The Final Seminar in the Series ‘Make Sense of the Noise’

Our final seminar took place in Cape Town’s stately Mount Nelson Hotel, with Table Mountain standing guard in the background like a sobering reminder of the need to be as firm and steadfast as the mountain itself.

After a brief introduction by Kieron McRae, Group Business Development Director at Carrick, the panel got right down to business, with Leanne putting things aptly into perspective.

Joanne launched straight into the conversation with a painful reminder of Brexit. She pointed out how just a week before many people had thought Brexit would never happen, and then it turned the world upside down.

She believes the message from Brexit is a popular rejection of the status quo and that people everywhere have had enough of what is happening in the world economy today. She raised the point of 62 billionaires controlling as much wealth as possessed by 3.6-billion people, which is half the global population. Ten years ago that figure was 388 people. According to her central banks have been printing enormous amounts of money over the last few years, and finally the middle classes are saying: enough is enough.

Justice added that it is important that people correctly read the signals “out there”.  What happened with Brexit was “political action”, the risk of which South Africans are constantly exposed to.

There are consequences, he said, and one should be aware of the key trends that will shape the next five to ten years in South Africa.

Three key drivers of SA trends

Justice singled out three key drivers of South Africa’s political future. The first is the fact that to understand South Africa, one must understand what’s happening in the ANC; the second is inequality; and the third will be the forthcoming local government elections on 3 August.

This turbulence that is being created won ‘t go away as long as there’s so much factional infighting in the ANC. That is going to drive our politics for the foreseeable future certainly up to the ANC conference in 2017, but I think there will be spill-over beyond that,” he said.About inequality being the second driver, he pointed out that only 104,000 South Africans or 0.44% are part of the employed elite, while 8.9-million people have no jobs, with more than 3-million having given up looking for work altogether.

This high unemployment, coupled to the dismal economic growth picture, is creating huge risk for all South Africans. Most of the protesters we have seen on streets recently are young people, where the unemployment rate is officially 57%.The elections – the third driver – will be the most closely contested elections since 1994. The ANC is battling to retain its majority hold on power, its support having fallen from 60% to 50% in just three years. In Pretoria the ANC could lose out to a DA/EFF coalition government.

Justice’s off-the-cuff remark that Julius Malema could become the mayor of Pretoria caused some nervous laughter.In Nelson Mandela Bay Metro the ANC’s support has fallen from 70% in 2004 to 48.3% in 2014. Because it is going to be very hard for the ANC to reverse these losses or maintain its majority there is going to “a lot of noise and volatility in the political environment” as the ANC tries to fight off the challenge from the DA and EFF.On a lighter note Leanne and Justice reminded the audience that there will be “no election” in the Western Cape. “We know who’s going to win here,” they quipped in reference to the DA’s strong position in this province.

Unemployed and unemployable

On the scary statistic of unemployment in South Africa, Joanne added that the 8.9-million unemployed South Africans are “unemployable”.

She emphasised this point with a graph that showed South Africa scored the lowest in the world when it came to the quality of maths and science education. She also stressed that South Africa’s unit labour cost should be very low when considering the high unemployment number, which of course it is not.

Joanne attributes this to labour federation COSATU having far too much say in government and not allowing free movement of labour. The 8.9-million unemployed is one of the biggest voting blocs, yet COSATU has too much say with the employed bloc.

“I worry about this as a South African in terms of our long-term productivity gains, and something has to change. I realise that finally my vote is going to count in the New South Africa, because there’s going to be lots of changes on 3 August.”

A more populist SA after elections?

Joanne also raised her concern about the ANC, after losing badly in the elections, decides to move in the direction of the EFF and become a more populist party, as opposed to moving more in the political direction of the DA. She suggested that, in the case of the ANC becoming more populist, it would be “very prudent to put as much money offshore as you possibly can”.

“And I am not saying offshore to buy rand hedges which is a very popular way of doing that. There are far better ways to do that to actually have your dollar assets offshore-offshore.”

She mentioned events in Zimbabwe and Venezuela to illustrate that forex policies can change quickly, and therefore it is imperative to contemplate in advance what would happen if the ANC lost badly and steered the country in a more populist direction.

Referring to the rand’s volatility and weakness, Joanne said for her the bigger issue is the deterioration in education under the ANC and the large number of South Africans that are unemployable. She pointed out the irony that South Africa spends more on education than most other countries yet the quality of education is not improving.

Picking up on the point made by Joanne, Justice referred to the ANC’s pandering to one small constituency, COSATU, in trying to set a minimum wage for all workers before the August 3 elections.  If, in a populist move by the ANC, the minimum wage is set too high for employers to afford, it may scare them off causing them to relocate their businesses to other countries. While the government acknowledges that South Africa has a massive unemployment problem, such a move would simply at the same time be undermining its own efforts to create jobs. This will be at the expense of the country as a whole, he said.

In such a scenario, where jobs will be lost, Joanne added that domestic spending will start to fall. She said while many people wanted to buy South African shares because of their attractiveness, she was worried about earnings growth. She believes the government should forget about a minimum wage and relax restrictive employment measures to allow greater employment freedom which will create jobs.

Going offshore & other emerging markets

Joanne believes that with most South Africans still continuing to live here, offshore investment becomes an option that necessitates a long-term view. She therefore still advises people to have local assets, but at the current margin right now, she advocates offshore as well.

And while the UK, EU or the US have serious problems right now, she says there are many other very attractive emerging markets, singling out India as a prime example. She said India is “a country that’s working” and commended Prime Minister Narendra Modi for “being a most incredible leader  who is getting things done, like getting rid of corruption”, among other things.

She also reminded the audience that equities is not the only option as there are a large number of asset classes one could invest in when going offshore, such as hedge funds, currency trading funds, long-short equity funds, fixed-income arbitrage, and more. Despite the political risk overseas, like Brexit and Donald Trump, for instance, and with bricks and mortar investments being unpopular, one could invest in entities like Amazon, for example.

She also believes people should be aware of the risk that the South African government could in future perhaps decide to stop capital outflows and people cannot take their rands out of the country.

Lack of political leadership

The speakers next turned to the issue of political leadership, or its lack, in South Africa. While the likes of Donald Trump coming to power in the US may pose risk there, the strength or integrity of US institutions will allow them to survive. In contrast no-one can have faith in South African institutions such as, for instance the Hawks, when someone criticised by a high court for being a repeat liar is appointed its head.

Justice felt that while South Africa does have excellent institutions such as the judiciary and the Public Protector, there were serious concerns about what is happening at the Hawks or the SA Revenue Service among others. These are institutions that needed to work and not be used for political ends, he said.
On the effectiveness of leadership, Justice pointed out that India’s Modi came to power at the same time that President Jacob Zuma started his second term. But while India in the first year following went from about 2% GDP growth to 5.4%, while South Africa was also at about 2% but has since fallen further, while in India the institutions are not being undermined as in South Africa.

In South Africa this leadership problem is not being addressed because power lies with the party and not the voter, explained Justice. South Africans vote for a party, not the leader, and the party chooses the leader. The powerful 86-member national executive committee (NEC) of the ANC, on which President  Zuma currently enjoys the support of about 60% of its members, has kept Zuma in power despite public opinion turning against him.

In the mining and commodity environment Joanne pointed out the political context that affects it. Before commodity prices fell, she said, no-one really cared much about President Zuma: he was “perhaps a nuisance to many but remained in the background”.

“But when commodity prices started falling and the country started coming under pressure, suddenly it mattered what government was doing.”

In this regard Leanne is concerned about Chinese growth in future, saying the type of growth China will have will not be very bullish for South Africa as China wants to grow its economy in sectors such as services. This is not very good for a commodity-producing country like South Africa. This means South Africa has to grow domestically in various areas, which again brings labour costs, the power of labour unions and lack of leadership into question.

While mines are struggling, they should not be burdened with high wage increases and BEE issues that make it hard for them to survive. And, the government continues with old policies that don’t work, instead of growing other industries like tourism that can create many jobs.

Policy uncertainty

Asked about the likelihood of government introducing more policy changes in future, Justice said that he is less concerned about policy changes per se than the uncertainty that comes with them in South Africa, pointing out the uncertainty created by recent attempts to change policy in the mining and agricultural sectors. In some cases even senior people in the ANC were unaware of these changes being made, but it became policy simply because a minister said so in a speech somewhere.

A this point Joanne put this kind of uncertainty into the global context, pointing out the massive global uncertainty created by Brexit, and how the lingering uncertainty around things like the renegotiation of EU/UK treaties are going to affect countries like South Africa.

The speakers agreed that uncertainty in South Africa in, for example, the mining sector, is playing out in the larger context of global uncertainty after Brexit, and South Africa should have been in a position to offer itself as a safe alternative. Instead investors will rather go to places like India.

Questions from the floor

Asked by one of the guests in the audience about either Cyril Ramaphosa or Nkosazana Dlamini-Zuma succeeding President Zuma, Justice said the issue was tied to the ANC’s two factions, with Ramaphosa being supported by one faction, while Dlamini-Zuma is being supported by the Zuma-aligned faction which, in his view is currently on the rise again.

If the ANC had to vote today, Justice believes Dlamini-Zuma will become president. While he does think she has positive qualities, the problem is that she may come under pressure from the faction supporting her, which would want to perpetuate its patronage system. Her challenge would be to decouple from that support base.

Asked by another guest from the floor about the recent violence in Tshwane following the ANC’s announcement that Thoko Didiza would be its mayoral candidate in the city in the August elections, Justice said it revolved around corruption. According to him people around the present mayor have benefitted from lucrative municipal contracts and access to resources, and therefore want the current mayor to remain.

Another guest asked about fear and opportunities. Joanne gave the assurance that despite the many problems there are still many opportunities for investment. The key is that with the high levels of global volatility and the constant shifts taking place, one has to entrust experts who monitor these ongoing shifts and can therefore identify the best options for investors. And if one is not too fearful, there are even more opportunities arising from all the volatility.

A final question from the floor wanted to know whether the ANC would go quietly where it lost power in the elections. Justice said he gave it a low probability that the ANC would resist as there are still people in the ANC who are invested in democracy and peaceful transitions.

At the end of the well-attended seminar, guests networked around the buffet table, probably chatting about the sudden standing down of Boris Johnson in the Tory leadership race – news that trickled in at the very end of the seminar. All in all, a most informative occasion!

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