Daily Maverick (Johannesburg)

31 January 2014

South Africa: Whither the Market in 2014? Financial Sangomas Gather At the Rand Club

analysis

Throughout the first half of the 20th century, legendary Wall Street financier and informal presidential advisor, Bernard Baruch, often used to read his daily paper and talk with friends and strangers both while sitting on a bench in Washington's Lafayette Park in or New York City's Central Park. Nicknamed "The Lone Wolf of Wall Street" for his reluctance to join one of the big investment banks or brokerage firms, he is said to have responded to a student who had asked Baruch about the secret of his business success, when he said simply, "Buy low, sell high." Easy to say but rather harder to carry out, since predicting the future has always been the tricky part. By J BROOKS SPECTOR.

But we, all of us, are eager to get that inside scoop, the killer insight, the crucial bit of knowledge that makes everything crystal clear for the future. For that reason, hundreds of the Johannesburg version of what columnist Tom Friedman dubbed “the electronic herd” - brokers, analysts and investment advisors – gathered over dinner on Tuesday evening at the Rand Club to harvest the insights of three experts to guide their decisions for 2014.

The Rand Club itself has a famous (or perhaps infamous) history. It was founded over a hundred years ago by the city’s mining magnates, the Rand lords, together with the politicians who worked hand and glove with them in the early days of South Africa’s gold rush. The building was the headquarters for the army during the 1922 miners’ revolt - the miners’ headquarters only around two kilometres down the road in direct line of sight from the Rand Club roof.

For decades it was the metaphorical headquarters for big mining capital. More recently, it became less frequently the centre of things as big business withdrew from the central business district, heading for Sandton (or London). Interestingly, the club is making something of a run at a revival, with business talks dinners and other events, attracting a new wave of young business leaders. In symbolic recognition of the changing order, the Queen’s three-quarter portrait at the top of the building’s grand stairwell has finally yielded its pride of place to a portrait of the late Nelson Mandela.

And so, the other night, the author attended a panel discussion at this building, “the old lady of Loveday Street” that featured economist Mike Schussler, the SA Institute of Race Relations’ new CEO, Frans Cronje, and Nerina Visser, a senior economic forecaster for Nedbank. The task for the panel was simple – give useful economic and business guidance for the coming year. In other words, foretell the future for a particularly cynical crowd - and give them crisp numbers to make their plays for investors.

Mike Schussler led off with a tart, cautionary economic overview. Noting that, as a class, the emerging market nations (including South Africa) are now doing rather badly in economic terms. Among other things, they have growing current accounts deficits – and South Africa now comes in on that score at a dangerously high 7% deficit. But South Africa’s problems also include its capacity problems in providing electricity generation (something crucial in minerals refining and thus a limiting factor for any real expansion of activity), water, and rail, road and air transportation and harbours.

More ominously, he noted, the country is barely into January and it has already lost over half a million workdays due to strike actions. Schussler argued that economic growth is now dangerously dependent on infrastructure spending – but even here much of that will be dependent on imported inputs and that has other possible problems in it such as an impact on the current accounts deficit. If (and here, perhaps, he could have said, “when”) the rand continues to decline, it will start pushing up inflation and that will feed into a rise in interest rates. This was on Tuesday night. Just hours later, on Wednesday, the SA Reserve Bank announced its prime rate rise of fifty basis points. (That didn’t seem to have the desired effect on the exchange rate, however, as the rand continued its decline against the dollar, pound and euro.)

Taking all these variables into consideration, Schussler then offered his predictions for the coming year. The country will only have around 2.4% growth, labour costs are, overall, going to shoot up around 7.5%, inflation will come in at around 6%, the current accounts deficit will remain at around 6%, the prime rate will hit 10-12%, the rand will reach 12.5 to the dollar, and the trade deficit will clock in at around forty billion rand. Some of these numbers generated a gasp or two from an audience that might well have been seeking a bit of reassurance for the future. In fact, Schussler’s numbers were rather weaker than what we had heard less than two weeks ago from Merrill Lynch’s chief economist.

Incoming head of the SA Institute of Race Relations Frans Cronje (until becoming CEO, he was SAIRR’s head of risk analysis unit) argued that in political, economic and social delivery terms, South Africa is actually performing better than the polling data says people think it is. Many more people have access to housing and electricity than before; the percentage of families living in informal housing (shacks for the non-PC) has declined from 16% to around 11% or 12%; and among the lowest socio-economic categories, some five million people have moved into a fairly modestly defined middle class.

Looking at the country’s political developments, Cronje noted that despite the fact many believe the country is performing well (perhaps once one gets outside the overheated conversations of South Africa’s chattering class), nevertheless, the economic message emanating from Julius Malema and his Economic Freedom Fighters is resonating with many South Africans at some level. One measure of this, perhaps, is that at present, nationally, the South African police are being called out to deal with four protests a day.

Looking ahead to the upcoming election, Cronje argued that the real number to watch is voter turnout, rather than possible percentages for the various parties, as a guide to citizen dissatisfaction with the current governing party and the government as a whole. For Cronje, this ties in closely with the pressures and challenges that come from the country’s on-going revolution of rising expectations, as well as the challenging shift in the balance between the numbers of those who work and those who obtain social grant support.

For example, in 1994, there were some four working people for each person receiving a government grant. However, by 2012 those receiving grants had become more numerous than those working in the economy. Moreover, to highlight the challenges that continue to face the country, Cronje said that the country needs a growth rate of 5%, rather than the rather anaemic 2.4% rate it was now reaching, along with his expectations of an exchange rate that will reach to R13 per dollar in 2014.

Looking ahead to the election, Cronje said it was possible the ANC would gain about 62% of the vote, the DA would hit about 24% (up from its previous 17%), the EFF could gain around 6%, and all of the rest would gather, together, the remaining 8%. This may well depend, perhaps, on how Julius Malema responds to whatever President Zuma offers the country in his State of the Nation speech next month.

Looking further forward, say by the election of 2024, Cronje argued that an ANC that has not managed to reform itself will have set itself up to lose that election. Of course, a more radicalised ANC might come through its current circumstances and, in responding to intra-party and social and economic pressures of the country, it could choose to adopt a significantly leftward tilt in its policies to appeal to dissatisfied citizens.

However, there is a third choice. The party’s reformers could gain the upper hand in the ANC, what he called the “verligte ANC”, and they could manage to turn their party around so as to address the country’s growing challenges. Cronje clearly seemed to be putting his money on the third option.

As the evening’s final speaker, Nerina Visser, led her audience through her calculations about the trends for South African corporate stock values. She noted that despite the common sense the economy has gold and platinum mining at its core, they are both, in fact, declining industries – and the future will only get worse for them. Since many of the country’s biggest corporations have dual listings in London, New York or even elsewhere, currency movements actually affect those shares’ market values rather less than is usually thought to be the case. Taking everything into consideration, Visser said that by this time next year, the Johannesburg All Share index would be on 50,000 points, or just a bit less than 5,000 points more than it is now. That equals about a 9% increase over a year’s previous level. The go-go years are over.

Taken together, Schussler, Cronje and Visser provided a sombre reading of the country’s business, economic and political future for the next twelve months – and not a great deal of joy on into the future, if current trends continue. The real challenge is that, so far at least, there is little expectation the country will come to grips with these challenges successfully. And perhaps that is the biggest challenge of them all.

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