CHARLES DE KOCK: The hard reality beyond the relief rally

The national election dominated news in SA in the past quarter. Most polls forecast that the ANC would drop below the 50% needed to form a government and would therefore need a coalition partner or partners. The market feared an alliance with the populist EFF. When that did not materialise and instead a more centrist coalition was formed, the rand rallied, long-term bond yields fell and domestic stocks surged — the so-called relief rally.

Our multiasset funds have a full offshore exposure and are light in SA bonds and domestic-facing stocks. Our funds will therefore underperform many peers during this relief rally. However, our positioning is based on the view that solving the problems facing the economy will take many years of consistent good decision-making and excellent implementation. Given a poor track record in this respect, this remains a grave concern.

The ANC’s loss of its majority has ushered in a new era of coalition politics under the government of national unity (GNU). But hopes of a reduced cabinet were dashed, with several dual deputy minister roles being introduced to appease members of the 10-party GNU. Key ministries within the cabinet remain under the control of the ANC, which still controls 22 out of 34 ministries. The DA controls six. The ANC has 31 out of 38 deputy ministers and the DA has five.

While the GNU is a positive outcome for the country and has the potential to address many of the pressing issues, it will not be easy to manage the day-to-day working of a government consisting of many different points of view and clashing ideologies. This opens up the risk of a continuation of the glacial pace of reform that we have become accustomed to. However, with the introduction of opposition parties into the various ministries there should be increased scrutiny of the checks and balances within these ministries.

Debt burden

The SA economy still faces big challenges, and though the direction of travel is positive, one cannot be hasty in moving long-term economic forecasts. Marginal positive revisions might be warranted at this stage, but the road to higher sustainable growth lies in the pace and minutia of implementation.

The low-growth rut in which we find ourselves is the result of many years of neglected infrastructure spending and poor management of vital state-owned enterprises, such as Eskom and Transnet. Without adequate power, water, rail and functioning ports, the economy will struggle to reach its potential. Turning these important parts of the economy into efficient working enterprises will take a monumental effort, with the benefits only visible in years to come. 

Government has also run up a huge debt burden. This has had the effect of pushing up government bond yields, making debt servicing costly and borrowing for new investments expensive. It is likely to take a number of years of running far tighter budgets to improve its fiscal position. And this comes while big spending on neglected infrastructure is vital. A way forward that may well be politically unpopular will need to be found. Wise and decisive leadership will be required.

The political road ahead will be bumpy. President Cyril Ramaphosa took some time to announce his new cabinet as its formation involved wide consultation to try to accommodate as many of the GNU parties and his own party’s individuals as he could. All parties in the GNU will have to find ways to make compromises for the benefit of the country. But overall policy direction (and implementation decisions) will still be shaped by the ANC in many of the key areas of economic development.

One must expect the sentiment in the market to ebb and flow between hope and despair. Trying to predict these waves is futile and we will continue to build our funds from the bottom up, selecting good businesses at reasonable prices in the domestic and global arenas. The same principles of investing apply to the bond and property sectors, where the longer-term outlook will always be more important than short-term volatility.

Improved outlook

Globally, the European Central Bank has started to ease interest rates, and in the US the Federal Reserve Bank is also expected to start the easing cycle in the second half of the year as inflation numbers have been moving in the right direction lately. When the developed world interest rate cycle moves lower it is likely that emerging economies will follow. The SA Reserve Bank will also be in a position to lower interest rates, though only mild cuts are expected.

The economic outlook for SA has improved. The new government has an opportunity to raise business and consumer confidence levels off an extremely low base by following sound, long-term policies and appointing competent individuals in areas where it is needed.

The financial markets will no doubt be buoyed by positive announcements. It reminds us of the period immediately following the election of Ramaphosa as ANC president in December 2017 — a period commonly referred to as “Ramaphoria”. During that time markets initially surged but later sagged due to disappointment in real delivery for the economy.

Investors learn from experiences and the market could well be less euphoric in its expectations this time, waiting for real results to materialise.

• De Kock is portfolio manager at Coronation Fund Managers.