platform to first boost consumer confidence and then business confidence.
The election of Cyril Ramaphosa and a potentially workable NEC is undoubtedly good news for financial markets. Nonetheless, given the split in the top 6 and the composition of the NEC, concrete steps from the new leadership of the ANC are required to make the recent rally in South African assets durable through 2018.
Comments from our investment team
Quality (Investec Opportunity and Cautious Managed)
Cyril Ramaphosa’s election to President of the ANC is an apparent win for all South Africans. It symbolises the promise of reduced corruption, increased political certainty, investor-friendly policy and better economic growth. As South Africans, we should be joyful and celebrate this outcome. But as investors, we should remain rational and focus on the opportunities at hand. It is tempting to allow oneself to be enveloped in exuberance and hope, but the outcome of the elective conference does not dismantle the system of patronage that has weighed on South Africa’s economic prospects. The local environment remains weak; budgetary concerns are forefront of mind; equity markets are toppish; and global risks remain.
The Opportunity and Cautious Managed strategies have not been positioned for a particular outcome. We have instead focussed as we always do on the best opportunities on a bottom-up basis, and, in doing so, have constructed a portfolio that is balanced against a multitude of risks. We would advise investors to remain cautious. Local assets and the rand have strengthened materially on this political outcome, but we do not believe that the local environment is supportive of these higher prices. We will continue to assess the opportunity set and grow your capital in a prudent manner.
SA Equity & Multi-Asset (Investec Equity and Investec SA Equity)
Over the past 72 hours, all eyes were focused on the ongoing 2017 ANC elective conference. To date, only the top 6 positions have been filled, with some dispute re the number of vetted delegates actually participating in the election – with some allegedly unaccounted for. Furthermore, the decision-making body of the ANC does not rest with the top 6 alone, but with the broader national executive committee (NEC) of 80 members.
Members of this body will be elected by the end of the conference on 20 December 2017, and this may materially impact the likely direction the party’s new leadership will ultimately pursue. Meanwhile, government under the leadership of Jacob Zuma remains in place and the reach of Luthuli House (the ANC’s headquarters) will be limited in so far as decisions, if any, made by the ANC are in conflict with those espoused by the Zuma presidency. From available information, it is clear that the near term will likely be filled with uncertainty around two centres of power, the ability and willingness to adopt a reformist approach by the new leadership under Cyril Ramaphosa and, lest we forget, far reaching judicial pronouncements that may well have a near-term and decisive impact on who leads the country in the foreseeable future. While answers to many questions will take time to materialise, the market has in our view, correctly, adopted a view that Cyril Ramaphosa, of all the potential candidates, will in time have the best chance of stemming the rapid decline in the state of governance and reclaiming the ANC’s long-held purpose of delivering a better future for all who live in this country.
Given these uncertainties, we prudently manage our investments in a bid to ensure that we have no overexposure to any one macroeconomic or market event that could possibly overwhelm our fundamental, bottom-up approach to investing. In the past few months leading up to the ANC elective conference, we focused on ensuring that our equity allocation was neutral from a sector and macro risk perspective, while employing our bottom-up process to assess stock-specific risk. The sharp appreciation of the local currency recently has impacted the rand returns of our direct offshore investments and companies generating their earnings offshore, while simultaneously boosting those that are focused on the local economy, including banks, property and government debt.
We believe a Ramaphosa win should be pro-growth and pro-reform – positive for SA domestic equities and local fixed income. However, a mixed slate within the top 6 and NEC could likely weigh on any reform agenda. On a medium-term basis, a better macroeconomic strategy should support positive earnings revisions on the back of a stronger currency, lower inflation/policy rates and stronger economic growth. Medium-term challenges remain hinged on the costly political path to restore conditions for higher sustainable GDP growth. We will continue to monitor the political backdrop in the context of broader local fundamentals and consider the impact this may have on the medium- to long-term prospects of the available opportunities.
Overall, our balanced investment approach continues to be reflected in the diversity of our portfolios. Our equity exposure remains diversified, with our positions driven by operational improvements and relative earnings expectations. We have select exposure to ‘SA Inc.’ stocks (banks and retailers), global cyclical and defensive rand-hedge businesses. This diversification is further enhanced in our multi-asset strategies given our exposure to different asset classes and regions.
SA Fixed Income
The ANC elective conference has been a major source of uncertainty for local fixed income markets for some time. Whilst the initial reaction to the top 6 outcome is positive, the situation remains fluid and the probability of necessary reforms will not be clear for a few months yet. This gives the fixed income market a moment to reflect on South Africa’s economic fundamentals, and the outlook is still one of low inflation and low growth. This mix is typically positive for fixed income assets and we continue to try and exploit this in a manner that is cognisant of the unpredictable political and fiscal climate.
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 advisor 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. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. 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. Any representation or opinion is provided for information purposes only. This is the copyright of Investec and its contents may notbe re-used without Investec’s prior permission. Investec Asset Management and Investec Investment Management Services are authorised financial services providers. Issued by Investec Asset Management, December 2017.