South Africans are justifiably angry. What should I do?

14 Nov 2017

We are angry because we are seeing our beloved country haemorrhaging and we feel helpless. Every day we read a new article on corruption, state capture and the ensuing suffering of all our people. Consequently, the country’s economy is spiralling down, and everyone is getting poorer. We want to shout “Enough is enough. Stop the rot.” Even our sporting teams (rugby and soccer) are losing embarrassingly.

The country needs change and quickly.

This means change in leadership. The ANC election conference is from 16 to 20 December where a new leader should be appointed that is likely to become President in 2019. This could be a watershed moment for South Africa, but predicting the outcome is very difficult. From our research with various fund managers and analysts, we believe there are three likely outcomes:

1)        Cyril Ramaphosa is elected. This should be the best outcome for the country. Simply,              much needed structural reforms can be implemented to reignite the country’s                            economy.

2)        Dlamini-Zuma is elected. This would be bad for the country as no critical changes                    are  likely and the policy of radical economic transformation will continue.

3)        The election process cannot be completed for internal reasons and it is postponed                   to  next year.

We believe outcome (1) has a 50% probability and will be well received by the country at large. The credit rating agencies will give us another reprieve as they review changes. For investors this would be a positive outcome and we should see the Rand strengthen materially to below 13 to the US dollar.

We believe outcome (2) has a 30% probability and will be generally negatively received.  A likely break away by Ramaphosa and his supporters will take place, weakening the ANC into the 2019 general election. In this scenario, we estimate there is a +50% probability the ANC does not obtain a majority in the 2019 general election. The country will then likely be governed by a coalition – an unknown concept in our national politics, which could have either positive or negative consequences.

We believe outcome (3) has a 20% probability which will be a disaster until there is clarity of new leadership. Zuma has stated that he will be stepping down at the end of his term.

So, how does this effect my investments?

The uncertainty of outcomes is too great to follow a specific direction. It’s too big a gamble. This is the view of many experienced investment managers. “We just don’t know what is going to happen in December and therefore one should not make an irrational decision.”

Therefore, it’s key to ensure your portfolio is correctly balanced to suit your particular risk profile.

Currently, the riskiest asset class is the Rand. It could swing sharply both ways depending on a favourable or disappointing ANC conference outcome in December. Thus, if you need a conservative investment portfolio (low risk) which will provide a steady return, your offshore exposure in your portfolio should not be more than 0% to 25%. As you are prepared to take on more risk, this offshore exposure range can widen. A moderate portfolio 0% to 50% and aggressive portfolio 0% to 100%.

Is a credit rating downgrade inevitable?

The answer is No. The rating agencies have been very patient with South Africa and realise the negative consequence of a downgrade to Junk status. The key issue is the country needs economic policy change, which will only happen with the most sensible new leadership. Hopefully Ramaphosa will be elected in December and institute economically viable strategies.

Therefore, there is a reasonable chance that credit rating agencies will give us another reprieve towards the end of this month. This should be positive as we believe the markets are largely pricing in the negativity of a downgrade into our bonds and currency.

Conclusion

A “cool-head” is needed during this emotional and volatile environment. Re-visit your investment goals. Ask yourself, do you need a steady income and capital preservation, or can you forget about your investment for the next ten years? A fair assessment of your goals will determine the risk your investment portfolio can take on.

Matching your goals with the appropriate risk-profile investment is critical in these uncertain times. At Investonline, our professional team with our financial planning models will assess your goals and ensure these are matched with the best investment portfolio to suit you.

Once a more certain outcome is clear, the appropriate risk adjustments can be made to ensure your investment achieves the best returns with the least amount of risk to suit you.

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