This is a question that unfortunately does not have a definitive answer. But first, a commentary on commentaries:
Forecasters for the future
Whenever you see people on TV, hear them on the radio or read their articles, remember that nobody knows the future. This includes this article. Predicting the future is a very inexact science to say the least.
Forecasters of the future for South Africa
As in any society, you have the “glass half full” type of people and the “glass half empty” types. There have been many predictions for South Africa and as you can expect, there are optimistic people and pessimistic people. At the time when predictions are made you have no idea who is going to be proved to be correct and to what extent they will be correct.
In the past, there have been many predictions that have proven to be excessively optimistic or excessively pessimistic. The reality has turned out to be far less excessive than either of these prediction outliers. This is typical of a bell curve type of probability outcomes. What I am trying to say is that, despite many excessively pessimistic predictions over the decades, South Africa is still here and is still functioning and still has many problems to overcome. It is not the utopia with sustainable 5% growth rates as predicted by the optimists, nor is it the disaster predicted by the pessimists. The future will most likely also fall between these two polar predictions. Remember this is also a prediction.
South Africa is an emerging market and has been so, basically since the gold rush 100 years ago. This is not going to change in the foreseeable future. So, while we should always strive to improve, we must realise that as an emerging market our country will have bad news, will have a structurally weak currency, will have policy uncertainty, will have a lot of negative comparisons if you measure against a developed economy. To quote a friend of mine who I respect greatly, “This is not Switzerland”. While it is not Switzerland, equally this is not Argentina, where the currency has fallen 75% in the last year. Or as an extreme example, Venezuela, where the currency has fallen 2 489 709% in the last year. In the last year, the rand has fallen 8%.
What are we like as South Africans?
There is an index called the misperception index. This index measures the average citizen’s perception of their country against the actual statistical reality. South Africa comes out first (or last depending on your view) in this index. When measured against statistical reality we as citizens have the biggest gap (negatively) against the reality of South Africa and our perception of that reality. Remember this index does not say that South Africa is good or bad, it just measures perception against reality.
In other words, the average South African is a grumpy person that must cheer up a little. Things are not as bad as we perceive them to be! Maybe put it in another way: South Africans like a bad news story about South Africa as this seems to fuel our negative perception gap about South Africa.
What has the past shown us?
Sometimes we need to look at the reality of South Africa. We all know the bad news. So here I am going to take a “glass half full” approach by stating some of the good news deliberately and just by mentioning a few:
- Inflation averaged 14% from 1970 to 1993. Since then it has averaged around 6%
- Overdraft interest rates averaged 17% from 1983 to 1999 and have averaged 13% since then, with the current level at 10%
- The rand is a structurally weak and very volatile currency and will remain so for the foreseeable future. However, the average depreciation (against the USD) was far worse in the past:
rand fell 220% in the 1980’s
rand fell 130% in the 1990’s
rand fell 22% in the 2000’s
rand has fallen 95% since 2010
While the present picture is not pretty, the rand is not worse than the past. It is in fact a little less bad.
- Housing prices (ABSA housing price index before inflation):
Rise in the 1970’s 125%
Rise in the 1980’s 232%
Rise in the 1990’s 127%
Rise in the 2000’s 325%
Rise since 2010 43%
While the rate has decreased dramatically since 2010, the rise was dramatic in the prior ten years.
- Household net wealth to disposable income (Sarb numbers)
This ratio deteriorated from +-370 in the 1980’s to 290 in 1990 and stayed there until 2002. Since then it has increased back to 374. So according to this (wealth) index, we are in the same position as we were in 1980 – not a good statistic at all (Glass half empty view). A glass half full view would retort and say that it has risen from 290 to 374 in the last two decades!
- Investment returns are very difficult to estimate, but using the average balanced fund unit trust return (including global assets but before fees and tax), the return since 2000 has been 343%. This has been a good double-digit return, even if the return has almost gone sideways since 2015.
Remember that here I am deliberately looking at good news in a positive light. Statistics are wonderful – you can find always find figures to support your view if you look hard enough and manipulate the start and end dates.
Any portfolio must include a very healthy exposure to global assets over time. You gain from exposure to many different asset classes, industry segments, structural growth and themes that are not available in South Africa. You also benefit from a structurally weak rand over time.
The rand is not always weak and we must remember this. We seem to forget it was R12 against the USD in 2002. The next stop was R6 against the USD. But many people took as much money overseas as they could at R12. They had to wait until 2015 just to break even on the exchange rate.
Global assets are also not a one-way bet. Investment markets are volatile and will always be. South Africans were desperate to get global equity in 2001. After all global equity had risen 300% over the last 10 years, while the JSE did nothing in USD. Then from 2001 to 2007, global markets did nothing while the JSE went up 400% in USD. Markets are impossible to predict. The only potential remedy to this is a well-diversified balanced portfolio and even this may only work over long time periods.
What is South Africa?
Our economic conditions are affected by many variables, which change over time and have different influences and consequences. One thing seems to be reasonably stable: we are a commodity producing emerging market and as such the direction of our economy is greatly influenced by the global commodity cycle. The “good times” from 2002 to 2008 related to the dramatic bull market in commodity prices, driven by China. During this time, the rand price of commodities rose some 300%, despite rand strength.
Post this, rand commodity prices halved between 2010 and 2015 and have now recovered 40% since then. In other words, they are still 60% lower in rand terms compared to 2008. We cannot expect a thriving economy without a thriving commodity cycle. Obviously, there are plenty of problems (challenges if you are a glass half full person or a politician) that should be addressed in South Africa to improve the economy (“self-help”). A fair amount of the economic problems from 2008 to 2015 can be attributed to the collapse in the commodity cycle. Politics clearly did not help at all, but did not drive the downgrades in my opinion. A collapsing commodity cycle was the main driver. Simplistically, we cannot heap all the blame on ex-President Zuma for the credit downgrades. We would have got downgraded irrespective of who was president in a collapsing commodity cycle, but most likely would not have skated with junk status.
Why are we feeling so glum at the moment?
After the ANC elective conference last year, the “glass half full” people ruled! Excessive optimism abounded. “Glass half empty” people and views were banished. I suppose it was unrealistic to think that everything could change in an instant. Now however the opposite seems true now: we are somehow worse off that what we were before the ANC elective conference.
In my view, the glum feeling permeating South Africa can be attributed to:
- The elephant in the room
- President Trump and trade wars and tariffs
- Excessive optimism as a base
- A small downturn in commodity prices
- A (again relatively small) depreciation in the rand
- The terrible first quarter GDP number (Which is after all only one quarter)
The elephant in the room
The moment something gets its own acronym it is important; LEWC – Land Expropriation Without Compensation. This is probably the biggest driver of the negative feeling now and will (unfortunately) remain so until there are definitive rules set for what LEWC is. Again, unfortunately I think we are going to wait until next year’s election before this is finalised. It is a very important, popular and powerful electioneering slogan.
A few factors must be considered when discussing LEWC. The most important by far is that, other than the term LEWC, we as South Africans know very little about what exactly this is. Nothing has been finalised. Parliament has passed nothing. The Constitution has not been amended. The proposed amendment has not even been drafted. The parliamentary investigation has not recommended anything. No rules have been set. LEWC has not passed the general provisions of the Constitution. LEWC has not been challenged in the Constitutional Court. So, whatever you see, hear, read on this subject is speculative (including my commentary). Do not jump to any conclusions: nothing has been finalised at all on this.
In such an uncertain environment speculation thrives. You will hear a lot of noise around this. There will be a lot of smoke screens. You are going to hear “school car park” stories and get social media postings about banks not giving loans to farmers because of LEWC etc.
There are basically two groupings that are thriving in the vacuum of uncertainty around LEWC:
- One group will say “The Land is ours and we will take it without compensation in any form irrespective of the consequences”
- The other group will say “Zimbabwe”
We do not at this stage know what the outcome will be. I read a very good article by a respected political analyst that clearly said that the ANC’s policy on this is (direct quote) “As clear as mud”. So, it seems as if the ANC also does not know what the policy rules are and it also appears as if there are conflicting opinions within the ANC. Again, nothing has been finalised on this. Do not believe emphatically anything yet.
What do we definitively know about LEWC:
That we know nothing about the details. Watch out for extreme views from both sides in this vacuum.
This is an ANC (government) policy and some Constitutional change will most likely happen (definitely happen). After adopting this policy, it would be very unlikely that the Constitution is not altered. Given how drawn out the legal system seems to operate, this could take a long time to occur.
The ANC (under “new management”) as the governing party, is driving this policy and not any other party.
We know that uncontrolled LEWC did not work in Zimbabwe and is a clear example of the cost to the economy if this is not done properly.
Maybe the best guide that we have on this is what the President said: LEWC will be done in a controlled, sustainable fashion that will not threaten food security and not damage any other sector of the economy.
While I think that everyone (half full and half empty) would like the President to say more on this, according to the report that I read, other that the broad objectives set out above, even he is not sure of the policy.
If you believe the President – don’t worry excessively – middle road type scenario. Bumble along type scenario. But ask for more clarity. Ask for the rules.
If you do not believe the President – worry.
I do not know the outcome. I cannot predict the future. I believe the President, but this is just my view. This article is just my personal view.
Wayne McCurrie specialises in wealth and investments and works for First National Bank.