While the focus was supposed to be on last week’s national election, US President Trump stole the show by raising tariffs on Chinese imports while negotiations with China were still ongoing. The immediate market reaction was predictably negative, as the global equity rally since late December was partly premised on a resolution in the US-China trade dispute. However, the market reaction was not nearly as bad as might have been expected. This is either because investors believe Trump is bluffing as a negotiating tactic or because the Federal Reserve has reaffirmed it will support growth.
This reiterates an important point: global factors ultimately affect your portfolio more than local factors do. US markets set the tone and determine the sentiment for global markets. A large portion of the shares in a typical balanced portfolio is listed and priced in global exchanges, even if there is a secondary listing on the JSE. Foreigners are also significant participants in local bond and equity markets. Finally, the rand is one of the most highly traded currencies around and many global investors use it to express views on emerging markets as a whole.
Chart 1: Global equity markets pull back on trade war fears
Local investors therefore tend to overstate the influence of politics on returns. The reality is that Washington DC matters more for policy than Pretoria, and Wall Street in New York more than Exchange Square in Sandton for equity returns. Local events can obviously impact markets in the short term, as we saw with the original ‘Ramaphoria’ rally or the ‘Nenegate’ slump. However, even in these two cases, the global context matters. Emerging markets were already selling off when then President Zuma unexpectedly fired finance minister Nhlanhla Nene in December 2015. Therefore, we need to continue to pay close attention to what is happening globally, particularly US interest rates, the US dollar and Chinese growth.
Election outcome in line with market expectations
Ahead of last week’s polls, many investors and business people saw it as a do-or-die situation where President Cyril Ramaphosa had to get a sizable majority for the ANC to cement his own position in the party to implement his reform agenda. The actual outcome, with the ANC securing 57% of the votes, is therefore good for markets and broadly in line with expectations. The ANC’s support was down from the 62% of registered voters it secured in the 2014 general election, but up from the 53% in the 2016 municipal elections. Meanwhile, though support for parties with more radical platforms increased, their overall share of the vote should give investors comfort that the appetite for extreme policy changes among the electorate appears limited. The rand was stronger despite the rising dollar, while local bonds rallied (yields declined). Local equities followed global markets.
Chart 2: Rand and government bond yield
Continuation of trends
This election was a lot less ‘binary’ than the ANC elective conference in December 2017. That was the pivotal event, where a different outcome was a real possibility with negative implications for the country’s economic and political landscape.
In contrast, the election represented a continuation of existing trends in voter support. A younger, more urban electorate continues to drift away from the ANC, and politics in general. According to the Electoral Commission of South Africa (IEC), only a fifth of first-time voters registered to participate in the election and only half of those between the ages of 20 to 29 years registered.
Chart 3: Demographic make-up of population and voters’ roll
Change takes time
Can we now look forward to significant change? Not necessarily. By all accounts, the ruling party remains divided, and there is no election outcome that will change this. It is a consensus-driven organisation whose president cannot make unilateral decisions. Its highest decision-making body, the National Executive Council, was elected in December 2017 and will remain in place until the next elective conference in 2022. It is unlikely that the party will agree to fundamental shifts in economic policy (such as widespread privatisation or deregulation), but tweaks are likely.
In contrast, the Constitution of South Africa does empower the President to implement certain decisions at his or her discretion, notably appointing Cabinet ministers. So there is a lot that President Ramaphosa can still do to reform the functioning of government and State Owned Enterprises (SOEs), and it is in this area that he can continue to make progress. His new Cabinet will be the first test and investors would like to see a smaller body, consisting largely of skilled, enthusiastic members with a reputation of integrity.
Need policy certainty
Corruption is not the main reason for slower growth, though it clearly hasn’t helped. It is hard to argue that there was no corruption in 2006 when the economy was growing 5%. The latest Transparency International ranking of least to most corrupt countries shows that South Africa is 73rd out of 180, but many countries with faster growth have worse rankings: India (78 out of 180), China (87) Indonesia (89), Thailand and Colombia (joint 99), and Mexico (138). Argentina and Brazil are not enjoying much growth at the moment, but are similar economies to South Africa and ranked 85 and 105 respectively.
The problem is that corruption has increased and, as shown by testimony at the Zondo commission, corruption-fighting institutions were deliberately hollowed out along with the capture of certain policy-making bodies and SOEs. These institutions are now being rebuilt, even if it will take some time before we see the prosecutions and convictions many people regard as a litmus test of Ramaphosa’s ‘new dawn’. The clean-up of the SOEs is also underway, but as we’ve seen with Eskom, this requires considerable resources that will not be available for spending elsewhere.
What investors and businesses crave most is policy certainty and a state that gets the basics right (like keeping the lights on). A business facing a set of rules or regulations it finds constraining will try and manage these as best as it can and learn to live with them over time. But if it is not sure what the rules will be a year or three later, it might not even try, and rather deploy its capital elsewhere. In the meantime, demand also remains constrained by factors outside political control: slow real household income growth, unexciting commodity prices and global uncertainty.
To summarise, the clean-up of government is likely to continue, and that should improve business confidence somewhat from depressed levels, but the prospects for substantial pro-growth economic policy reforms will be limited by many of the same factors that existed prior to the election. A cleaner and more competent government will help the country’s economic performance over time, but sustained growth requires policy changes and more certainty around contentious issues.
Focus on the future
There is hope for South Africa. We take for granted that elections will be largely peaceful and represent the will of the voters; that there is full transparency in terms of the outcome; and that the media has the freedom to report on the voting from anywhere or from any angle. There are many countries where this is not the case. (Just last week, Turkey’s ruling party forced a rerun of the Istanbul municipal election because it did not accept losing by a small margin.) What the politicians do with our votes is another matter, but here too the mechanisms exist to hold them accountable. Importantly for investors, the institutions managing monetary and fiscal policy (Sarb and the Treasury) retain global credibility.
Two final points: as citizens we care about local politics, but as investors, we can spread our wings globally, making use of the best opportunities locally and abroad. Secondly, conflicting views on the impact of the election have seen many investors sit on the side-lines until there is clarity. But markets rallied well before the vote, and these investors have missed out. There will be a deluge of analysis on the post-election political landscape in the coming days and weeks. Don’t let it distract you from sticking to your financial plan to achieving your future investment goals.
Dave Mohr is Chief Investment Strategist) & Izak Odendaal is Investment Strategist from Old Mutual Multi-Managers