There is an amusing trait of many of SA’s elite in that they like to forward me messages whenever anything goes wrong offshore, whether it is Boris Johnson’s antics or drama in the US. Perhaps it is a cathartic experience.

Of course, the central conceit of this is that the UK government has a leadership vacuum at its heart yet the state and the economy still tick over just fine with low unemployment. The US economy continues to churn out innovation and technological advances. Economies with higher standards of living and lower rates of unemployment where the concern is relative, not absolute, poverty, are more able to weather inflation storms than a country with so many living so close to absolute levels of poverty.

Last week’s inflation data for May from Stats SA shocked to the upside, printing at 6.5% vs 6.1% that surveys had expected. Most of the surprise was driven by food, while core goods and services showed much lower inflation and a smaller surprise. That food price pressures are now showing up — after several months of softer-than-expected food inflation despite rising import and raw domestically produced prices for agricultural goods — shows how the petrol price shock in particular is starting to percolate into wider prices. Equally it raises the uncomfortable fact that, while helping at the margin with household budgets, the fuel levy cut cannot fundamentally shift the pressures petrol is producing on broader price setting.

The question is what to do about such price pressure. First though its important to understand the problem. Stats SA suggests there is about a two percentage point gap between the highest and lowest inflation rates experienced by different income deciles — with the poorest experiencing inflation about 1.5 percentage points higher than the headline rate, which is  dominated by the richer who spend more.

Drowned out

The Pietermaritzburg Economic Justice and Dignity group calculates baskets of food and hygiene products based on what and where the poorest actually purchase them. They calculate that inflation for such groups is about 11.4%-11.9% (for food and hygiene products) but maybe more importantly still highlight the substitution challenges that such households experience between different products when on set budgets (from grants or from low wages) — do you purchase less food to buy hygiene products or the other way around?

The compression in real incomes in lower income decile households is not seen much at all in the headline data because it is drowned out by the spending of the richer income deciles many times over. The lack of high frequency meaningful data of how all income decile households are spending and consuming is problematic.

What is odd is that while there is so much focus now on the payment or not of the social relief of distress grant — which has been flat at R350/month now for more than two years — there has been exceptionally little debate over the huge real-terms cuts that grants are facing. No doubt such calls will come at the eleventh hour into the February budget (rather than the medium-term budget policy statement in October) and the Treasury will be able to keep a cap on things because it will be so late in the day.

The simple answer is to tax more and spend more on grants. Yet the sustainable tax base is lacking. You can’t raise grants one year given inflation and then cut them the next year — the point is the price level keeps ratcheting higher. The same argument can be made about public sector wages and cost pressures such as wages on tariff regulated entities such as Eskom.

Unsustainable fixes

The tax base space is lacking to hike taxes further without causing unintended behavioural and growth consequences and gobbling up tax options that were meant to be spent on other things (such as National Health Insurance). There isn’t the ability, political or capacity wise, to cut expenditure meaningfully to make space. As global interest rates rise the space to raise debt issuance levels further is lacking.

There are some short-term fixes given the levels of cash the fiscus has and the income from short-term price effects of the terms of trade boon, but these are unsustainable.

In an ideal world the fiscus would have been running at a small primary surplus with slowly falling debt levels before an inflation shock, which would allow them to have the fiscal space to adjust spending and borrow more to smooth the shock for the poorest.

We are in a very different place instead — where to prevent risks to future spending from rising debt service costs and so on a very narrow path has to be navigated. This is the only option given the lack of alternatives, but is deeply suboptimal.

It is exactly why a faster path of priority reforms is necessary to make the fiscal space to provide this kind of insulation, and for the space to open up to make more challenging choices on expenditure. Such faster growth would also absorb more potential grant recipients.

Comparing SA to peers again — where it is vs other emerging economies or vs developed economies — SA’s current account surplus and speed of tightening in primary fiscal deficit in the past two years has stood out for investors as a key comparative positive. This is why, despite Fed hikes and global market wobble — the rand and bonds have been surprisingly well behaved.

Stepping back though, and looking below the hood, the sum of historic choices has meant that we are actually not in an optimal place to respond to shocks. This will have deep political economy impacts in the few years ahead.

• Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company. This article first appeared in Business Day.

Intellidex’s Senior Banks Analyst Nolwandle Mthombeni joins Michael Avery on Business Watch. She joins as a panellist to discuss findings from Intellidex’s May Banking Monthly alongside David Buckham, CEO of Monocle Solutions.

Topics of interest for May 2022, as discussed by the panel, include central banks capitulating to inflation, expectations for lending growth across the sector and some of the bank AGM outcomes. 

“We look at three main components (to construct the Intellidex Momentum Index) 1. The balance sheet. 2. Income statements. 3. Profitability. We look at the SARS data that is tracked every month to track if the momentum is showing improvement or is it going backwards. We then on a month to month basis create and index to show where the growth has been going,” says Nolwandle Mthombeni.

Watch the full panel discussion below.

*The Banking Monthly is a report launched by Intellidex in April 2022. A new report is available on the first Tuesday of every month. You can download your version of the May report here.

The ESG acronym is on the lips of investors worldwide. I can’t think of any other investment phenomenon that has spread so fast, from pension funds to private equity fund managers.

Yet astoundingly, when you really interrogate it, no-one seems to know what it means. Sure, it is “environment”, “social” and “governance”, but regarding a portfolio strategy, just what should you be doing to make your portfolio ESG compliant?

Talk to large global fund managers, and you’ll find some that think ESG is just another way of pursuing alpha. By eliminating companies that are involved in exploitive environmental practices, or who treat customers and staff exploitatively, or who practice poor governance, your portfolio ends up being one that will outperform.

Other funds have a quite different view — ESG comes at a cost because you are restricting your set of possible investments, but it is a price worth paying because you are avoiding reputational risk. Still others use ESG strategies as a way of positively seeking out investments that will change the world — those developing technology to make green energy or to dramatically improve sanitation at low cost.

So ESG can be positive in the sense of actively seeking investments, and negative in the sense of screening them out. It can be about improving returns over some neutral benchmark, and about making the world a better place at the cost of returns. This is an astounding range of interpretations and practices.

This spills into controversies such as the decision to exclude electric vehicle manufacturer Tesla from the S&P Global ESG index last month. If you think ESG is about screening out companies, it makes sense — the company’s labour relations and some features of its governance meant it scored poorly. But if you think ESG is about changing the world, it makes no sense — Tesla is disrupting the vehicle and battery market in a big way that is accelerating decarbonisation.

Recent research I undertook with my firm Intellidex for the UK government revealed a disturbing way this is playing out in global investment flows: ESG is biasing investment away from emerging and frontier markets. The markets where investment can have the greatest impact in terms of eliminating poverty and improving wellbeing are finding it more difficult to attract capital because of ESG.

Losing weightings

There are many reasons for this. Many investors have built models that use public indicators such as the corruption perceptions index, the press freedom index, the labour rights index, CO2 emissions rankings to get an ESG score of a market. Now, which do you think scores better from such a process between, say, Sweden and Swaziland?

This screening approach does not mean an outright knock out. But, in general, it means that developing countries are losing weightings in ESG indices compared to the neutral index. This is problematic. If you think ESG should be directing capital to achieve certain desirable social and environmental outcomes, such as those encapsulated in the Sustainable Development Goals, then it is going to let you down.

A further problem is the lack of quality data available from emerging and frontier markets. An ESG model may want to rank companies on their internal gender equity, for example. Developed market companies produce such information routinely, but few in the frontier markets do. The cost of information gathering is often higher.

The other problem is that the “E” and “S” have quite different data features — thanks to developed world efforts, many environmental measures have been developed. But that is not true of social measures. You can judge a company on its impact on CO2 emissions, but how do you judge it on its impact on inequality, health standards or literacy?

As investors grapple with building models they can apply in practice, environmental concerns tend to dominate because it is easier to measure. Emerging market should have a competitive advantage in offering “S” outcomes, yet “S” is low priority in global approaches.

Exclusion approach

For a country such as SA, this is obviously a concern. SA is in many respects ahead of the curve in understanding ESG, and its companies are quite sophisticated in giving investors the relevant information. But it does them no good if investors are applying a “sovereign ESG ceiling” with SA downweighed because of high carbon emissions and corruption perceptions.

The solutions are to rethink what matters in ESG. Conceptually it is still evolving and we need to change course from the exclusion approach. What we need instead is a focus on additionality — how does my investment add to positive environmental and social outcomes? Such an approach needs a higher risk tolerance for potential negatives, such as the quality of governance at sovereign level.

For those who want ESG to be an ally to global development, this is a conversation they must embrace.

• Theobald is chair of research-led consulting house Intellidex. This article first appeared in Business Day.

This is a unique position for a mid-level equities research analyst to take a step up to leading a team in a dynamic business that brings genuine thought leadership to capital markets development.

The senior equity research analyst will lead euities research for our retail investor client base and develop our institutional research product. This is a senior-level position to lead the team providing equities research as part of our wider capital markets team that includes macro, political economy and banking specialist researchers.

You would join a team that studies South Africa’s equity markets broadly, and some markets in other countries. In particular, you will lead the preparation of equity research reports on a broad range of JSE companies with an emphasis on small- and mid-cap sectors, as well as Intellidex’s coverage of local and international ETFs. This position involves financial modelling, valuation, discounted cash flow calculations, fundamental business analysis, general market awareness and participation in the capital markets team. While the role will be focused on servicing retail investors, the candidate will also have the opportunity to develop our equities offering to institutions, servicing our global institutional client base, ranging from large global asset managers to innovative hedge funds.

Intellidex also has a leading practice in social economy and development finance, and the equities team regularly contributes to thought leadership on capital markets development to deliver public policy priorities like a just energy transition and employment. This has a global emerging markets scope and sits at the cutting edge of international conversations on the role of impact investment and ESG in aligning capital markets to public policy ambitions.

Essential requirements are (do not apply if you do not meet these requirements as your application will not be considered):

Preferred requirements are:

Intellidex offers a unique environment that draws together top academic skills, financial markets research and insight on South Africa’s financial sector. We work with investors, financial institutions and domestic and international policymakers to improve outcomes for South Africans and other emerging and frontier markets. Intellidex is well-recognised for high quality research and you will become a core part of a highly skilled team, providing significant learning opportunities to advance your career. 

Performance will be judged by the delivery of high-quality research projects and reports, as well as engagement with clients and other audiences. We have offices in Sandton, where this position will be based, London and Boston. The position will report to the head of capital markets research.

We offer a small company environment in which you will have considerable latitude to shape your role. Remuneration will be a mixture of basic (in the senior researcher range) and performance-based pay.

Our standards are high. You will be working with MBAs, CFA charterholders and PhDs on our team to ensure that Intellidex delivers high levels of client satisfaction and responds dynamically to new business opportunities.

If you are interested in the position, please send a covering letter in which you address the seven requirements listed above, and CV, using the form below. Please apply before 31 June 2022, though the role will be filled as soon as a the right candidate is identified.


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The headlines of the past two weeks were something to behold. 

There was an outpouring of joy from all quarters at the employment (Quarterly Labour Force Survey) and then GDP data. The economy was going gangbusters and surging above pre-Covid levels and all was fine. Reforms were working, and why not?

Let’s extrapolate a positive narrative and some spin on investment implications. After all, the QLFS data showed a rise in formal employment of some 408,000 on the quarter, with unemployment surprising just below one percentage point on the better side. GDP, meanwhile, surprised consensus expectations strongly to the upside, printing at 1.9% quarter on quarter, seasonally adjusted.

This is all quite mad. There is so much going on to unpack.

We need to be careful because the path of reform affecting growth is long and complex, and to suddenly think it all came piling in during the first quarter could lead to complacency and misaligning expectations. That could lead to seeing the wrong risks into price pressures, and so the wrong monetary policy choices being made (though I don’t think the Reserve Bank will fall into this trap).

First, the economy in the first quarter was supported by household consumption growth being faster, not investment growth which is still only just above 14% of GDP. Most investment-related reforms, like spectrum and embedded generation, had not happened to see actual investment occur.

Second, trade volumes growth showed up the continuing logistics restraints preventing better export-led growth.

Most of all though, straight-line projection from the data ignores the drama to come in the second-quarter data from the floods and intensity of load-shedding then. In fact, mining and manufacturing data out last week were a substantial surprise to the downside for April as the floods and load-shedding hit, and showed, once again, that the economy cannot take part in the mining substitution story caused by the war in Ukraine. SA will be stuck with the price effects for now until we see the logistics reforms bear fruit. This is positive for tax revenue now, but not as much as it might otherwise be.

Growth will most likely fall back substantially then in the second quarter,  and the impact might be felt for some time after.

The unemployment data is more problematic. The commentary simply ignored the huge data quality problems with the QLFS that particularly affected the previous two quarters and saw a marked underreporting of employment by about 1.3-million formal-sector workers for each quarter. So the first-quarter data saw just some correction in this issue, but was misinterpreted as amazing employment growth.

The “other” employment data released by Stats SA — the Quarterly Economic Survey — is far less volatile and has made much more sense through the Covid crisis. It is out in a few weeks and some commentators may then have egg on their faces. We expect it will show some improvement in the first quarter as the economy successfully navigated the summer season with an endemic stance on Covid, and so an actual tourism season to speak of. It just won’t be as good as the Quarterly Labour Force Survey data implied.

(As an aside, there is a silent crisis in data quality caused by underfunding of Stats SA that needs more attention.)

The global economy is also slowing markedly as interest-rate hikes and higher inflation erode household balance sheets and uncertainty curtails investment decisions. SA’s current account surplus of about 2% of GDP is a bright spot, which can help provide some more stable macroeconomic backdrop before reforms can fully kick in.

Serious, difficult and meaningful reforms are happening step by step. Indeed, I think many local economic agents aren’t aware of quite the scale or pipeline. Hence there is a degree of shock, for instance, at the larger Nersa embedded generation registrations of about 50MW-100MW now happening — with a handful set to be registered each month from now on and accelerating from there as grit blocking the pipeline is cleared.

However, it doesn’t make sense to overplay the narrative on reform now, only to suddenly throw everything out the window and question if any reform is happening at all with worse data in the coming months.

It is going to be a slow and difficult path to meaningfully reduce unemployment and to boost underlying potential growth when there is still likely two years of increasingly intense load-shedding left. That will show up in the volatility of data and it’s likely to seem the economy is never really firing on all cylinders yet.

Eyes must be on the prize, however, and what comes out on the other side with existing and new priority reform steps now under way. To be sure, it will test people’s patience as things remain volatile, not just the economics but increasingly the politics as well. But a path is certainly available. Let’s take it — together.

• Attard Montalto is head of capital markets research at Intellidex, a South African research-led consulting company. This article first appeared in Business Day.

We are drifting with apparent indifference into being greylisted by the global money laundering and terrorist financing watchdog FATF (which stands for the somewhat Hollywoodesque “Financial Action Task Force”). This would eliminate medium-term economic growth completely, and almost no-one seems to be worrying about it.

The consequences of grey-listing will be dramatic. Every counterpart across the world will have to apply a higher level of due diligence to SA businesses. International banks will add another layer of bureaucracy to engagements with South Africans. International aid funders such as the World Bank and EU will apply additional restrictions on support to SA. The IMF often specifies FATF compliance for access to funding.

SA would join other countries such as Pakistan, Nicaragua, Cayman Islands and the United Arab Emirates that are greylisted. A study last year on Pakistan, which has an economy roughly the same size as SA, estimated its greylisting from 2012 to 2015 cost the economy $13.4bn (R208bn), and GDP took some time to recover after. All sectors of the economy were hit, with declines in local investment, exports and inward foreign direct investment. If SA were to experience similar effects as Pakistan, it would amount to one to two percentage points being wiped off GDP — effectively removing the growth currently being forecast for the measure.

In May, the Reserve Bank sounded the alarm about the risks of FATF greylisting, citing it as a new risk to financial stability. Its semi-annual Financial Stability Review said greylisting would lead to higher costs for domestic banks and reputational damage to SA’s financial system, with consequences for the currency and for capital flows. It rated the likelihood of greylisting as “high”.

The FATF put SA on notice in 2021 after a “mutual evaluation” of the country’s compliance with the FATF’s anti-money-laundering and terrorist financing rules. I wrote at the time that the peer review report contained serious criticism of how SA identifies and prosecutes money laundering and terrorist financing. While the Financial Intelligence Centre Act has established a central point that banks and other institutions must submit information to, this information is not systematically used in prosecutions.

The FATF also bemoaned the lack of focus on money laundering itself — instead, illicit financial flows are only targeted when they are the consequence of some other crime (such as corruption). The problems are much related to the destruction of commercial crime investigation and prosecution during the state capture years. The FATF, however, is running out of patience with the efforts to recover capacity.

A one-year observation period kicked off in October 2021, during which SA must demonstrate substantial progress in meeting a list of 17 “priority actions” that the FATF says must be taken. Those range from providing the Hawks with more forensic investigators, to ensuring that attorneys and estate agents are better monitored for money-laundering and terrorist financing risks. Come October 2022, the FATF will examine SA’s progress in delivering on the priority actions. If it is not satisfied, SA will be greylisted at the FATF plenary in February 2023.

When the mutual evaluation report was published, a response team was hastily assembled under the guidance of the National Treasury, reporting to the cabinet. The Treasury said at the time:  “The government is fully committed to implementing the recommendations contained in the report, and strengthening the entire system for investigating financial crimes, including the fight against corruption.” But so far there has been little evidence that the issues raised by the FATF are being rigorously dealt with.

The challenge of course is that many fall outside Treasury’s reach, particularly the criminal justice system. Quite apart from the FATF, the pressure on the National Prosecuting Authority to deal rigorously with the long list of corruption cases stemming from state capture has been immense, and it has struggled to rise to the task. Similarly, commercial crime investigations have also struggled from a lack of resources.

Should SA be greylisted, it will be important to have a clear plan to escape from it quickly. Mauritius and Botswana both exited the grey list in 2021. Mauritius had been on it for a year and Botswana for four years. Having a clear plan is a signal to international counterparts that greylisting is temporary and it is worth their effort to maintain relationships in the interim. As it stands, SA would struggle to give counterparts that sort of confidence. Indeed, so far SA seems quite indifferent.

The whole country has been crying out for improvements in the criminal justice system, and the voice of international counterparts is now loud too. The FATF was created after the September 11 terrorist attacks to ensure global monetary systems are not used to finance terrorism or launder the proceeds of crime. State capture actively undermined corruption investigation and prosecution. While the financial system did stand firm, the world is losing confidence that it cannot be abused again.

• Theobald is chairman of research-led consulting firm Intellidex. This article first appeared in Business Day. 

Standard Bank SBG Securities’ dominance of the Ranking the Analyst survey has come to an end after six consecutive years at the top. RMB Morgan Stanley is this year’s top-ranked research firm with Standard Bank SBG in second place and JP Morgan in third.

The Financial Mail’s 2022 Ranking the Analyst Awards were held on 31 May in a hybrid online/in person ceremony hosted by Arena Events with renowned comedian Loyiso Madinga as MC.

This survey  is believed to be the longest-running survey of its kind globally. The Financial Mail has been publishing the rankings of SA’s sell-side analysts since 1977 and Intellidex has been conducting the research for them since 2014. The awards recognise excellence in research, shining an important light onto the institutional stockbroking sector in South Africa.

Noah Capital is the Small Black Broker of the Year for the third consecutive year while Absa CIB’s Samantha Naicker is the Young Analyst of the Year.

RMB, the investment banking arm of FirstRand, joined forces with the internationally powerful Morgan Stanley in 2006 and has been consistently highly rated in these awards that recognise excellence in South Africa’s sell-side analysts.

For more information please contact Heidi Dietzsch at hdietzsch@intellidex.co.za.

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