OLD MUTUAL WEALTH NEWSNOTE 31 MARCH 2017
PRAVIN GORDHAN REMOVED AS FINANCE MINISTER Dave Mohr and Izak Odendaal, Old Mutual Multi-Managers It’s been a week of high drama, culminating in the removal of Finance
it’s not the individual that matters, but whether fiscal policy changes. A
Minister Pravin Gordhan and his deputy Mcebisi Jonas as part of a
key test will be whether Gigaba retains the commitment to stabilising
Cabinet reshuffle that saw a number of other ministers lose their positions.
government’s debt burden around 50% of GDP (a level that is low by
Gordhan’s removal was not entirely unexpected, but the timing was a
global standards). However, with global growth improving, the cycle
surprise. This must be seen in the context of the ANC’s leadership contest
of downgrades that affected many sovereign and corporate borrowers
later this year. Until that is settled, political uncertainty is likely to remain.
could turn, supporting South Africa’s rating. Global markets have long
Malusi Gigaba, a long-time Cabinet member, will now be the fourth
priced South Africa as “junk status”, with our credit default swaps (CDS)
Finance Minister since December 2015.
trading in the same region as Brazil, Turkey and Russia (and well above
Rand pulls back sharply The rand started the week on the front foot. Before the news broke on Monday that Gordhan and Jonas had been recalled from their overseas roadshow, the rand hit R12.31 per dollar. By Friday morning it fell to around R13.60 per dollar, a decline of almost 10% during the week. This of course brought back memories of the market reaction to the axing of then Finance Minister Nhlanhla Nene in December 2015. However, the global context was very different at the time. With hindsight, the timing of that event could not have been worse, as global investors were already extremely pessimistic about emerging markets and commodity prices were close to multi-decade lows (certainly in real terms). The US dollar was at its strongest level in 13 years as the Federal Reserve was about to embark on an interest rate hiking cycle for the first time in a decade. All these factors have improved from the rand’s point of view: emerging markets are back in favour as economic growth picks up, commodity prices have rebounded somewhat from bombed-out levels, and the US dollar appears to have peaked as only gradual interest rate hikes are expected.
other BBB- countries). Not the time to panic We have also witnessed other major political shocks – including the US election and Brexit – in recent times and the lesson from these has clearly been not to make knee-jerk portfolio changes because the market reaction turned out to be different than expected. Such events always evoke strong emotions, even among seasoned investment professionals. But making investment decisions based on emotions is almost always the wrong thing to do. One of the reasons we like team-based asset managers (and operate in a team-based environment ourselves) is that team members can encourage one another to calm down and assess things rationally. We urge clients to similarly refrain from making reflex investment decisions, as these developments have probably not played themselves out fully. The best defence against uncertainty is appropriate diversification. It might feel safer fleeing to cash or taking all your assets offshore, but such concentrated, fearful portfolios do not deliver the desired outcome
The Reserve Bank was forced to hike interest rates soon after Nene was
removed, compounding the economy’s growth decline. Yesterday, the
Strategy Funds positioned to deal with uncertainty
Reserve Bank’s Monetary Policy Committee left rates unchanged, and noted that “we may have reached the end of the hiking cycle”. Despite its recen