“Evil prospers when good men do nothing.”

South African Market Comments

Last night’s late and sinister announcement by the State President in his cabinet re-shuffle has shaken the country for several reasons:

1. At least half of his inner cabal warned him not to fire the Minister of Finance.
2. His political alliance partners warned him not to do it.
3. Business leaders warned him that the financial repercussions could be catastrophic for financial markets.

However, hidden in a broader cabinet reshuffle were the replacements of both the Minister of Finance, the highly-respected Pravin Gordhan, and his deputy, Mcebisi Jonas.

It is not our role to make pronouncements on the political outcomes of presidential decrees except to the extent that they impact the portfolios we manage for our clients.  The impact, both in the week’s lead-up to the announcement and the immediate repercussions this morning have been relatively benign as the markets are waiting for the reaction to last night’s events, certainly compared to the ructions experienced in December 2015 when President Zuma last dismissed his Finance Minister.  The Rand has indeed weakened slightly, and the long bond rate has increased but nowhere near to the extent experienced in December 2015.

The outcomes in the next few days seem to be binary.  Either the President gets away with his manipulative behaviour or good people, within the ANC and alliances, stand up to be counted and erode his power base.

If he is allowed to get away with his autocratic shenanigans, the repercussions are dire.  The Rand will depreciate even more, long bond rates will rise, and interest-rate sensitive shares will suffer.  The long-term outlook will be gloomy given that South Africa is already in a low growth, inflation-sensitive phase and unlikely to grow out of that environment anytime soon.  In addition, the downgrade of SA’s foreign-denominated bonds is definitely back on the table.

If however, the weekend brings announcements of some particular good people standing up for a better South Africa, the Rand and long bonds will stabilise and foreigners may stop selling those bonds. Interest rates are likely to remain stable. Many commentators are calling for a split in the ANC between the “good people” and the incumbent cadres, and we believe that this would be a positive outcome of the firing of Mr Gordhan.  However, the low growth environment will not disappear overnight, and the long-term view of the Rand will still be one of steady but predictable depreciation.

Portfolio management is all about achieving balance and positioning the portfolio so that it is not dependent on a single outcome.  For some time, we have favoured offshore investments both directly and through domestic rand-hedged stocks and have steered clear of domestic long bonds.  Both scenarios above suggest this is still prudent.  With this in mind, we will question all of our underlying asset managers to assess if they are making any changes in their portfolios and will keep our clients posted.

We strongly believe that major action in our portfolios is inappropriate until the direction of the action to last night’s announcement becomes clear and will maintain a close eye on that action and the market’s reaction to it.