Market Volatility Continues…
May has proven to be another difficult and volatile month for markets both locally and abroad following what has been a challenging year so far – we have in fact not seen a worse start to a year since the great bear market of 1974! The ongoing Russian invasion of Ukraine; stubbornly high and persistent inflation; Federal Reserve [USA central bank] shrinking its balance sheet; the complicated global backdrop of Chinese lockdowns to try and deal with COVID outbreaks, [resulting in continued pressure on the supply side of the curve] as well as the impact of rising interest rates all remaining a headwind for consumer confidence. What is also worth mentioning is the fact that in the last 30 years, we have never seen global markets fall and the ZAR strengthen simultaneously – this is an anomaly which has unfortunately had a negative impact across client portfolios. Volatile and falling markets are understandably unnerving for clients, however, it is important to remember that volatility normally occurs over the short-term and it is only over the long-term that you reap the benefits of staying in the markets. While current markets may feel uncomfortable, they do create opportunities for asset managers to buy at cheaper prices which should translate into higher prospective long-term returns. Despite the above notable headwinds, we do expect economic growth to remain above long-term trends given the lifting of COVID restrictions, strong levels of employment [globally] and pent up demand.
Environmental, Social and Corporate Governance [ESG] is a very topical discussion around the world and rightly so. Many asset managers have released articles on their views of this and how they are doing their part, through their investment capabilities as well as their shareholder influence to reduce the negative impact companies may have on any one of these ESG factors. While the world at large is mainly focussed on the environmental impact, it is important to be aware of the social and governance issues as well. Recent articles published by Allan Gray and Ninety One explain that while sustainable investment approaches need to adapt, there is certainly not a one-size fits all solution. Globally, there has been a substantial focus on environmental considerations, particularly climate change, but locally with the JSE only accounting for less than 1% of the global investment universe, we have a very limited opportunity set. Mining companies are generally placed in the ‘bad’ basket due to the harmful impact on the environment, but it is also important to consider the metals they produce which is essential for energy transition and providing substantial employment in South Africa. It seems that a balanced approach, recognising that, unfortunately there are often trade-offs Finlaw Newsletter Quarter ending May 2021 Page 2 Finlaw Consulting SA (Pty) Ltd Reg. 1998/015129/07 FSB License 7259 Directors: John Wallace [CEO], Simon Francis, Stacey Barron, Nolan Wallace that need to be made between the ESG factors is a better way to approach this subject. While climate change is a critical global priority, in a developing country like South Africa, the need to address social issues, like inequality and transformation, cannot be ignored. It is important that all externalities are considered when making an investment decision. Asset managers are certainly leading the way in assisting companies in reducing [improving] their overall impact on the environment as well as supporting companies’ social and governance responsibilities.
It’s not all bad…
While we are all well-informed of the ‘bad’ in our markets, I thought it would be important to shift the focus to what has been good, particularly closer to home in South Africa. JP Landman, an independent political and economic analyst wrote an article, “Connecting the Dots” and I thought I would share some of his views:
- Despite Ace Magashule and ex-president Jacob Zuma’s call for a change in the mandate of The South African Reserve Bank [SARB] when the independence of the SARB came under attack, the SARB’s independence and stature have only grown – this is crucial for stable, non-political inflation targeting and control.
- Fiscal policy has come under severe pressure, particularly over the last 3 years with the COVID19 pandemic, load-shedding, massive Eskom, and other state-owned enterprise [SOE] bailouts and the destabilising effect of the July 2021 unrest. Given these pressures, government managed to break the three-year wage agreement on civil servants’ increases in the 2020/2021 financial year. In 2021 civil service increases were considerably below inflation. The extra spending due to COVID-19 and the emergency relief was substantially financed by cutting other expenditure [re-prioritisation] rather than taking on more debt.
- Government remains committed to structural reform – The Economic Recovery and Reconstruction Plan has now been accepted as government policy – all departments defer to it. Structural reform has become the key economic policy of the Ramaphosa administration. The biggest reform is playing out in the network industries: telecommunications, transport, and electricity.
- The biggest [and the most important] reform of all is taking place in electricity. We have seen municipalities allowed to procure their own power, independent power producer contracts being signed, and our renewable programme imminent.
The above are just a few of many dots which are slowly being connected – hopefully as more dots are connected, we can increase the size of our economy and substantially reduce the unemployment rate. In 2019, the President said: ‘The man who moves a mountain begins by carrying away small stones’ – summarising Ramaphosa’s presidential style perfectly. Over the past 2 years, the stones have systematically become bigger. The mountain will move!!! As usual, please give us a call should you wish to meet with us – we are so looking forward to seeing you all.