Old Mutual Investment Group

Peter Brooke looks at the market impact of the ANC elective conference on the Money Show this week

December 20, 2022 Old Mutual Investment Group
Old Mutual Investment Group
Peter Brooke looks at the market impact of the ANC elective conference on the Money Show this week
Show Notes Transcript Chapter Markers

Portfolio Manager, Peter Brooke, unpacks the market reaction to the ANC’s elective conference results announced yesterday, as well as the news of Woolworths selling David Jones.

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The Money Show  00:07

Well, the trading volumes might be lower on the JSE, of course, it is December, some of the traders and investors are taking some holiday off. And, you know, we've seen very little movement on the JSE, but still up. The All Share was ending the day up more than a half a percent, pushed up by a surge in financial shares. We are joined by Portfolio Manager at Old Mutual Investment Group, Peter Brooke, to come and look at some of those numbers. Peter, do you think traders were looking at the ANC National Conference and, you know, that's what moved the Rand today?

Peter Brooke  00:42

Absolutely. I think everyone was watching it. We certainly were. I mean, you had quite... those interesting developments over the weekend where Zweli Mkhize was coming through with much stronger numbers, you saw some big shifts. So, initially, markets are on tenterhooks and actually there was a little bit of risk-off coming into the market. So, if you think about politics, and its impact on markets, the three places you want to look at are the currency, the bond rates, and the bank prices. And all of those sort of sold off a little bit, and then came back sharply as Cyril Ramaphosa came through with the victory. So, you can see the news flow in the way the market was trading, it was initially, whoa, what's happening here, there's a bit of risk. And then quite quickly, it recovered. And, for instance, the Rand today ended 1.6% stronger, which is pretty much the strongest currency in the world. So, definitely moving on its own beat as opposed to driven by global factors.

The Money Show  01:44

And what do you think traders are looking for there? Just consistency maybe in the leadership in the party, and, as in fact, a national leadership, or, because I know markets often look for, you know, consistency, certainty. So, when there is a sudden change in leadership, there could be weakness in terms of movement there.

Peter Brooke  02:04

Look, I think... I mean, the stakes are much lower with TR 22 than TR 17. So, if you think back then, where you had state capture running extremely badly, you had the Rand was selling off, bond yields were weakening, you had the changes in finance ministers, so the stakes are much higher. And that's why markets reacted much more strongly. And you saw that sort of optimism in terms of Cyril Ramaphosa and markets trading off it. Now, I think it was the risk that you saw a reversion back to the RET fashion. And one of the challenges of our political system is that with proportional representation, its winner takes all. So, whoever won the ANC then speaks for all of the votes of the ANC, because of the political system. Other sort of places like the UK, you might disagree with the party, you're still a member of parliament until you're voted out. Here, if the ANC chooses to throw you out, then you're out. So, the political risk in something like this is much greater than in other countries. And that's why I think markets were on tenterhooks. 

The Money Show  03:22

And another company that was looking at political risk would have been the chemical and logistics business, KAP Industrial, coming up with a trading statement today, saying that they plan to have an energy strategy that will be the answer to South Africa's state infrastructure failures.

Peter Brooke  03:38

Ja, I think this is really important. So, I mean, if you look at what KAP said, so they're up slightly on the day, 0.7% up. But they really are a bellwether for manufacturing and industry in South Africa. So... which is a big chunk of the economy. And you can see it's hard. So, running a business is difficult in the best of times: you get floods, you get volatility in commodity prices, your semiconductors don't arrive because of China, and because of all these issues. So, when you have additional problems, it makes it just so much harder. And they were really flagging that they are investing to try and minimize the risk to their business. The first thing that they've done, they've already put in 10 megawatts into their Safripol chemical plant in Sasolburg. And then they've approved another four megawatt at PG Bison. 

And in a way, this is the important story, not so much about the politics. I don't believe sort of a single person is going to change the course of South Africa. We're a complex, interesting country that isn't just... we don't have a savior coming to fix us. And one of the very optimistic stories about South Africa at the moment is because power generation has been so weak, as you allow the private sector to come in, then you get a solution. And this is the solution, these companies producing their own electricity. The concern is, of course, with the change with Andre de Ruyter is, what's the policy with Eskom? And where do we end up? How does politics influence that? Because, you know, I don't think it's a coincidence how some of these things play out just ahead of the ANC Elected Congress. 

So, the absolutely critical thing for South Africa is that Eskom's transmission lines are separated and are able to distribute the power that the private sector produces. We can't rely on Eskom to deliver the electricity, the generation capacity there is failing, and will continue to fail as it ages. Even if it was run brilliantly, and everything was going well, we didn't have to call the army in, it would still fail because it's too old. So, you have to, and now we have a little bit of uncertainty in that space. And I think that's much more concerning. The good news, and you have companies like KAP forcing themselves out, the bad news is can we do that at scale to get out of these rolling loadshedding, which is disastrous.

The Money Show  06:22

And just quickly, Peter, Woolworths getting rid of the old ball and chain, if you want to put it that way. Separating with David Jones after the company has been a drag on its balance sheet. How good is that for Woolies?

Peter Brooke  06:36

Yeah, I mean, it's all up in the share price today. It's good. I think it's good news. It's... but you can actually see that Woolworths has been a massive outperformer over the last year, as they've sort of restructured and solved their problems and improved their capital allocation and their thinking around that. And this is an interesting phenomenon, is now Australia would be considered a triple A country, relatively low risk. But yet, if you pay the wrong price for the assets, you destroy enormous quantities of value. So, South African company going overseas, and malinvesting has been a real challenge. And part of the thing is, if we had better growth in South Africa, then you could invest in your own doorstep, where you have scale, where you have critical mass, and you have a much better probability of delivering better returns for your investors.

The Money Show  07:33

Well, thank you very much, Peter Brooke there, Old Mutual Investment Group Portfolio Manager, wrapping up the numbers for today's trade. 

The ANC National Conference and the movement of the Rand
Peter shares his thoughts on what traders were looking for out of the ANC National Conference
KAP Industrial and their plans for an energy strategy to help SA’s state infrastructure failings
What separating from David Jones means for Woolworths