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May 23, 2018

Is Ramaphosa = Good times ahead?

Is Ramaphosa = Good times ahead?

Mr. GJ van der Merwe from Ceres always used to say, “a fish rots from the head down.” South Africans saw this in practice over the last 9 years.

Now that we are finally rid of Zuma, South Africans have a spring in their step once again. All of a sudden, the future looks much brighter than 6 months ago when people were making doomsday predictions about South Africa.

What is important to remember is that good times do not directly translate into financial prosperity for all. It didn’t work out all too well for those who took all their money offshore at the end of 2015 when the Rand was heading for R20 to the Dollar. Similarly, it might not work out well betting blindly that South Africa will now be entering an era of strong financial growth and an even stronger Rand.

Avoid the current optimism when making decisions about your future and your investment strategy, just as you should have ignored the prevailing pessimism 6 months ago. Rather focus on fundamental principles and try to take a much longer view than the next year or 5.

Does a better or more popular president (what we assume Ramaphosa will be) automatically mean a stronger Rand, faster growing economy, better performing stock exchange and lower unemployment rate?

Below, using a couple of indicators, we can see that it becomes hard to draw a parallel when we look at the last 3 presidents who served a meaningful term (Mandela, Mbeki and Zuma).

I believe out of the last 3 presidents, Mandela was the best/most popular, Mbeki was somewhere in the middle and Zuma was by far the worst. But if you merely look at the numbers you might have come to a completely different conclusion.

Mandela faired the worst in 4 of the 5 categories and Mbeki the best in 4 of the 5 categories. At face value, Zuma’s performance, except for the massive rise in state debt, looks good compared to that of Mandela. Herein lies the problem… what you see is not necessarily what you get.

Events in global capital markets and market valuations of both currencies and equity markets have a way bigger impact on these outcomes than merely the quality of the president at the time.

According to Warren Buffett, “Where a company with a bad reputation and a CEO with a good reputation comes together it is usually the company’s reputation that stays intact.” All I am trying to say is that Ramaphosa is no silver bullet and the challenges he will face are huge.

A few qualifying comments and perceptions given the above data and the times we are in:

  • Even though the Rand is much stronger now than it was 2 years ago, it can strengthen even further. A downgrade to junk status now seems unlikely and South African long-term bonds offer good returns to foreign investors, making it an attractive asset class. A year ago, no one would touch the same asset class. Beware of thinking unilaterally. In the short term the Rand is affected by political movements but over the long term the Rand moves in line with other emerging market currencies. See correlations below. Note however that the Rand’s correlation with Brazil has gone up to 98% over the last 8 years.

  • The starting point is important. Mandela’s presidency started when our market traded at a price earnings ratio (PE) of 19.23 (very expensive) while Zuma’s presidency started at a time when our market was trading at 10.48 (very cheap). Given the low starting point, the performance we had over the last 9 years was actually very disappointing. Our market is now trading at similar levels compared to when Mandela became president (expensive at face value) but our market has changed so much over the years (Naspers and mining specifically) that it becomes hard to make assumptions about what the future may hold. However, I am willing to go out on a limb and say that active managers should outperform the index and passive funds from this point onward.
  • Even though Mr. Ramaphosa looks like a skilled pilot you need to remember that he is not flying a pristine aircraft. He has just taken over the controls to an aircraft with bullet holes in the side and a burning engine. He might be a decent pilot but if you are expecting a soft landing you might be irrational. The measures that now needs to be put in place and the changes that needs to be made will not be comfortable. State debt is sitting at record levels thanks to Mr. Zuma. The father who takes the family to Disneyland is much more popular than the one selling the expensive car and cancelling oversees trips to get his finances in order. Mr. Ramaphosa will be the latter. Mr. Mbeki had much more breathing room in terms of monetary and fiscal policy to put SA on a good path forward than Mr. Ramaphosa has now. Interest rates are still low, and taxpayers cannot carry more of the burden than they currently are.
  • Ramaphosa will probably have a harder time than any of his predecessors in closing the gap in the uneven distribution of wealth. It will be no easy task balancing those requirements, his political party’s survival and finding an economically feasible route to implement it all.

In conclusion I want to implore you not to run from port side to starboard side of the ship when it comes to investment decisions. It never ceases to amaze me how people can change their long-term plans based on events from the last 3 months or even a year in financial markets, worst of all political changes.

Decide on where you want to get to, put a strategy in place that will get you there and then stay the course.

Andró Griessel is a certified financial planner and the managing director of ProVérte Wealth & Risk Management.
Follow him on Twitter @Andro720911. He writes twice a month for Netwerk24.

Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. ProVérte Wealth & Risk Management is an authorised financial service provider with FSP no. 5966.

Andró Griessel
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