• Stonewood AM

A 'New-ish' Dawn

This weekend saw the end of the 2019 National Elections in South Africa. The outcome was well telegraphed in advance with most analysts and polls getting it close to correct, which is a far cry from the kind of insight we saw for the last US presidential election and BREXIT. The African National Congress (ANC) winning with 57.50% of the vote, and 8 out of the 9 provinces under their control can probably declare success even though on a relative basis you could read something into the long-term trends around ANC support.

Sadly, the voter turnout was disappointing with only 66% (albeit higher than most developed democracies) coming out and getting their fingernail marked after making their ‘X’ on the ballots. This low turnout could be an indication that people feel like they didn’t have anyone to vote for, or they simply didn’t want to vote against the party they have always voted for. Below is a summary of the votes nationally, as well as a breakdown of the top three parties:

For many, the fact that the elections are over, and the outcome is what it is, means that President Cyril Ramaphosa can FINALLY get to work. He took over from former President Zuma but in the wake of this has been boxing with one hand tied behind his back. Mr. Ramaphosa is now the elected president of SA and has a full term to get cracking on the promises he has made his constituents and more importantly, the promises he has made to big business and offshore investors, namely:

  • A smaller government

  • Dealing decisively with corruption

  • Fix State Owned Enterprises

  • Create job opportunities and rebuild the economy

This is not an easy ask but these are the things that need to be done.

The positive side is that those not even in the ANC camp see Cyril as someone, or even the only one, who can achieve this in the current backdrop.

So, it is over to him to get to work - and fast!

If all these mandates are achieved then SA is a very different place to live and work, which would also mean a much better place to invest or remain invested. The reality is that almost all these things will take a long time to course correct than we would like; we are talking years not months nor days, not that complete achievement is needed for there to be a noticeable material difference. A change of direction and some wind in the sails of the ship headed in the right direction would go down splendidly with everyone.

So, without getting into a political debate or analysis its over to the investment side of things.

SA has long been one of the ugly ducklings in the Emerging Market (EM) basket of countries, despite our promise and potential. A volatile currency and a disappointing economic back drop have resulted in a decline in competitiveness, more red tape and less economic opportunity. Investor confidence is low, unemployment is unsustainably high and inequality continues to grow.

It’s been a tough place to be invested for South Africans and foreigners alike, as per the below cumulative performance of the JSE All Share Index in ZAR and relative to relevant Indices in USD (over the past 5 years), respectively:

Source: Analytics

Source: Analytics

Despite this, many South African investors choose to invest the majority of their assets into local investments. This is what is known as a “Home Bias”.

Home Bias is where investors choose to invest most of their assets into local investments despite the clear benefits of global diversification because they are familiar with the names and brands that they are investing into, while Regulation 28 also adds to the amount of Home Bias investing.

In my opinion, you should avoid the behavioural trap known as “Home Bias” and focus on investing into assets across the world (developed and emerging markets). Holding a diversified portfolio of asset types and assets from different jurisdictions to reduce risk and provide better risk adjusted returns is widely prescribed. Being right doesn’t mean that it’s easy to change investor mindsets and behaviour and as a result I expect that people will remain overweight SA assets in their portfolios by virtue of the fact that they have fallen victim of the home bias.

However, in light of the above section on the election outcome the only point that is left to make is: If Cyril Ramaphosa and the ANC can act on the mandates they got elected upon, even with some level of success in the next few years, and the global economic backdrop remains relatively stable (this is a major assumption) then investing locally could reap some very attractive risk adjusted returns, especially for companies that are focused/geared toward the SA economy and consumer.

EM and SA cyclical stocks remain cheap on a relative basis and therefore may be poised to generate some strong relative returns for those who position themselves accordingly. It is far too early to predict which way this will go and winning an election is not a guarantee of any kind of action or success; the work only starts now.

We can already see evidence of some investor confidence if we look at the recent downward movement in the RSA Government Bond Yield as per the below (a lower yield, means a higher price, which means investors are buying these instruments because they are more confident that RSA is a safer investment destination):

Now is not the time to get carried away with a “Ramaphoria” type investing pattern but it could be time to be slightly more optimistic about the investment backdrop for SA investors. The time to relook investing one’s hard earned Rands or moving out of cash into more growth orientated assets like equity and property may be upon us or about to be upon us. This is by no means a projection that investing in SA will necessarily yield worthwhile investment outcomes by any means, but for a long time it has felt like there has been little or no hope for our economy and investing locally. This could be the first step in a long journey (make no mistake this is going to be a long journey) that could make investing in local shares and businesses more attractive, at least on a relative basis, than it has been for a VERY long time. James Twidale


Market Update

Source: FactSet

The ALSI was up for the fifth month in a row returning 5.2%, carried mainly by Financials and Industrials, both up 6.6% for the month. Small Cap and Large Cap Stock trailed just behind the frontrunners, both up roughly 4.5%. Resources, which has ordinarily been a large contributor of the ALSI, dropped -2.0% for the month of April on the back of depressed mining data coming out of SA.

SA Property posted a 3.2% gain, recovering some of the losses previously experienced. One of the four companies which were part of the Resilient group, Nepi Rockcastle, was cleared by the FSCA of false and misleading reporting which lead to heavy losses last year. Nepi Rockcastle is the second largest listed property company on the JSE and thus the clearance by SA’s highest financial market regulator bode well for the index. Below demonstrates asset class returns in ZAR terms which will give you some perspective on the performance on your current portfolio:

April Asset Class Returns (ZAR)

Source: FactSet

The SA Reserve Bank released its bi-annual Monetary Policy review which shows much of the economic data releases were in line with expectations and they continue to take a hawkish view on interest rates as expected. Inflation for April came in lower than expected at 4.5% with retail sales, money supply and private sector credit coming in higher than expected. Business confidence is however, at its lowest level this year.

The IMF cut its economic growth outlook for SA to 1.2% this year, down from 1.4%. This put pressure on the Rand during the month of April, coupled with the elections which were held on May 8th. The results are in and the rand has strengthened on the back of an ANC win.

Global equities also saw a positive month despite the IMF’s lowering of global growth, posting a positive return of 3.4%. Developed markets were led by the US after a combination of strong earnings reports as well as better than expected economic data were released last month, which helped lift the S&P 500 and NASDAQ to record highs. Global property saw a decline despite its recent gains, while bonds and cash stayed relatively unchanged for the month.

Emerging Markets managed to have a positive return despite China’s equity market not performing as well as it did in the first quarter of the year. EM ended the month 2.1% higher. President Trump has escalated trade war tensions with the promise of increasing tariffs to 25%, up from 10% on $200bn worth of Chinese goods. This and the subsequent response by China could potentially have a negative impact on EM and global markets going forward. Haidee Chiat, Oratile Tlhabane

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