Now That The Dust Has Settled
South Africa’s sixth democratic elections are now over. PAUL CLUER takes stock of South Africa’s economic and investment prospects under the new administration.
The outcome of South Africa’s 8 May national and provincial elections was never in doubt. Most analysts and polls predicted a comfortable ANC win, albeit with reduced support. EFF gains and DA setbacks were anticipated, but voter turnout surprised. Turnout plummeted to 66%, reflecting disenfranchisement with the democratic process and outcomes.
Cyril Ramaphosa was reinstalled as the country’s president amid rumours he would dramatically cut the size of his cabinet. In the event, he belatedly announced only a moderately reduced ministerial team. Cabinet’s composition and the ANC’s subsequent disturbing choice of parliamentary committee chairs are evidence that continued factional battles within the ruling party will compromise governance.
Pravin Gordhan returns as Public Enterprises Minister in a move aimed at fighting state capture at state-owned enterprises (SOEs). South Africa’s debt-laden SOEs pose the biggest financial risks to the country. Despite being an able administrator, Gordhan seems disinclined to tackle the gross overstaffing at SOEs which has resulted in an unmanageable wage bill. Government is now planning a massive R230 billion Eskom bailout.
Tito Mboweni continues as Finance Minister amid flagging tax revenues as the country stands on the brink of another technical recession. The expected first-quarter economic contraction came in at a shocking 3.2%. Falling second-quarter output would mean that SA’s economy will have shrunk in four of the last six quarters. The SA Reserve Bank says that the economy is now in its 67th month of a weakening cycle — the longest downward cycle since 1945.
The SA economy thus faces severe structural risks and is nearing a sovereign debt trap. The new political leadership augers some hope of a better future, but successfully implementing a turnaround requires tough decisions that do not seem probable. Failure to improve growth will be negative for SA’s investment grade rating from ratings agency holdout Moody’s Investors Service.
The US Federal Reserve’s dovish January U-turn and expectations for interest rate cuts in the world’s largest economy have put downward pressure on global interest rates and buoyed US stock markets to all-time highs. Resultant US dollar weakness has offered temporary relief to the beleaguered rand.
Foord’s defensive strategy of low “SA Inc.” equity, low property, high cash and medium-term government bonds and maximum foreign assets has turned out to be broadly correct. Stock selection detracted from better returns.
South Africa’s cash and bond markets offer attractive, high-yielding investment opportunities. Medium-term SA government bonds have a high probability of achieving at least 4% per annum above inflation over the next three to five years and we own substantial quantities of these investments.
Share return prospects for companies that sell services and goods domestically are poor, despite a significant fall in the share prices of SA consumer and industrial companies. We still favour investment in JSE-listed global companies with a lower risk of loss compared to SA Inc. counters. But these too are not immune to short-term volatility.
Lastly, we are reminded that meaningful inflation-beating returns do not come in tidy increments over every discrete period. Returns are lumpy and cyclical. Staying invested through cycles is the key to achieving long-term investment outcomes.