Intellidex head of capital markets research, Peter Attard Montalto, gives an analysis of the losses incurred at Eskom. Watch the analysis on SABC News here:

Intellidex head of capital markets research, Peter Attard Montalto, speaks to Al Jazeera about how embattled parastatals pose a threat to South Africa’s economy. Watch the full interview below: 

The risk of load shedding is still real as operational issues at Eskom were not fixed but were merely put to bed during winter. Those issues will return as summer draws closer, says Intellidex’s Peter Attard Montalto. Featured in The South African

A joint CEO and chairman for Eskom presents governance challenges and is not a sustainable solution even in the short run, says Intellidex’s Peter Attard Montalto Featured in Daily Maverick

There’s been massive build-up of financial stress at state-owned enterprises. Some are really right on the edge and require significant amounts of taxpayer support, says Intellidex’s Peter Attard Montalto. Featured in Al Jazeera

Strong leadership is needed to sweep aside ideological cobwebs to drive reforms but government has shown we cannot expect this

This column was first published in Business Day

SA has never had macro-level austerity in any real sense in recent years. Expenditure has continued to grow even in real terms in ever year bar a small dip in 2016/2017. Indeed, expenditure this fiscal year will grow about 11.6% including the special appropriations bill.

This was the fallacy of the Pravin Gordhan years of fiscal “prudence”, which were driven off a noncredible view of long-term potential growth, backed up by analysts blindly accepting the paradigm.

Ratings agencies, such as Fitch Ratings last Friday, will now drive the reality home: growth in per-capita terms is at best around zero (that is, headline growth around 1.7%) in the coming years.

Gains from improved collection by new management at the SA Revenue Service will be offset by emigration and lower growth than forecast. There are no gains to be had from higher taxes — they will simply reduce buoyancy more. Debt service costs will climb faster with higher debt.

All these populist pressures will be dressed up as ‘Thuma Mina’ and social compacting, but the reality is that the issues here are no-one else’s to solve but the government’s.

Eskom has eaten up all the space for doing anything interesting with expenditure to support growth. Instead, raising more debt for this will crowd out private sector investments the government so sorely needs to turn sentiment. The government is on the one hand asking the private sector to invest more in the economy while on the other asking for more money into government bonds. It cannot do both.

The result is that the abstract concept of “misallocation of capital” is now, for the banking sector and asset management industry, becoming the reality, hence low growth and low productivity growth get entrenched.

National Treasury will always be trusted to utilise to the maximum extent possible the political space it has to ensure fiscal sustainability. However, there are no easy options left. The result will be that status quo at state-owned enterprises and public sector wage increases are protected for ideological reasons stuck in the 1960s, but programmes are cut. The government will become more grossly inefficient and unproductive as a result.

The Treasury has started this process with its current negotiations into the October medium-term budget policy statement, laying down scenarios for discussions of reductions versus budget of 5%-7% in expenditure. This is huge in logistical, growth impact and political terms. It would shave off R47bn and R50bn in the coming two fiscal year.

Such cuts will limit the ability to implement reforms and limit the optionality for the government going forward, but there is no option. It is too late. They will be required not so much for just Eskom’s bailout but to offset the underlying weakness in the fiscus.

While it is uncertain if these scenario-based cuts will survive the budget process through cabinet, it shows the real intent of the Treasury to drive home the realities. They could be blocked but they will have tried to keep the show on the road.

This has blowback for the Cyril Ramaphosa faction into the 2022 elective conference (and the 2020 national general council). The question will not be “did you keep the show on the road”, but “what did you do to the rent pie?”

This will drive a desperate hunt for more populist routes, including more pressure for rate cuts and QE (quantitative easing) from the SA Reserve Bank, more lending from state development banks, more pressure on local banks and asset management, and with it prescribed assets chatter will reach fever pitch. These factors will achieve little or set back growth by damaging credibility and sentiment further.

The Bank is not here to do the heavy lifting the government is meant to do. Even if it did cut rates sharply there would be a one-off growth spurt that would then quickly die back to a lower growth rate than now as credibility was lost.

All these populist pressures will be dressed up as “Thuma Mina” and social compacting, but the reality is that the issues here are no-one else’s to solve but the government’s.

This is not just about things such as visas and industrial policy not making progress, but also “fallout risk” of making the situation worse. The best example of this in the coming weeks will be an unfundable, unworkable, unconstitutional National Health Insurance (NHI), which can only work by restricting private property rights and private access to health care into a centralised system that will be a fertiliser bed for future state capture while driving medical professionals overseas.

The turnaround at Eskom, however, is the most acute example of the strong message that nothing is happening. No political capital is being deployed and problems have been kicked down the road to a chief restructuring officer that should hopefully be appointed this week. Investors now realise that ideological blocking forces in the government are preventing reforms proposed by the task team to keep the status quo. That coal will crowd out renewables and unbundling may be in name only. Private participation may well eventually happen, but with no minority shareholder rights if some in the government get their way.

Downgrades will further limit political options and ability to implement and reform with such a politically risk averse leadership, and indeed will increase calls for populism. Once you are over the “scary” hump of downgrade calls for fiscal restraint, it will be easier to brush aside.

For me, it is these psychological impacts of a downgrade that are far more important than the short-run market and economic impact themselves.

What is needed is fiscally zero-cost reforms that allow the private sector to step in and drive growth, job creation and development. The only way to do that is strong and immediate leadership to sweep aside blockages and ideological cobwebs. The past two months have shown, however, that this should not be expected.

• Attard Montalto is head of capital markets research at Intellidex.

Eskom needs to appoint a restructuring officer and advisors, formulate a plan, get the plan approved and then execute the plan. This is likely to take a year before any unbundling can occur, says Intellidex’s Peter Attard Montalto. Featured in Tech Central 

Classic Business with Michael Avery speaks to Intellidex analyst Peter Attard Montalto on the Special Appropriation Bill in relation to Eskom. Listen to the full interview below:

The lack of detail on what the Eskom cash injection will be used for or how it will be funded is disappointing, says Intellidex head of capital markets Peter Attard Montalto. In Bloomberg today

By: Heidi Dietzsch

There is one sure thing in this world we live in and that is change. Various developments and innovations, especially technological innovations, are reshaping the world faster than ever before. This is certainly the case for market research.

Change is, however, never without challenges. The future of market research is full of challenges – how to incorporate and use new technologies, how to redefine the role of researchers and how to build and strengthen partnerships with clients,[1] among others.

For decades, market research was in a stable, comfortable position, but is now being forced to evolve and revolutionise to keep up with a society that is changing rapidly. These could be scary times indeed for market researchers who are unwilling to adapt. Data quality, respondent recruitment, traditional methods and even the purpose of market research have all been subjected to transformation and will undoubtedly lead to uncertainty.[2]

One of the main changes relate to the survey as we know it. For the longest time surveys have been at the forefront of data collection. However, the growth of smartphone penetration globally has brought a great deal of change to traditional surveys.

A big challenge of orthodox surveys is that respondents need to rely totally on their memories – which is not always to be trusted. One of the solutions to this are short intercept surveys (SIS) where respondents document their views and perceptions on their smartphones while busy with a particular action – for instance, buying a new product at the store. SIS are short and unlikely to cause respondent fatigue and are done while requested information is still fresh in respondents’ memories.[3] Michalis Michael, the CEO of UK market research firm DigitalMR, believes that these types of studies will eventually replace long monthly customer tracking studies.

Michael also believes that social listening analytics will become an absolute must-have for market researchers.[4] Social listening entails the monitoring of a brand’s presence on social media, followed by an analysis of the perceptions social media users have of the brand. This tool allows brands to realise how big and influential their presence is in social media, how many mentions they receive and on which channels, and whether these mentions are positive or negative. Also, brands can see how they compare to their competitors and whether their image and reputation are favourable.

Social listening analytics can also enable brands to take concrete action. They can create the kind of social media content that attracts clients, come up with new ideas – and even products and services – based on industry trends. Brands will be able to improve the customer experience by interacting directly with clients and continuously shift their customer strategy to fit the current need.[5]

Another rising trend is the use of passive data that is collected without specifically asking people for it. This is also called implicit data. Conversely, use of active data or traditional data relies on the participation of people and is known as explicit data.[6]

Kristin Luck, founder of US management consultancy ScaleHouse, believes that market researchers will increasingly make use of passive data.[7] Passive data collection has signalled the era of big data – the volume of data which you can gather in a short space of time can be staggering. Imagine the scenario: people are purchasing on an app. It might only take them a few moments to complete the purchase but in that short space of time researchers can glean their location at point of purchase, their interests, their spending behaviour and preferences on payment methods. If they’re using a loyalty card, you then have all that information to mine as well.

The passive data collection process requires minimal involvement from researchers themselves. However, the researcher’s role as an analyst who mines a vast quantity of data to pinpoint key information will become more important.[8]

As in most areas of our everyday lives, market research is progressively becoming automated. This is good news for clients – who need results yesterday – as well as for researchers who can now free themselves of time-consuming tasks and focus on generating insight.

One of the most difficult tasks in market research is to recruit respondents to participate in studies – that is, enough respondents to reach clients’ samples and also fit their sometimes very specific respondent criteria. This process has become more and more automated due to the increase in aggregation services. These services refer to sample vendors that use multiple sources to create larger, more accessible respondent panels. While the premise of aggregation is simple, it is the filtering and selection technology behind it that thrusts vendors into automated territory. By simply selecting a few basic parameters, these panel providers send invitations to relevant respondents, making it easy to fulfil nearly any client requests.[9]

Then there is artificial intelligence (AI). People tend to confuse AI with automation, but these two concepts are not the same. Even in its most complex forms, when a task is automated, software follows the instructions it has been given. The software does not make any decisions or learn something new each time the process runs. Learning is what distinguishes AI from automation.

AI can empower researchers with insights and analysis that would not have been possible previously. For instance, it has the ability to process open-ended data or large, unstructured datasets using statistical analysis techniques.[10]

All these new developments and technological advancements can certainly create a sense of unease – especially in an industry that is renowned for its tried-and-tested methods. Nevertheless, they do have strong potential to enhance market research and help ensure the survival of the industry. Stalwarts desperately clinging to the “good old days” will, unfortunately, not be so lucky. New technologies should be embraced and researchers must be willing to learn and adapt. Most importantly, however, deep insights require the creativity and imaginability that no machine will be able to replace.











PepsiCo’s bid for Pioneer Foods is part of a deal-making spree by investors who need nerves of steel and a long-term view

This column was first published in Business Day 

SA’s companies are being targeted in a deal-making spree. Last week, PepsiCo launched a bid for Pioneer Foods, Clover got Competition Commission approval to be bought out by Israel’s Central Bottling Company, and Aton was blocked from taking over Murray & Roberts (M&R). From this action alone, you’d think that the SA economy has bright prospects.

Well, it certainly doesn’t. Last week provided yet more evidence of political dysfunction with the scene set for a constitutional crisis over the public protector’s call for remedial action against President Cyril Ramaphosa.

Despite the quarter-point interest rate cut in the same week, the economic outlook remains bleak, with no prospect of even surpassing 2% growth in the medium term. The political dysfunction is making it impossible to deal decisively with Eskom or the many policy blockages in the way of a decisive shift in economic outlook.

But anything is a buy at the right price. In SA decent assets with decent potential returns are available on the cheap.

The Pioneer Foods bid by PepsiCo had been rumoured in some corners of the market (Financial Mail columnist Marc Hasenfuss tipped it the day before it was announced), but the premium it offered was certainly a surprise. The two companies have a long relationship: Pioneer was once Pepsi’s local bottler.

No doubt there have been conversations already between Ethos and PepsiCo about a potential deal

The bid price is 56% higher than the trading range of the share in the previous 30 days, which appears generous, valuing the company at R24bn (a number that will make a big contribution to Ramaphosa’s foreign investment targets). But two years ago, when PepsiCo is last thought to have pondered a bid, the share price was about 30% higher than the current offer. The New York giant could well think it is getting a bargain.

The next step surely is an offer for Pepsi SA, the local producer of the main Pepsi brands that sits in The Beverage Company, a soft drinks business owned by private equity house Ethos and Nedbank. No doubt there have been conversations already between Ethos and PepsiCo about a potential deal.

The Clover deal has a lot in common with the Pioneer one. CBC Israel is the bottler of Coca-Cola in its home country and owns an array of food, dairy and brewing interests globally. Its R25-a-share offer for Clover was a 70% premium on the 30-day price when it was made in February and values the company at R4.8bn.

The market clearly thought the competition authorities would throw up a barrier, with the share price trading some way off the offer price until the commission’s approval was announced last week.

CBC’s Israeli roots led to caution that the deal may be thwarted by politics, with Brimstone already having pulled out of the bidding consortium over concerns regarding Israel’s human rights record. With the commission’s all clear, the deal looks very likely to proceed, though now with the interesting complication of the much more vigorous Pepsi to compete with.

Block a surprise

Not so for M&R. The commission has recommended that deal be blocked on the grounds that bidder Aton is a close competitor and the companies would control too much of the market between them. Germany’s Aton has been pursuing a hostile bid for the company for years and has steadily built up a 44% stake, making a bid of R17 a share for the rest in mid-2018.

The M&R board has been resisting, declaring fair value to be in the R20-R22 range. The commission’s block on the deal came as a surprise, wiping 17% off the M&R share price to just R11.80.

Aton had simultaneously been building a stake in struggling Aveng, which M&R had wanted to buy in 2018, arguably in an effort to bulk itself up to beyond the reach of Aton.

The German engineering company has a big share of the shaft-sinking and underground development market globally through its ownership of Canada’s Redpath, and M&R was set to be a lucrative addition to its portfolio. Now it will be somewhat hamstrung, having acquired its shares mostly at a significant premium to the current share price. Selling out will book a big loss so it will likely stay put with its 44% and attempt to influence the company while pondering how to get the commission to change its mind.

It will also be nursing losses in its 25% interest in Aveng, which has since become a penny stock.

These deals were set in motion after the election of Ramaphosa as ANC leader but before the current standoff that is making the president seem isolated against the assorted forces of Zuma-aligned apparatchiks in the ANC. Friday’s public protector report alleging Ramaphosa deliberately misled parliament creates a major distraction from the job of actually leading the country. Deeper dysfunction is clear in the inability of the cabinet to agree on a convincing plan for Eskom, let alone the rest of the state-owned corporations.

In that political atmosphere it takes nerves of steel to make a multibillion-rand bid for an SA asset.

Aton and CBC are family-owned companies that are thinking long term without immediate shareholder pressures. The rest of us would do well to take a leaf from their books and look at SA assets with a step removed from the maddening political mess.

• Theobald is chairman of Intellidex.

Business Day TV caught up with Intellidex analyst Peter Attard Montalto to discuss the South African Reserve Bank’s decision on rate cuts. 

The interest rate cut will not meaningfully boost economic growth, says Peter Attard Montalto, head of capital markets research at Intellidex. Featured in Business Day today.

Markets have somewhat glossed over the resignation of André Pillay as Eskom group treasurer  given the market’s ‘risk-on’ mood, says Intellidex head of capital markets Peter Attard Montalto in Daily Maverick.

For business, the message is that departments’ thinking is not changing, which means inequality and unemployment will continue

This column was first published in Business Day 

If you listened to the budget vote speeches last week — without the benefit of context — of the departments of trade, industry & competition and mineral resources & energy, what do you guess the growth rates would be in 2019 and 2020: 2%, 3% or 4%?

And given they were brimming with optimism, what would you guess business sentiment would be? Positive?

There was a strange, even bizarre, aura of “policy as usual” around the speeches. There was no real recognition of a major crisis of unemployment or inequality. Hands were certainly not waving in the air with a blood-curdling scream that would signal urgent recognition of SA’s economic predicament.

Overall, a business with rock-bottom sentiment would have little reason to feel any better because it was clear there was no mindset change from the government.

The department of trade, industry & competition was predictable enough: lists of sectors and interventions. The timing couldn’t have been less fortuitous scarcely 24 hours after ArcelorMittal had announced about 2,000 job losses.

The message to business was that money is available if you fit into a cookie-cutter mould and want to partner with the government. If you just want to get on with it, less is on offer.

The government has a love affair with interventions. These appear to be trying to mimic the automotive industry, which is unique with its huge ecosystem of small, medium and micro-sized enterprises, upstream suppliers and downstream demand. Other industries, such as mining or high-tech manufacturing, struggle with this setup.

The public enterprises speech extolled the religion of state-owned enterprises (SOEs) by unhelpfully referring to the conditions that they can flourish in — which don’t exist in SA. SOEs in Singapore, China and Europe run off some of the world’s best education systems, an acceptance of foreign talent and wider, more developed industrial complexes to match.

No mindset change

A quick whizz around a range of business leaders after the speeches suggested some serious head scratching. The home affairs speech mentioned skilled-immigration visa processes improving with e-visas but made no mention of the key skills list, which is the real bugbear of immigration policy.

Overall, a business with rock-bottom sentiment would have little reason to feel any better because it was clear there was no mindset change from the government.

This isn’t to say there isn’t reform. The more efficient deployment of government funds for industrial development (even if picking winners doesn’t create growth), the move to e-visas and the speeding up of business registration processes are all positive and will help get from negative to zero per capita growth.

A recovery will take place — the point is to where and how quickly.

One particularly egregious set of references among the speeches that led to the most head scratching among business was energy policy. This left the unanswered question: what does the government favour? Surely an energy policy should maximise jobs, investment and growth, and minimise tariffs for users, and supply risk. The Integrated Resource Plan process doesn’t seem to be aimed at optimising this mix. Instead a cadre is put in charge of colouring in boxes for different energy allocations using MS Paint.

Gwede Mantashe made it quite clear in his energy budget speech that the key optimisation point is utilisation of SA’s resource endowment. Why this should be so important is unclear — certainly not why it should be more important than tariffs or jobs. Does the endowment include SA’s world-beating solar energy reliability? That is a resource after all.

The department of trade, industry & competition budget speech was all about lowering tariff costs — something no one has ever explained. Does it mean cross-subsidy between users? Taxpayer subsidy to industry? How is all this meant to work when Eskom still has tariffs that do not reflect costs. Surely it would be far easier just to have a system producing the cheapest power?

The government is clearly not undertaking any proper optimisation. Work by the Council for Scientific and Industrial Research has shown clearly how it is possible to optimise a system with lower tariffs (saving up to R60bn annually), more jobs (maybe up to 60% more than alternatives) and more investment and growth under a steady but sure transition towards renewables (with battery and gas balancing) and away from coal.

The government could maximise jobs and keep unions on board as well as do the hard graft through BEE schemes’ involvement in the Renewable Energy Independent Power Producer Procurement Programme to keep broad vested interests happy. Indeed, there is evidence that there is a slow winning over of unions to renewables.

Yet the status quo in the government of maximising use of the resource endowment combined with pipe dreams on industrialisation — despite so much evidence and failed work done in the past 10 years on both clean coal and nuclear — remains stubbornly in place.

SA should be feeding the seeds of tech and fintech start-ups with talent and policy support, not trying to resurrect a globally problematic nuclear industry from a standing start.

The next big hurdle risk in this area will be trying to keep a lid on a delevered Eskom’s monopoly mindset regarding its own attempts to do renewables in future rounds.

For business the message of the past week is that the government’s thinking is not changing. Reforms will come, the economy will recovery — but to a level of potential growth of about 2%, which will not rise. Inequality and unemployment will continue.

In such an environment, populist policies, attacks on the Reserve Bank and prescribed assets will become the norm.

Sentiment will not recover until there is evidence that the government’s mindset is changing. This is how trust with business will be built.

• Attard Montalto is head of capital markets research at Intellidex.

Should Eskom give preferential treatment to the PIC over other bondholders, it would create huge legal headaches for government, warns Peter Attard Montalto, Intellidex’s head of capital markets. Featured in Bloomberg

The intense lobbying over SA’s energy mix is creating “a misleading impression of where the centre of gravity is”, says Peter Attard Montalto, Intellidex’s head of capital markets research. Featured in Daily Maverick

There are now more ‘good’ reasons to implement a prime lending rate cut – such as the fall in global yields, Eskom’s tariff hikes and lower oil and petrol prices, says Intellidex’s Peter Attard Montalto. Featured in Business Tech

With urbanisation increasing at a rapid pace, those in the lower end of the market need to be able to get credit to buy homes

This column was first published in Business Day 

It is increasingly difficult for South Africans to get small mortgages and therefore own low-cost homes, despite several government initiatives. That is damaging low-income consumers’ financial health and frustrating access to housing in urban areas. We need new ideas on how to fix the problem. I want to propose one.

But first, consider the scale of the issue. Today, 66% of South Africans are urban, up from 62% in 2009. In Johannesburg alone, 3,000 new residents are thought to enter the city per month. The demand for mortgage finance should, therefore, be higher than ever. But in the last quarter of 2018, just R1.4bn was lent in mortgages of R350,000 or less, only 3.4% of all mortgage lending. Ten years ago, 16% of all mortgage finance went to that segment and R4.4bn was distributed.

This is a disaster for long-term urban stability. We want urbanisation to accompany widespread property ownership to ensure residents have a vested interest in urban development.

There are various reasons for the collapse of small mortgages. Banks are under pressure from regulators to shorten the length of their loan books and thereby reduce risk, so are less keen on 20-year assets. But the market has also shifted into unsecured loans because there are bigger profits to be made. Anecdotally, low-income consumers are using unsecured loans as part of their efforts to buy properties (though some also do so through lease-to-buy deals). That, naturally, comes at a far higher cost. Since the National Credit Act opened the market for unsecured loans in mid-2006, growth has been substantial. At the end of 2008, 12% of the credit disbursed in the market was unsecured credit. A decade later it was 22%.

The margins on mortgages are a fraction of those on unsecured loans, plus the costs of mortgages have gone up due to court decisions that affect banks’ ability to quickly sell properties in possession. Simultaneously, the cost of new housing has risen.

This is a disaster for long-term urban stability. We want urbanisation to accompany widespread property ownership to ensure residents have a vested interest in urban development. While we have made much of the importance of giving people title to their properties in the land-reform debate, we’ve made little of enabling people to acquire title in the first place. We need interventions in the market that will shift lending patterns back into mortgages.

There are several government and city-level schemes that help. The Finance-Linked Individual Subsidy Programme (FLISP) allows households to claim a grant from government for their first homes if they earn less than R22,000 per month. The subsidy is up to R121,626 for those earning between R3,501 and R3,700, and less for those earning more. But in the 2017/2018 year, only 2,295 subsidies were granted, while over 17,000 had been budgeted for. The scheme was overhauled in July last year, increasing subsidies and qualifying limits. R950m has been budgeted for over the next three years. But even if it reaches targets, it is still a relatively small dent in the problem. The programme is administered by the National Housing Finance Corporation, a quiet but well-run state-owned enterprise. Over the past year it leveraged R2bn in private-sector funds into home financing while disbursing R381m directly itself. This is admirable, but it needs to be at a larger scale to make a noticeable difference, considering that the total SA mortgage book is now close to R1-trillion. Steps are being taken to scale it with the creation of a human settlements development bank, depending on how National Treasury capitalises it.

But clearly more is needed. So here is an idea. Tax-free savings accounts have been introduced to drive a better savings culture in SA, but further incentives could support savings specifically for housing. A scheme could allow those who earn within the lowest tax bracket of up to R195,850 per year to contribute up to R50,000 per year to a first-time buyers savings account.

Rather than a deduction, such as for pension savings, government could add 18% to amounts contributed into a first-time buyer’s account (perhaps sliding lower the more that is contributed). It would effectively be giving back the 18% that taxpayers in the lowest bracket pay, though those earning below the tax-free threshold of R79,000 would also benefit and therefore gain an incentive to save too. Providing a credit has a better psychological effect than avoiding tax through a deduction and spurs greater behavioural change.

Such a policy would be highly progressive and redistribute income into productive asset accumulation by lower-income South Africans, reversing some the inequality currently being created by differing costs of finance at different income levels. The problem with FLISP is that it doesn’t crowd in personal savings in the same way. In time such a scheme could integrate or replace FLISP.

Catalysing the credit market to direct more finance into low-cost housing is clearly needed, and ideas on how to do so should be part of the land reform debate.

• Theobald is chairman of Intellidex.

Government should split Eskom into generation, transmission and distribution entities, as promised, as a deleveraged Eskom with a monopoly mindset is dangerous, says Intellidex’s Peter Attard Montalto. Featured in Reuters