A Change for the Better
By Adrian Meager, General Manager Warwick Asset Management
December 2017 saw a change in ANC leadership that held the potential to change the direction of the South African economy and uplift the lives of the South African population. As January rolled by, some were beginning to question whether the ANC’s new president, Cyril Ramaphosa, had the political will to replace President Mr Zuma before his term of office was due to expire. Matters gathered pace in February and when the State of the Nation was postponed, the ANC top six held emergency meetings, many anticipated that Mr Zuma’s term as State President was nearing its end.
On the 14th February, Jacob Zuma resigned as President of South Africa and since then, we have witnessed a well-delivered and encouraging State of the Nation Speech followed by a tough, but necessary budget speech and a major Cabinet shuffle. We believe that these key events may be enough to prevent Moody’s from downgrading South Africa to junk status. Should we avoid a downgrade, this will add materially to the the sense of optimism in the country since the Mandela presidency. Given the potential that these tectonic changes hold for us as South Africans, we have outlined some of the effects will have on the South African economy and consumer and how these developments may impact on our client’s investments:
Leading up to the budget speech which was delivered on 21 February 2018, our financial markets already saw signs of life, with foreign investors showing renewed confidence in South Africa by increasing investment in the local bond and equity markets. We often view our own markets’ strength through the eyes of foreign market participants and as things stand, they clearly like what they see. The South African 10-year Government bond rate, which is often used as the benchmark to gauge the government’s ability and willingness repay its debt, has reached a level last seen at the beginning of 2015.
The South African Rand has also benefitted, not only by appreciating in value, but by stablilising against major currencies. This is not to say that there are only opportunities within our borders, even though SA Inc. will surely benefit from the improving economy. Globalisation has placed us in a fortunate position where we can seek investment returns not only on our door step, but in markets offering opportunities which may not be available locally and share in the new era of synchronised global growth.
The budget speech delivered by then Finance Minister Malusi Gigaba was, as expected, filled with some hard truths. South Africa is not out of the woods yet, but we finally have a game plan on how to improve our fiscal deficit, turn state-owned-enterprises around and allocate money to projects that will ultimately benefit us as South Africans. These improvements, along with many others, paint a positive outlook for our economy and citizens; one many of us would have thought near impossible just a few short months ago.
Given the remarkable changes that have unfolded over the last three months and the direction the local and global economy are heading, we have made some subtle changes to our clients’ portfolios. Notably, over this period, we have increased our weighting to South African banks and retailers. This decision was made to take advantage of the renewed consumer confidence, lower inflation and potential interest rate cuts (boosting disposable income), and stronger GDP growth, all of which could result in higher earnings revisions. We also reduced our exposure to some of the Rand hedge healthcare stocks, as we believe there are better opportunities in South African-exposed companies.
Although we believe South Africa is turning the corner and we will look to capitalise on the opportunities that present themselves, it is important to note a couple of things: 1) South Africa makes up a tiny fraction of the global economy and global stock market and at Warwick, we still believe that a well-diversified portfolio should include companies which have revenue streams not dependent on one geographic region alone. 2) Even though the South African economy is poised for a turn around, it is important that we weigh-up the fundamentals of an investment/potential investment versus the markets expectations of that investment/potential investment and identify any potential upside or downside risk. At present, there is lot of optimism around the South African economy and market expectations can often run ahead of fundamentals, exposing investors to unnecessary downside risk. It is our job to identify those opportunities that look attractive, versus which opportunities are attractive. Getting these calls right will be to the benefit all of our clients.