By Dan Kemp
Chief Investment Officer, EMEA
The Facts and Market Reaction
The decision to ‘reshuffle’ the cabinet is claimed to bring ‘radical’ change to the South African political system and in doing so, facilitate policies designed to boost the growth of the South African economy. While there appears little disagreement that improvement is necessary in an economy that has struggled to hold its credit rating, the stark reality is that the Finance Minister has been a pillar of strength in holding South Africa’s finances together.
The Long-Term Impact of the South African Political Change
Turning to the longer-term impact of the result, it is noticeable that media coverage of the potential consequences are very light on detail but rich with suggestions of potential market turmoil and even a banking crisis.
This lack of detail should highlight the uncertainty that accompanies this change. In common with the previous political events of 2016, including Brexit and the Donald Trump election, it is currently unclear what the longer term political outcome of this change will be and even more unclear how this will impact capital markets.
In this situation, the words of Nelson Mandela appear particularly apt: “I learned that courage was not the absence of fear, but the triumph over it. The brave man is not he who does not feel afraid, but he who conquers that fear”. Fear is a natural but destructive trait in both investors and portfolio managers as it promotes action based on weak evidence.
Any changes to portfolios at this point would necessarily depend upon drawing a single conclusion from the broad range of potential outcomes that now present themselves. We can claim no skill in forecasting political outcomes (a trait we appear to share with professional pollsters and political analysts) and therefore will not gamble with investors’ capital.
Instead, we will continue to prioritise research over reaction, carefully assessing the fair value of the potential investments and comparing that to the current price. As valuation-driven investors, we are drawn to those assets currently trading at a significant discount to their fair value in the expectation that this discount will close over the long term, creating above average returns for investors.
Global Exposures and Local Bonds under the Spotlight
One of the most interesting areas we continually monitor is the balance of South African exposures relative to global exposures. We have emphasised the importance of diversification for a long period of time and these unpredictable events confirm this importance.
It is also worthwhile reiterating that panic can create opportunity. Despite the challenges posed by the current political environment, a spike in bond yields creates a situation whereby South African debt could become undervalued and represent an attractive opportunity for investment.
In this context, volatility in market prices should be welcomed, as a fall in prices can create opportunities to buy assets that are significantly under-priced relative to their long term fair values, thereby sowing the seeds of future returns. The key is to maintain patience and to assess the developments with a rational framework that avoids behavioural impulses and political biases.
Keeping Perspective
Our ability to access any opportunities that present themselves in the aftermath of this uncertainty is also dependent upon having sufficient resources available in portfolios to fund these purchases. Our portfolio managers have therefore been using the high prices we have witnessed over the last year to raise cash holdings by selling positions that have become over-priced. Consequently, portfolios are well positioned to make new purchases where we see opportunities.
We also remain in close contact with the managers who run the underlying funds in your portfolio. Each of these managers has been carefully chosen for their experience, expertise and rigorous investment process. We therefore expect them to approach the current situation with a similar long-term, opportunity seeking mind-set.
Lastly, we appreciate that the political instability is unsettling for investors and we hope the above provides a useful summary of the work we are undertaking on your behalf.
