Dark Days Indeed

I keep a folder of insightful investment research, which I collect from all over the world, and then consult when putting together my latest presentations. Generally, the research goes back around five months.

The interesting thing this time, is that I only have three months to draw on, because I quickly realised that anything written before the end-March cabinet reshuffle is worthless. Everything was so optimistic then, and rightfully so, as we were headed for good times.

Whilst economically we are starting to feel downgrade pain, from an investment perspective, the first half of the year has been pleasant. Global stock markets enjoyed the best first half since 2008. A globally synchronised recovery and a US president promising a trillion dollars of infrastructure spend, all contributed to a more relaxed, less volatile world as it became clear that the global recovery is clearly intact. This news ushered in investor confidence with the dollar and equity markets loving it.

The good news is that this benign global economic environment should remain intact for a while to come. Whilst central bankers globally are threatening markets with rate increases, or removing the proverbial punchbowl, the truth is that this recovery, or party, is nowhere near the time to start flicking the lights. Economies in the US, Europe and UK are enjoying recent improved health far too much to jeopardise that by raising rates aggressively too soon.

Whilst the possibility of a short-term global equity pullback is certainly there (and would be welcomed by investors who missed getting in), investors are currently neither exuberant nor nervous, which means that global risk-on is here, at least until the end of this year.

The benefit for us as a country, is that risk-on means that global investors are prepared to risk looking for extra yield, which is why we have held up so well from a currency perspective since the downgrades.

From an SA equity perspective, the first half of 2017 extended the run of sideways movement that investors have had to endure for three years. Boring markets are, however, always better than bad markets, and given that equity markets trend upwards over time, investors must be very careful of sitting uninvested on the sidelines while inflation ravages their cash. A bit of rand weakness should see some movement injected into the SA equity market.

I wrote last month that given the cabinet reshuffle and consequent downgrades, further weakness from the levels of R12.80 to the dollar was inevitable unless we made some quick fundamental changes. Since then, the rand has weakened, mostly due to developed world central bank tightening rhetoric (global central bankers threatening that they’ll raise rates), but compounded by SA-specific problems.

So, whilst we bask in the risk-on emerging market sun, the question must be how long this can last and what the chances are of government doing something fundamental to improve our predicament?

Some things are apparent:

First of all, nothing’s going to happen before December, so those hoping for an early presidential exit should adjust their expectations.

Secondly, the race between CR17 and NDZ is going to be tight, very tight. As South Africans, we all need to do everything we can to try and make sure the vote goes the right way. Do not for a second think that the ANC, or politics in general, is going to rectify itself.

Interestingly, there is increasing talk of a “compromise cabinet”. This was suggested by the President after the recent ANC conference. What is unclear, is whether his suggestion is out of fear, as he feels NDZ’s chances slipping away, or out of confidence, as an olive branch to CR17 in order not to split the party and lose the 2019 elections.

Thirdly, with pretty much conclusive proof of Russian interference in the US, UK, Dutch, French and Ukrainian elections, I don’t know why more concerns aren’t being raised about their potential interference in ours. They have much to gain from having the right people in Pretoria, and compared to rigging the US elections, ours must be as easy as making a cup of tea.

In addition, as we sit buffeted day after day by more and more Gupta emails, a couple of things are becoming very clear.

For one, whilst the NPA and Hawks will say they are investigating, they are not likely going to do so with much vigour, if at all.

The level of state capture and abuse of our precious taxpayer money that could, if managed properly, have made an enormous difference to the lives of ordinary South Africans is utterly horrific, not to mention intricate. The amount of effort, brainpower and time that has gone into ensuring the contracts go to the right people, leaves one with no doubt that the plight of the poor and unemployed has probably not been mentioned once in the past three years in the corridors of power.

There is also now talk of a “corruption amnesty”, where individuals could confess to what they’d done, and with whom, then pay back the money and receive amnesty. This would allow us to draw a line in the sand, and move forward as a country.

Whilst I am assured that the electoral process at the end of the year might be subject to some branch vote buying, wholesale rigging is apparently unlikely.

However, given the highly lucrative and immense capture efforts mentioned above, plus the very real chance that some in the ruling party risk facing criminal charges should the vote go the wrong way in December, I worry that behind the scenes there might be efforts under way to ensure December’s elections are not free and fair.

August 23 2017 By Jeremy Gardiner, Director at Investec Asset Management Investing & Markets, Politics