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Investment views

South African elections: a time to take bold moves

16 May 2019
Authors: Nazmeera MoolaHead of SA Investments, Jeremy Gardiner

With votes now counted and the ANC majority confirmed, Nazmeera Moola and Jeremy Gardiner unpack where South Africa stands.


Lindsay Williams: Let’s have a look at a post-2019 general election in South Africa with Nazmeera Moola, who is Deputy MD at Investec Asset Management in Cape Town, and joining her and joining me is Jeremy Gardiner, Director at Investec Asset Management in Cape Town. A satisfactory result I think, Nazmeera, and I think we can be proud to say these elections were free and fair.

Nazmeera Moola: I think we can definitely say they were free and fair, Lindsay. There were occasional reports of problems but the vast majority of findings were absolutely no issue, so that is great and, in terms of the results, I think satisfactory under the circumstances is a good way to assess it.

Lindsay Williams: Jeremy Gardiner, satisfactory under the circumstances – there is a hidden meaning there. What do you think?

Jeremy Gardiner: I think Nazmeera is quite right. It certainly ticks a lot of boxes. It gives the President enough of a mandate to go on. There were fears that the ANC could do a lot worse than that, in which case they would have to go for alliance partners, possibly the EFF populist policies coming through. They are not going to have to do that. So I think, as Nazmeera said, it makes a lot of sense, this result, and we can be thankful certainly from a financial perspective, for this result.

Lindsay Williams: We have a relatively mature democracy now and I think this is a unique position for a relatively mature democracy, for someone to say okay, there was a lot of bluster before the election and we said we were going to do this and we said we weren’t going to do that but now, with this 5-year period ahead, I think Mr Ramaphosa and his cabinet and his team has the unique opportunity, which many democracies do not have, to say right, we are going to do this because we are in a dominant position. Nazmeera, do you think there is a time for a sea-change in South Africa when it comes to policy?

Nazmeera Moola: I think a sea-change is vitally needed in South Africa right now. I think maintaining the status quo in terms of policy, in terms of the financial trajectory of Eskom or the country is ultimately unsustainable and will result in significant funding issues down the line. So I think it is absolutely necessary that we see Mr Ramaphosa use this result from the election as authorisation for him to take some bold moves. He is not a man normally given to them but that is what is necessary at this point.

Jeremy Gardiner: But, Naz, is that possible, given the two, I mean absolutely a big change is necessary, but is it possible and how much is he going to be able to manoeuvre, given the two different factions within the party?

Nazmeera Moola: Jeremy, I tend to think that the result we saw this week demonstrated the support for the President over the party and part of the reason, the main part of the reason, I say that is the differential in terms of the ANC support at national level versus provincial level. This is not a result about the ANC. This is a result about Cyril Ramaphosa. That is how I think about it and I would hope that is how he thinks about it. So if he goes for the very cautious approach, then I think growth will fail to pick up and exactly what we fear, which is that the opposition in the ANC will try and take control, will happen. He needs growth as much as the country does at this stage.

Jeremy Gardiner: So you think 57% gives him the mandate he needs?

Nazmeera Moola: I think 57% gives him the mandate, coupled with the fact that they had so narrowly held onto Gauteng.

Lindsay Williams: I don’t want to get into a political debate between the two of you or the three of us rather but do you think that there is going to be some factional infighting and, if he is bold and does institute sea-changes that we spoke about a few moments ago, do you think there is any chance that there will be discontent within the party and that will hamper him somewhat (a question for both of you)?

Jeremy Gardiner: I think there is no doubt that there will be discontent if he goes hard forward on policy. The question is what happens with that discontent. Is the discontent strong enough to actually neutralise what he is trying to do? Could you even see some people perhaps leaving, setting up a splinter party in exchange for – Naz, is it 2022 or 2024 when the next – as I understand it, the President is safe until 2022 or is it 2024?

Nazmeera Moola: So the next ANC Congress is in 2022. The next South African election is in 2024. So theoretically it is possible for him to lose the ANC Presidency and remain South Africa’s President but I suspect, if that were to happen, Jeremy, we would see a move against him pretty soon after that conference. So that is why I think of 2022 as the safe point. He has got the three years.

Jeremy Gardiner: Okay. One of the big questions or one of the big rumours circulating a month or two before elections was that, even with a strong mandate, you might still see the opposite faction within the ANC try to oust the President shortly after elections. Naz, correct me if I am wrong but we did ask most of the country’s top political analysts that very question. They almost all seem to say that he is pretty safe at least until 2022. Would you agree with that?

Nazmeera Moola: I do agree with that. I think what we were seeing was a bunch of people trying to make it possible. So if you talk about it a lot, you try and create rumours, it becomes part of the consciousness and therefore the possibility of ousting him beforehand becomes viable, which does two things: (1) it creates some leverage, so it allows you to try and contain policy, try and contain prosecutions; but (2) it does table the viable option that something that has never been done before (to remove an ANC President outside a conference) could become a reality.

Lindsay Williams: Wouldn’t it be a terrible thing if everything goes swimmingly and these new changes, these radical changes that we hope will be instituted are instituted and suddenly the international environment, Naz, scuppers our ambitions? In your piece that you kindly sent me, you say: “the international environment is distinctly unhelpful”. We have got trade wars, we have got North Korea, we have got Iran now, we have got oil tankers being attacked in the Gulf of Oman and suddenly something could happen, just when we are starting, starting the journey to get our act together, the international markets, as I said, scupper all those ambitions. 

Nazmeera Moola: I think they could make them distinctly more difficult. Therefore, it is absolutely vital that we take control of the things we can take control of. I am also aware – Jeremy, I would like to hear your thoughts on this but I am also aware that Cyril Ramaphosa cannot do everything. So as much as I would like him to reduce costs at Eskom significantly by cutting headcount and prosecute a whole lot of people that have been accused of corruption and loosen visa regulations and implement a sensible Mining Charter and, and, and, I don’t think it is possible to do everything because there are too many fights to be picked. So, Jeremy, what do you think the key one or two things are that he should do?

Jeremy Gardiner: Well, if I can just pick up on what Lindsay was saying just before, one thing which would really help him is a bit of a tailwind globally and I must say this just feels like déjà vu, it really does because last year we started off so well in 2018. We had Ramaphoria, we had suddenly April/May, Trump declared economic war on the Chinese, foreign investors pulled out of emerging markets and it all soured quite significantly and to an extent we have had the same this year. Just as we get our lift after elections, now suddenly it looks as though the global environment might sour again and upset everything we were looking for; finally, as the planets align in favour of emerging markets with the pick-up in equity markets that we saw at the beginning of this year.

So I am really worried that the global environment is not going to give him the support and may actually turn it into a headwind. That is the first thing but, second of all, I think that there just are a few things that the President could do quite quickly:

  • policy to make South Africa more investor-friendly. There’s a couple of things that we could do;
  • allowing skilled immigrants into the country so that we can start creating more jobs. That is quite an easy one to do;
  • lift all the visa regulation. I mean we still apparently have visa regulation that makes it complicated for tourists. If we could lift that and get tourism going – I think the figure is for every 8 foreign tourists, 1 permanent job is created. That is an industry that we can grow significantly immediately just by making it easier.

Lindsay Williams: Just on that note, on a personal note, Jeremy, you are quite right, it is so easy to lift these visa regulations. I have applied for my permanent residency every single month for the last 6.5 years and I get no reply from Home Affairs. I won’t go there because I don’t have the time to go there. I don’t have the stomach to go and queue but these things are so easy to do. Nazmeera, as Jeremy says, there are so many easy things to do immediately. The difficult stuff comes with the meaty matters later on.

Nazmeera Moola: Yeah, I think that is right, Lindsay. I am hesitant to say it is easy; I think it is obvious but visa regulations should be easy. Cutting jobs at Eskom I think will be the difficult one.

Jeremy Gardiner: Yeah, quite right. There is going to be low-hanging fruit and the difficult stuff.

Lindsay Williams: Nazmeera, let’s have a look at our portfolio positioning or rather Investec Asset Management’s portfolio positioning. It is probably a little bit too early for you to say well, we have had these meetings and we have decided that this is our asset allocation for the next few months or next couple of years given what has happened with the election but your immediate reaction to what has happened is probably quite comforting because the rand and the bond market have reacted quite favourably to our election process.

Nazmeera Moola: I think that is exactly right. So we have had the currency react favourably, outperform most emerging markets over the last week and we have seen the equity market, particularly the domestic shares, also perform well. I think we are still a little bit cautious. We want to see actual progress and therefore the President’s cabinet is going to be our first thing to watch. I would expect it almost definitely by the end of the month.

I think the Fixed Income team was quite optimistic into the election. I think at this point in time we would be turning a little bit more cautious, still optimistic on the inflation outlook but the budgetary dynamics are worrying, particularly with Eskom. I am fascinated to see how they have been keeping the lights on for the last month non-stop. I worry that there is a lot of diesel being burnt there.

In terms of the more multi-asset portfolios, our absolute return products remain quite cautious (they have been for some time) and our more benchmark relative portfolios were heavier weighted in the mining space but looking at the domestic sectors as well.

Lindsay Williams: Just to summarise, Naz, when it comes to local assets, South African assets, ceteris parabus (in other words, if there is no disaster overseas), we are cautiously optimistic with a note of caution about the local situation, whether it be the rand, whether it be the bond market, whether it be fixed income, whether it be JSE Securities Exchange, listed securities that are skewed towards South Africa.

Nazmeera Moola: We are cautiously optimistic and our cautious optimism is based on a hope that we see growth improving as the President implements a reform agenda. Without that reform agenda, the growth doesn’t materialise and that cautious optimism will start to fade.

Lindsay Williams: Nazmeera, thank you very much for your time. Nazmeera Moola is Deputy MD at Investec Asset Management in Cape Town, joined by Director of Investec Asset Management in Cape Town, Jeremy Gardiner.

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

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