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Weekly Comment IconA global and regional view from the perspective of our Cape Town office.

The potential effects of global and domestic central bank policies, politics, geopolitical risks in our investment portfolios and on domestic currencies are not just the talk around dinner tables (or braais in South Africa), but also in our weekly MitonOptimal Group investment committee meetings. Our advisory clients and investors often ask us for our views and how each conceivable scenario can or will affect their investments. Historically, we would steer away from trying to second guess what policymakers will do next, but nowadays it is a reality that we simply have to consider in our portfolios. Whether you are living in the USA, UK, Europe, Emerging Asia, Africa or South Africa, political events affect capital market sentiment in the short term. In South Africa, we have a scheduled ANC elective leadership conference late in December 2017.

As an established discretionary fund manager (DFM) in South Africa, we have our own views on most of these matters but are also exposed to the views of other asset managers, political analysts and economic commentators. One of my colleagues was privileged to obtain the SA political views of three large SA asset managers at an investment committee meeting recently. All three expressed the need NOT to bet on the potential outcome of the ANC elective conference. Nobody knows who will win; even if there will be a conference and how quickly any winner can affect any turnaround strategies. In terms of portfolio positioning, all three are positioned to benefit about 50/50 on the rand and 50/50 on the effect on SA Incorporated shares!

With regard to portfolio positioning, we share that view of ‘sitting on the fence’ on this potential binary event in SA politics. Most political analysts give the two main contenders (Mr Ramaphosa and Dr Dlamini-Zuma) a 40% probability of a win each, while many new contenders like Zweli Mkhize can also affect the outcome of this conference, either as leading contenders or powerful allies.
From a portfolio construction perspective, we can build good arguments to be optimistic about SA asset class exposure in the short/medium term.

Those are:

  • There are sufficient signs of ‘green shoots’ in local economic drivers, which indicate that we will not experience a third quarter of negative GDP growth and therefore escape the tag of a technical recession. An improving SA Capital Account, as imports slow down and export numbers improve, can be one of the reasons for a more stable rand. SA Inflation (thanks to lower oil and food prices) has reduced closer to 4.3% p.a. and it all assists in bringing relief to the SA Consumer.
  • The continued global ‘search for yield’ – backed by synchronised global growth and expansionary economic conditions – that ends up in foreigners purchasing more SA Bonds (already about R55bn of inflows for this year to date) and strengthening (stabilising?) the SA rand.
  • The SA Reserve Bank can use the stable rand, lower inflation, weak SA economy and ailing SA household consumption as a good collective reason to lower interest rates locally.
  • These factors will make SA Equities more attractive and will potentially enhance the local residential and commercial property market.
  • The local capital market is pricing in a 50% chance of a 25 basis points rate cut by the next meeting in September, a 100% chance of a November cut and a 100% chance of a 50 basis points rate cut by May next year.
  • The last time business confidence was as low as it is right now was in 1993, before the SA referendum. South Africans who lived in that era may remember how fearful a portion of the population was of change, only to embrace complete economic and leadership unity two years later when we won the Rugby World Cup against New Zealand!
  • A positive political outcome in December can motivate rating agencies to hold off a local currency downgrade and enhance business confidence which can, in turn, drive investment spending and improved domestic productivity.

We can also cite reasons for a bearish case for SA asset class exposure in the short/medium term. Those are:

  • A growing SA budget deficit as tax collection targets are not met, due to a slowing economy, which will continue to challenge the Minister of Finance to balance expenses vs. income.
  • Negative political outcomes and a lack of funding solutions for SOE’s in particular can further dampen SA GDP growth in the short term, which can lead to further local currency downgrades by rating agencies in December or January.
  • These actions may weaken the SA rand, prop up domestic interest rates and continue to affect business confidence and household spending negatively.
  • It will also affect SA residential and commercial property negatively.

Ray Dalio’s quotes below ably demonstrate why we need to keep our eye on both local and global politics:
“(D)emocracies are threatened when the principles that divide people are more strongly held than those that bind them and when divided people are more inclined to fight than work to resolve their differences.”
“It seems to me that we are now economically and socially divided and burdened in ways that are broadly analogous to 1937…”
“(P)olitics will probably play a greater role in affecting markets than we have experienced any time before in our lifetimes.”

Ray Dalio, Co-CIO of Bridgewater Associates

Bloomberg yesterday flagged a court case in which the High Court in KwaZulu Natal is expected to rule next month, regarding an application by KZN ANC party officials to overturn the results of the 2015 election of ANC provincial leaders in that province, which they claim was flawed. Apparently, most of the officials elected at that time are staunch supporters of Jacob Zuma and hence are seen as sympathetic to Dlamini-Zuma’s presidential campaign. Should the court rule in favour of the plaintiffs, this could see the centre of power within the ANC swing away from Dlamini-Zuma towards Cyril Ramaphosa, in a province which has the largest number of ANC members and hence significant influence at the party conference. Whoever wins this case will be seen as favourites to effectively help determine South Africa’s political future at that time.

We agree that much is at stake for all current local politicians and SA citizens. We are comfortable in admitting that your SA domestic portfolios will have a 50/50 chance to benefit from events of December 2017, but can commit our 100% effort to react to any facts that may change our neutral approach to this matter.

Do We Need to Have a View on Every Political Scenario?







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