Picture: 123RF/suthisakaewkajng
Picture: 123RF/suthisakaewkajng

No country matches SA’s financial sophistication amid pervasive poverty. Disruptions to the funds management industry are unrelenting. Can this country’s unique positioning provoke globally relevant solutions that advance commercial and social interests? If realism informs innovativeness, then yes.

Most investors have long time horizons while consistently superior performance is rare. The expanding variety of passive investment alternatives widely challenges active management’s appeal. A percolating third way has been socially responsible investing or environmental, social and governance (ESG) funds that seek to advance environmental, social and governance objectives.

ESG funds often exclude socially undesirable investments with marketing advantages checked by modest on-the-ground impact. Active management generates similar returns and, employing vastly larger sums, produces far greater societal benefits.

Just as the inefficiencies of haggling in village markets has been replaced by bar code enabled check-out counters, professional investors conquer the formidable challenge of pricing publicly traded securities. This encourages broader investment flows, which lift living standards. Determining such prices requires much infrastructure spanning law, regulations, accounting and specialists covering various sectors.

The grocery store counterpart to ESG investing is nutritional labels. Both are valuable initiatives where improvements can spur greater relevance. ESG investing still lacks the equivalent of a “serving size” to assess what happens at the household level. The challenges now confronting the global economy reflect core household shifts, which portfolio managers and policy makers are only beginning to confront.

Globalisation, broadening prosperity and expanding women’s opportunities have been mutually reinforcing. Better-educated women have fewer children leading to increased investment per child which further promotes prosperity. Youth populations are now declining or plunging in all regions except the least globally integrated and thus poorest region, Sub-Saharan Africa, where they are surging.

The resulting inadequate global consumer demand had been expressing itself subtly. For instance, lowering interest rates became less effective as it doesn’t induce older people to buy more. But now trade wars are surfacing the deeper fissures.

No one understands the threats of insufficient global demand better than the engineers who continually recalibrate China’s economy. More than three decades of birth rate suppression means China’s youth population is plunging. While asset managers and multiparty state politicians fixate on recessions and short-term fluctuations, the Chinese are focused on maintaining a high long-term growth trajectory. This requires access to more consumer demand than their recently created middle-class provides.

China’s policy pivots after the 2008 financial crisis reflect confidence that their central planners can outmanoeuvre other nations thus capturing a rising share of the world’s insufficient final demand. Many of US President Donald Trump’s most ardent critics now support a tough trade stance toward China amid growing awareness of the global shortage of adequate consumer demand.

Declining youth populations point to fewer countries having healthy long-term growth trajectories, with many enduring prolonged stagnation. SA is among the first to be caught in such a stagnation trap. The cause is insufficient final demand’s cousin: inadequate purchasing power.

SA’s youth population is growing moderately. The problem is insufficient purchasing power reflecting weak exporting alongside high unemployment mixed with overindebted households headed by underskilled workers. This cannot be remedied swiftly but it urgently needs to be managed more effectively beginning with better understanding and improved monitoring.

In one-party China, technocrats closely track key performance indicators. Conversely, SA’s recent elections made little progress toward identifying a workable growth plan and this traces to politicians shaping issues to suit voter appetites. Key performance metrics didn’t feature.

Whereas China’s leaders focus on growth and employment while having openly accepted that some people would get rich first, SA’s ruling elite routinely prioritise inequality ahead of poverty. The two goals are then blurred to dodge accountability. The same motives discourage tracking household wellbeing. Such an environment is not conducive to designing a workable growth model.

Government efforts to solicit investments that rely on selling to SA’s financially stretched domestic consumers is a policy error reflecting poorly developed metrics. Excessive expectations for AfCFTA, the African trade pact, reflect similar toolbox shortfalls. Most Asian policymakers have emulated the policy-informing metrics of their wealthy neighbours who were quick to integrate into the global economy. Their comprehensive gauges span from household wealth building indicators to exporting success determinants.

SA employs many talented investment professionals whose efforts consolidate with their international counterparts to signal macroeconomic expectations, which inform investors, businesses, and government policymakers. Not establishing and steadily growing a large, stable middle class has been SA policymakers' most damaging failing. Insufficient data flows make corrective steps more elusive. ESG funds can be designed to overcome this.

SA’s dominant party favours an economy centrally controlled by a one-party state. However, its leaders show little interest in “crossing the river by feeling the stones” as recommended by the father of China’s spectacular rise. Stones below the surface have informed China’s policies supporting phenomenal export successes while achieving widespread household prosperity.

This country has been ravaged by health and wealth plagues, HIV/AIDS and poverty. AIDS has been tamed by pills. Policymakers have subsequently travelled extensively to find magic economic pills. But sovereign wealth funds, high-speed trains, silicon valleys and the fourth industrial revolution (4IR) won’t replicate the magic of the pills that subdued AIDS.

As Deng Xiaopeng surmised from feeling the stones below the river, the path to broad prosperity requires combining household prudence with full global integration. Economic pills can only produce magic if they induce prudence and a lust to compete.

To create a large and sustainable middle class, SA’s entrepreneurs and exceptional business leaders must develop export paths. Meanwhile, ESG funds should directly support companies and initiatives that advance broad household wealth accumulation. The indirect benefits will include improved visibility of household trends for policymakers. This is crucial as transformation objectives and patronage have distracted from monitoring and supporting household wellbeing.

The fund management industry is conditioned to create indices and measure portfolio managers against their relevant index. Thus indices focused on, say, small listed companies expand awareness of how to grow smaller companies.

That growth in SA’s sustainable middle class has been quite modest is underappreciated. Over-reliance on expensive consumer debt boosted GDP while diminishing long-term growth prospects. Eskom’s style of transformation through swelling its headcount is ultimately counterproductive as it harms households to the point that it is unsustainable.

That government policymakers are so wide of the mark in a country with quite sophisticated financial institutions means that SA’s money managers are able and motivated to become global leaders in developing an important new range of investment products. They will know they have gotten it right locally when demand for funeral policies dries up as households accumulate considerable inheritable wealth. Similar successes are possible in many markets.

SA’s money managers should assess the country’s dismal long-term prospects both with a sense of duty and an eye for spotting opportunities. Where the two perspectives converge, solutions come into focus.

There is a global need to make ESG-styled funds more robust. Given today’s pivoting demographics, supporting upliftment of low-income households is the right place to start. No country better combines the motivation and capabilities required.

• Hagedorn is an independent strategy adviser