Hope in turbulent times

When I was a youngster, my December holidays were five-week caravanning trips, spent building amazing memories and developing special family bonds. One of the things I remember so clearly was my dad’s request to be left alone to ‘gather his thoughts’ for the first week. Yup! I think I’m becoming my dad!

The last few years have been tough. The news assaults us daily with more stories of corruption, commissions of inquiry, and what feels like a never-ending stream of depressing news – and that is just in South Africa! 

News around the world does not seem to be much better: the USA and China Trade War, the perpetual saga that is Brexit, Europe and the devastating refugee crisis, and that’s before we even get into discussing world leaders.

Over the past 20 years, South African financial service professionals have witnessed a lot: the Russian financial crisis, the dot-com bubble, the economic fallout of the September 11 attacks, the market downturn of 2002, the Great Financial Crisis of 2007/8, and some very flat years when the market generated almost no returns at all. 

However, the sector has also witnessed some wonderful years where the world’s markets delivered amazing, high, double-digit returns and it seemed little could go wrong. But somehow the last five years have felt different, felt worse.

While the academic solution to South Africa’s economic woes is simple, actually having the will, the political capital and the ability to implement these much-needed changes is not that easy.

Government largely needs to focus on a handful of areas:

1. Deal with corruption and jail offenders
2. Reduce spending i.e. reduce the labour force in government, SOE and parastatals
3. Ensure that those who are employed know how to do their jobs properly, and
4. Reduce ‘irregular expenditure’

That being said, a government seen to be actively reducing the workforce will ultimately be going head to head with labour, and that inevitably means losing votes. As such, any changes to the current system would have to implemented slowly. This is frustrating for those of us desperate to see change and regrettably, often gives a platform to the likes of the EFF, Black First Land First (BLF) and unions in the process. 

Nevertheless, the good news is that these changes are definitely happening. From hiring freezes to the elimination of thirteenth cheques, small changes are quietly unfolding across government, SOEs and civil services. The private sector continually does battle with labour – often winning – in its constant quest for greater efficiency and, by extension, greater profits, making for an attractive investment case. 

So, as I have asked before and as we are once again constantly being asked as advisors, is there still an investment case for South Africa, or is it time to pack up and leave? 

There are still sufficient indications that the answer to this is an optimistic and emphatic YES!

Over the past year, a different, not-yet-clear picture has emerged. In many ways the country has been here before. The driving factors that have culminated in this point may be different, but South Africa has faced what seemed like insurmountable odds previously, and made it through. And it will do so again. There is little doubt that it will not be quick or easy, and volatility will most certainly be a regular companion, but we have the right people in the country to turn this ship around. 

It is at times like these that an objective approach is needed, one that provides as realistic a perspective as possible of the market. Such an approach allows observers to remain uninfluenced by overtly negative or panic-driven sentiment, and to rather be informed by that golden rule in investing – focusing on true market valuation.

It is time to start viewing the news differently. Yes, there will still be daily news stories about SAA, the SABC, Eskom and other flailing SOEs. But under the very able guidance of Pravin Gordhan, corrupt and ineffective boards are being replaced, not based on nepotism, cronyism or political favours, but on merit. When last did we see that? This situation will take time to correct, but once the ball is rolling and corrupt ministers understand that their time is up, things will start to get better much faster.

Our president Cyril Ramaphosa took over at a very difficult time. Notwithstanding this tough environment, look how many changes have already happened for the better. These might not have occurred as quickly as anticipated, but things certainly are better than before.

The case for remaining invested

It is undeniably tempting to switch our current investments into cash, and wait until the markets have turned and the volatility has died down before reinvesting. However, is that the best idea right now? 

If we take an objective view of valuations, the South African stock market definitely shows amazing value. While many would argue that after a strong year like 2019 the offshore markets are nearing ‘fully priced’ valuations, back home in Mzansi quality companies are trading at record-low PEs, making a very compelling investment case.

Where to from here?

As 2019 draws to a close and we reflect on the challenges it, and the last five years brought, it is still best to look ahead. Will we finally get that sustained positive upswing we have been waiting for? Only time will tell. But given global political uncertainty, now is the time to focus on what really counts in the long term – true valuations. 

There is plenty of value in the South African market. It is easy to hear the noise, but the real value is in not listening. Rather focus on fact!

I would like to take this opportunity to wish you safe travels should you be away for the holidays, and hope you enjoy your much-needed break. I know I certainly will!