Is this the turning point?
The country has been waiting with bated breath hoping for a Ramaphosa victory. Many of us have been unable to see a positive outcome given the years of disappointment and frustration that we have endured with Zuma over the last 8 years.
But, this is probably the watershed moment we have all been desperate for. Ramaphosa can create a positive legacy if he follows through with his plan to reignite growth, rebuild investor confidence and tackle a 30% unemployment rate. The question is, will he have the courage, the strength and be ruthless enough to implement the necessary changes.
Already there is doubt over the speed of change given the election of the top six, which were evenly split between the presidential nominee camps. There is doubt that Ramaphosa may not have enough support to make necessary changes such as reversing state capture and quashing corruption as well as implementing many critical policy changes.
Despite the split in the top six and, irrespective of the outcome of the NEC (top 80) elected, we see this is as a “new dawn” and believe that Ramaphosa will get enough support to make changes as needed. The uncertainty is how quickly these changes will be made, i.e. will Zuma be recalled as President in January? The odds are good that this will happen.
In our opinion, this is the turning point. The ousting of Zuma can only be positive. Under Zuma, the economy has suffered with an average annual growth of only 1.4% p.a since 2009. The Rand has depreciated from 7.50 to 14.30 to the US dollar and our debt to GDP has ballooned to 60% from 31%. All of this is due to poor management of the economy, corruption and state capture.
With the economy at a low base, critical economic changes should produce quick noticeable growth. The simple change from a negative to a positive investor environment should make a material difference to the country’s future.
Investonline Investment View
Our political and investment market analysis throughout the year has ensured that we maintained a more balanced view in allocating capital between Rand and offshore investments. We did not buckle under pressure when many commentators were saying the Rand was a one-way bet to weaken. The Rand has been volatile this year moving between 12.46 and 14.47, which has made investing difficult. But, the key issue has been to ensure investors’ offshore exposure has been matched to their risk profiles resulting in low, direct offshore exposures (12% to 17%) for conservative investors and higher, direct offshore exposures of (23% to 28%) for aggressive (longer term) investors.
Our view is that the election of Ramaphosa is a “game changer” and very positive for the country. A rating agency (Moody’s) downgrade is likely to be avoided and the Rand should continue to strengthen to below 12 to the US dollar. Purchasing power parity – the “fundamental fair value of the Rand” – is around 11.20. Despite this, structured diversification is critical for all portfolios, which needs to include the right amount of offshore investment depending on your risk profile.
Investonline’s recommended portfolios have all had below average offshore investment weightings over the last two years as the Rand has strengthened from 16.50 to 12.70 (-23%), which has placed them in good stead. Given that offshore market valuations are expensive, selective offshore positioning is vital, which we believe is included in our measured offshore exposures.
The market is likely to undertake a large sector rotation as fund managers refocus their attention on South Africa which will be positive for our portfolios in 2018.
