An April’s fool tale

By Patrice Rassou, Head of Equities at Sanlam Investment Management

Politics has been the dominant theme driving global financial markets in the past year, says Patrice Rassou, head of equities at Sanlam Investment Management.

Whether it was the unexpected decision of the UK to exit the EU or the election of Donald Trump, this trend very quickly put to bed the old adage that “…only in emerging markets does politics play a greater role than economic policy in driving performance”.

In South Africa, the murky world of political intrigue has taken top billing with the surprise removal of Finance Minister Nene at the end of 2015, which gave our financial markets a shock jolt, only to be revived by a spectacular volte-face and the appointment of a more experienced Pravin Gordhan, and yet another abrupt about-turn with Gordhan’s removal on the eve of 30 March.

The fiscal restraint conundrum

Meanwhile, credit rating agencies put us on notice – a downgrade to junk status would require the country to go into debt counselling for a number of years. National Treasury has a financial tightrope to walk. How to exercise fiscal restraint to keep our foreign creditors at bay while fulfilling the mandate of poverty alleviation.  The last budget was an exercise in fiscal belt tightening for “the haves” where the marginal rate of income tax was hiked, while sufficient funds were made available to provide social grants to over 17 million of the poorest South Africans “the have-nots” – a third of the population.

But having that said, even such redistributive policies have a limit. Wasteful expenditure has become the scourge of society – for all the juggling by our technocrats at the financial heart of government, the real economy is not creating enough jobs, growth has been lack-lustre as commodity producing economies took great strain driven by a severe correction in commodity prices. And in the real world, business confidence has remained low and an impediment to investment and job creation, with public sector enterprises unable to take on the baton of creating enough jobs to absorb growing youth unemployment.  Demands on the treasury are many – free tertiary education, better and more affordable healthcare for all among others.

South African corporates are stalwart survivors

For over 8 million unemployed South Africans, an economy which is not growing and creating jobs is cause for much hardship. And this lack of growth is in stark contrast with financial markets, which seem disconnected from the real economy. Don’t be too surprised by this conundrum; Credit Suisse found that for the past century (1900 to 2016), the JSE delivered the best stock market returns in the world, outstripping the likes of the US, UK and all the European nations. This shows that our corporates have outlasted world wars, economic isolation and periods of extreme economic mismanagement. Today, the JSE is dominated by global companies that derive most of their earnings outside of our borders with the largest listed stock Naspers, owning a stake in Chinese internet giant Tencent, which is the largest emerging market stock by market cap!  So for our clients invested in a diversified portfolio of assets on the JSE, there is some matter of comfort that the SA Inc. has stood the test of time when it comes to financial performance.

Can we deliver the change the economy needs?

However, the bigger existential question that we face is whether the shift towards more radical economic transformation will deliver the changes we need in terms of better education and jobs to alleviate economic hardship. Our foreign creditors, who own over a third of our government’s debt, are watching closely. In a low-growth environment, Government’s job should be to focus on reducing wasteful expenditure in state-owned enterprises and incentivising the private sector to create jobs in South Africa – something President Trump made his election mantra.  Any economic misstep will hit the poor the hardest, resulting in foreign capital giving our shores a wide berth. Higher cost of servicing our debt will mean that there will be less money for social grants and a weaker exchange rate will fuel inflation, which will increase the cost of living for all South Africans. For those with pensions invested on the JSE, our philosophy is to invest in companies with solid business models trading at attractive valuations as the best way to protect your savings.  Good companies can withstand economic turmoil through a diversified business model and by focusing on defending their margins. Unfortunately, however, this could be at the expense of job creation.

Warren Buffett advises on investing in businesses with safe ‘moats’, ie those with a sustainable advantage because, he says, “you should invest in a company that even a fool can run, because someday a fool will”.

More than ever, this has become relevant to our economy.