The point of ‘capitulation’ in economic cycle theory is generally seen as the bottom in any cycle, the point just before ‘things start to improve’. It is unfortunately, and indeed sadly, also generally the point at which most equity investors finally give up and sell, when stocks are at their cheapest, driven entirely by sentiment and emotion rather than investment fundamentals.
The investment industry must be one of the few where people are inclined to sell when their asset is cheap, and conversely, when prices rocket, they buy more.
Anecdotally and deviating slightly from economics, the fourth quarter of 2018 for me felt like the point at which South Africans reached their ‘capitulation point’ with our country. Of course, a collapsing currency and equity market combined with a rocketing petrol price didn’t help. The level of political anger and noise seemed unprecedented: everyone was fighting with everyone and with it came a spike in talk about emigration and about having a ‘Plan B’. South Africans are angry, and many seem to have reached the point of ‘giving up’ on Brand SA.
So does that mean then, that things are about to improve?
Well, things do feel slightly better this year. It could simply be down to a good holiday and some sunshine. Also, don’t underestimate the impact of rising markets and a strengthening currency in terms of improving the mood. And conversely, don’t underestimate the negative impact of loadshedding on ‘darkening’ the mood, so hopefully it doesn’t last.
While one doesn’t want to herald a ‘false dawn’, there are a number of factors that could work in our favour to certainly numb the pain, and perhaps even lighten the mood considerably. Could investors finally be rewarded for the five years of flat returns they’ve had to endure?
First of all, one shudders to think how angry and depressed we would have been if we still had Jacob Zuma as President, with the prospect of another five years of the Zuma presidency coming after elections. We would still have Finance Minister Gigaba running what would be an officially (across all three rating agencies) junk economy and similarly junk currency, probably around R25 to the US dollar.
And while the various commissions currently playing themselves out are both fascinating and horrifying at the same time, be very thankful that they’re happening. They certainly wouldn’t be if the Zuma Dynasty were still in control. Hard as they are to watch, as they brutally expose the corruption ‘free for all’ that existed during the Zuma presidency, it is a very necessary process. If we are to right the wrongs of the past, it is important that we know exactly who and when and how everything was done.
Secondly, Donald Trump is in trouble. His government shutdown has – according to polls – plunged his popularity to 34%. He’s got elections in just over 18 months’ time, and stock markets are soggy. He is therefore being much friendlier to the Chinese this year – a reduction of the trade war, and even a discontinuation, would be very positive for emerging markets, including SA.
The world is ‘slowing, but still growing’ seems to be the common theme out of Davos this year. The US and China should both remain firm and if the Chinese stimulate more, which they may well, then emerging markets, including SA, will see stronger growth.
‘Slowing, but growing’ means we shouldn’t see unexpected US rate hikes. None are forecast for this year, and some, including previous Fed Chair Janet Yellen, are signalling this may be the peak of the tightening cycle. In addition, a temporary reprieve from balance sheet normalisation should mean the US dollar has probably peaked. That, together with stable US interest rates, are both favourable winds for emerging markets like SA.
Across the pond, Britain will most likely stumble into some sort of deal, and then the world can move on from the noise that is Brexit. While there is an element of schadenfreude in seeing Britain or the US also suffering self-induced pain and political turmoil, we always have to remember that any significant instability in the developed world inevitably sees us (read emerging markets) being punished as well.
So, all of the above, coupled with the fact that emerging market equities, bonds and currencies are reasonably valued, have seen investors starting to shift back towards higher-yielding emerging market assets, including SA.
Some economic tailwinds (as opposed to the headwinds we faced last year), is exactly what Cyril Ramaphosa needs. Add to that a strong mandate from successful elections (and certainly most polls seem to be pointing that way), and 2019 should not only see South Africa lifting from the muddy waters of corruption in which the ‘Zuma lost years’ left us stranded, but investors hopefully finally being rewarded for their patience.