NANCY HOSSACK
When then-president Jacob Zuma infamously appointed “Weekend Special” Des van Rooyen as finance minister for a spectacular 48-hour term in 2015, a radio commentator – possibly Bobby Godsell – memorably noted that “South Africa has a history of repeatedly walking up to the precipice, peering over it and then deciding ‘not today’”.
This has been the reality under which South Africans have lived since the formation of the Union. Arguably, life was even more volatile before then.
This observation describes well the state of the nation following South Africa’s May 29 national and provincial elections. The election result was not good news. Faced with 10 years of declining living standards, voters abandoned the ANC in large numbers. A decade ago, the ANC received 10 million votes. In this election, the party managed to scrape together only six million.
What the poll numbers don’t show is that most South Africans chose not to vote. In a damning indictment of the democratic process, 60% of eligible voters did not vote. This cohort includes eligible voters who did not register and registered voters who did not vote. This highlights the distaste that has developed for politicians in general and a growing feeling of helplessness in the country.
Where voters did shift their votes, they shifted them to Zuma’s uMkhonto weSizwe Party. The MK Party advocates a radical-left ideology that includes state ownership of all land and the dismantling of South Africa’s Constitution. In the face of the hopelessness created by many of the individuals, South Africans are turning to more radical policies proposed by the same people.
This is not good news. A silver lining has been the formation of a government of national unity (GNU), comprising the ANC, DA, IFP and other smaller parties. Freed of its most radical elements, the ANC has chosen to turn back to the political centre — in essence, stepping back from the precipice.
While this is welcome relief, we also remain cautious. We have agonised over the different trajectories the election could determine for the country. Knowing the possible set of coalition partners, we think there is a high probability that no coalition — in the GNU or at provincial and metro level — may last even five years. Instability will be our new reality.
The last few weeks provide ample examples. I would point to the last-minute negotiations between the ANC and the DA, which were incomplete even as the day dawned to elect the president. In fact, there was “no deal” as the chief justice was swearing in members of Parliament. And then came the haggling over Cabinet and provincial posts, which continues to threaten the stability of the GNU.
The trouble is that the ANC is a tricky coalition partner. While it is less divided than it was in 2018 when Cyril Ramaphosa was elected as party president, it remains highly factionalised, with many competing interests. The competing interests will be fighting over diminishing spoils, which will increase internal pressure. Many party members are implicated in corruption and risk prosecution if portfolios are handed over to other parties.
This is well illustrated in Ramaphosa’s Cabinet. It is obvious that despite the Statement of Intent signed between the DA and the ANC, he awarded a disproportionate number of ministries to his own party and other smaller parties, at the expense of the DA. It suggests that the ANC has not come to terms with the sharing of power.
Markets nervously cheered the results. While the rand, SA bonds and SA Inc shares — notably financials — rallied, none of the assets are trading at optimistic levels relative to history: rather, the valuations suggest only relief that a negative outcome has not come to pass. We saw a similar market event in 2018, after Ramaphosa’s earlier ANC elective conference win – by the thinnest of margins – which the market dubbed “Ramaphoria”. It did not last long.
The political — and, therefore, policy — uncertainty I have described produces what the investments industry calls “risk premia”. The risk premium describes the extra return investors in SA assets require to compensate them for potential for negative outcomes. The adverse risk premium on SA assets will probably remain a headwind unless the country achieves consistent economic growth. And everything will depend on growth, which has been elusive for the past decade.
The big question is whether the coalition can deliver the structural growth that South Africans — and investors in South African assets — need. We think that in the near term there should be improved growth from a low base. We know that discretionary and fixed-asset spending has been extremely low leading up to the election. For example, the value of building plans passed (adjusted for inflation) has stagnated at 2004 levels. We should see some normality in these and other metrics, which will be positive.
However, longer term structural growth is going to be harder to achieve. It requires that we deal decisively with infrastructure failures and invest more money in fixed capital formation. To do so, we need competent ministers and directors-general in portfolios like Public Works, Transport, Electricity, Trade and Industry, Water and Sanitation, and Finance.
We also need increased competence from the Presidency to influence the renewal of state-owned enterprises. In this regard, Ramaphosa’s Cabinet announcements were a mixed bag: competent appointments were made in the Electricity, Finance and Public Works portfolios, but appointments in the four other key portfolios were underwhelming.
If South Africa fails to achieve meaningful growth, it will suffer from an increasingly accelerating debt trap. With this risk growing, Foord has maintained a low weighting to South African nominal bonds in its South African multi-asset portfolios, which include the Foord Conservative, Balanced and Flexible Funds. However, we have been increasingly adding to our inflation-linked bond investments, which offer considerable value and capital protection.
Foord’s investment style is to err on the side of protecting investor capital instead of speculatively chasing rainbows. Accordingly, in the lead-up to the election, we were overweight offshore assets to protect investors from a very negative — and underappreciated — coalition outcome.
However, as the ANC’s negotiations with the DA progressed positively, we increased our exposure to SA Inc assets, including nominal bonds and bank shares. This was fortunate as the assets rallied when the GNU became likely. Nevertheless, our portfolio returns will lag those of more aggressively positioned peers.
We broadly segment SA equities into SA Inc shares, resources and offshore companies. At the time of writing, SA Inc investments have rallied 9%, while resources and offshore shares are down mid-single digits on rand strength (already reversing). Any changes we make to portfolios will be circumspect. We continue to think that there may be some legs to the relief rally, but longer term growth is not guaranteed.
Fortunately, SA asset prices — despite the recent rally — remain inexpensive. We continue to favour investment opportunities where companies can grow earnings despite the macro environment, as well as those that have considerable upside optionality.
Nancy Hossack is portfolio manager at Foord Asset Management.
The Star