STUART THEOBALD: Investors’ eyes are on Ramaphosa over needed reforms

Posted in: Capital Markets, i-Blog, SA Equities on October 29, 2019

With equity delivering almost no returns over the past five years, the ANC should do more to stimulate the economy

This column was first published in Business Day. 

The equities market has been flat since July 2014 — five years of almost no returns on share investments. It is thus extremely tough for stockbrokers and others to make the case for their clients to trade. They’d rather be in cash, and if they go onto the market it is only to buy passive investment vehicles such as MSCI World tracker funds. SA equities are a hard sell.

But when retail investors are most bearish, it is often the best time to buy. A recent study on US markets in the Financial Analysts’ Journal found that retail investors are a good contra-indicator for future returns. They are overly miserable after negative returns and overly bullish after positive returns.

Comfortingly for professional market analysts, this wasn’t true of them. And it is their views that have greater influence on future performance. But it shows that policymakers can sometimes focus on the wrong thing. It’s not about convincing the masses to believe; it is about making genuine structural reforms that change the economy’s potential to generate wealth.

The problem for SA Inc is that the professionals are not positive either. The series of delays to structural economic reforms that could move the needle on SA Inc is continuing to feed into a loss of interest in SA. It’s hard to attract international attention when you’re contributing only 0.4% to global GDP.

After Cyril Ramaphosa’s election as ANC president in late 2017 there was a spark of interest. But that has since dissipated, despite the efforts of the president’s investment envoys and events such as the investment conference next week.

One key issue to watch will be the minister’s success in his demand that government departments cut 5% from their wage bills, rather than cutting into growth-enhancing investment plans

Many have strongly conveyed to the president that reforms must happen, and fast. Some recent events have begun to suggest something fundamental has changed. One was the most recent ANC national executive committee statement, which struck several positive notes along the lines that the economic shock therapy proposed by finance minister Tito Mboweni in his surprise paper in August might be allowed to be administered. But that momentum hit an immediate speed bump when the mid-month cabinet meeting statement ignored several elephants in the room, particularly the appointment of a CEO for Eskom and a plan to rescue its balance sheet.

It hit another speed bump with the publication of the Integrated Resource Plan days later that included new nuclear generation as well as coal, despite these clearly not being the least-cost option for the country. We are now waiting for a paper to be published with a plan for the future of Eskom that we hope will provide a believable way forward not just for Eskom but for the whole energy sector.

That background may inspire Mboweni to use the medium-term budget policy statement (MTBPS) to build credibility that the government can fix its house. One key issue to watch will be the minister’s success in his demand that government departments cut 5% from their wage bills, rather than cutting into growth-enhancing investment plans.

He’s unlikely to get near that, but even halfway would be a positive indicator that the government is serious about fixing its financial performance. The medium-term budget doesn’t normally play the policy role that the main February budget does, but we are at an unusual inflection point for faith in government finances. There may therefore be some commitment, for example, to move spectrum auctions forward, not least because they can raise some money for the government, and maybe even a nod to the growth-enhancing potential of sorting out mining regulation and visas.

As finance minister, and within the context of the medium-term budget, there is not much more Mboweni can do. It will thus be interesting to watch Ramaphosa’s performance at next week’s investor conference. It is his second conference, and while such narrow attempts to drive investment are unlikely to make much difference, the platform affords Ramaphosa the opportunity to set out his case.

The most recent conference, in October 2018, was overly focused on sentiment and on putting specific investment commitments on the table by big companies. As most were going to be done anyway, it was an exercise in optics with R301bn promised. But the outlook for the economy did not change.

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What is needed instead is evidence of genuine structural reform; the kind that will make analysts return to their models, change parameters, and deliver to their clients forecasts of better economic performance.

That doesn’t happen because companies are cajoled into public commitments; it happens because policy opens opportunity in the economy for investors to generate returns. And it is that genuine opportunity for more profitable activity that leads millions, not a few hundred in the Sandton Convention Centre, to take advantage and deliver growth.

If Mboweni can squeeze in a better fundamental outlook for government finances and a few positive policy indicators, and Ramaphosa can follow it up not with impassioned sales pitches and glad-handing but with genuine evidence of structural reform, that five-year equity malaise will end. And with it the lost decade of economic non-performance.

  • Theobald is chairman of Intellidex.
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