Old Mutual Investment Group

Macro Perspective 49 | Market response to Ramaphosa resignation risk

December 06, 2022 Old Mutual Investment Group
Old Mutual Investment Group
Macro Perspective 49 | Market response to Ramaphosa resignation risk
Show Notes Transcript Chapter Markers

Portfolio Manager, Peter Brooke, shares his latest Macro Perspectives, focusing on the market fallout of last week’s speculation around President Ramaphosa’s resignation, as well as portfolio positioning amid SA’s political risk.

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Peter Brooke  00:00

Good day. I'm Peter Brooke. And this is Macro Perspective 49 of 2022. The big story is clearly around local politics with the Phala Phala report and the implications for South African government, and obviously our investments. As always, when discussing politics, these views are my own and do not represent the views of my employer, Old Mutual Investment Group. 

Peter Brooke  00:23

Firstly, I want to look at the market reaction. What was interesting was initially the market didn't respond that much. But as rumours of Cyril Ramaphosa's resignation grew on Thursday, a standard risk-off pattern was traded. Weaker Rand, weaker bonds, weaker banks, and stronger Rand hedges and resources. Looking at our 10 year bond as a proxy for our cost of capital, yields went up by 70 basis points to 11 and a half percent. And that meant that the bond return on the day was roughly -4%. Subsequently, with the President not resigning, some of this price action has reversed with yields having fallen back to 11%, the Rand strengthening, and domestic share prices recovering. Clearly, the market prefers the certainty of Cyril Ramaphosa, rather than the risk of David Mabuza, the deputy president, stepping up. I think it is important to note that the extent of this sell-off was much better than under Nenegate, which highlights that we've made some progress since those dark days. It is also possible that it takes a lot to shock fund managers these days, with the markets becoming accustomed to political turmoil all over the world. 

Peter Brooke  01:40

Perhaps most importantly, the question is what does this mean going forward? Our starting point is that 80% of what drives the South African market is driven by what happens outside the country. For instance, the reopening of China, and the recent weakening of the US dollar is good news for the Rand. There's also when we look at our own price reaction, we've only weakened by 2% against the US dollar in the last week. But remember now, most countries have strengthened because of that dollar weakness. For instance, our investment in the Malaysian equity market has benefited from the Malaysian Ringgit being two and a half percent up against the US dollar, or four and a half percent better than the Rand in the week, which highlights that we need to focus what's our opportunity cost against our peers. For the 20% that is driven by South African specific drivers, increased political uncertainty is clearly unhelpful. It drives up the cost of capital, which means less investment, which means less growth, which increases inequality, which in turn drives up risk. When President Ramaphosa was elected, we argued that reform would be a positive thing for South African assets, as the cost of capital would be lowered, and the ease of doing business would be increased. And it's actually been fascinating in the last year, South Africa's relative cost of capital has actually improved compared to the rest of the world. While our bonds have returned a low 4%, global bonds are actually down 15%. Even taking off the 9% weakness in the Rand, South African bonds have outperformed and the numbers that I'm quoting are after this recent political turmoil, or Farmgate. 

Peter Brooke  03:27

However, following the slow progress in Eskom, no one in our team currently has a positive team on South Africa anymore. Therefore, this latest news doesn't particularly change our views on South Africa, and hence, how our portfolios are positioned. South African assets remain cheap in a global context. And while inflation remains under control, we still find South African bonds offer an attractive real return. The hawkish Reserve Bank, and the fact that globally inflation is falling, also supports our overweight in South African bonds. However, many other assets in the world have now fallen or gotten cheaper. So, we're finding growing value or opportunities to invest elsewhere. And this is South Africa's key challenge. It cannot score own goals if the rest of the world is up in their own game. I hope you enjoyed this perspective. Until next week.

How the market reacted to the Phala Phala report and implications for the South African government
What does this mean going forward?
Does the latest news change how our portfolios are positioned?