PDSnet Articles

The Year Ahead


2019 is going to be an interesting year both locally and internationally.

In our view, the American economy is almost certain to continue growing rapidly – and that growth must, sooner or later, be reflected in share prices.

In our last article we suggested that the collapse in the S&P500 index over December was unprecedented and suggested that it was probably due to the temporary shut-down of the US government (clearly caused by Trump) at a time when most investors were away on holiday. We suggested that as soon as they returned, we would probably see a “V bottom”.

That “V bottom” is now well on its way. Consider the chart:

S&P500 Index August 2018 to January 2019 – Chart by ShareFriend Pro

It is clear that the broad thrust of investment opinion is that the shut-down is a temporary set-back which does not materially interrupt the general recovery in the American economy.

On the local front, the election will dominate the news this year. International investors have been very concerned about the outcome of this election because Ramaphosa is not yet an elected president. They were concerned that the ANC would fall below the 54% support that it got in the last election – or worse, fall below 50% and be forced to make a deal with one of the two opposition parties.

Two recent polls, one by Ipsos and one by the Institute of Race Relations suggest otherwise. Both indicate that the ANC is likely to win around 60% of the vote in May. This changes the whole investment picture. If Ramaphosa is about to get resounding support from the electorate for his reforms, then he will surely have the mandate he needs to continue and even extend his reforms.

We believe that if the ANC wins 60% of the vote in May it will open the door for the more fundamental structural reforms such as:

  1. Changing the labour legislation to make it easier for employers to fire people. By making it easier and less expensive to fire employees, the government will open the door for business to hire more. At the moment businesses are so concerned about how difficult it is to get rid of someone that they are avoiding hiring people which contributes significantly to the very high levels of unemployment in this country.
  2. Privatising most state owned enterprises (SOE), which would generate capital to reduce the government debt and ensure that these businesses performed profitably. For many of the 200 SOEs in South Africa (like SAA) there is absolutely no reason for them to be government owned and run.
  3. Reducing the size of the civil service. The number of people employed in government and quasi-government organisations is hugely excessive by almost any measure. Probably, that number should be reduced by half.

Obviously, these measures will all tend to be very unpopular with the masses – and so they will have to be done very carefully and slowly. The union movement which was partly responsible for the ANC gaining power in 1994, is bound to resist any moves in this direction – and indeed a confrontation between the unions and the government (similar to what occurred in the UK under Margret Thatcher) seems inevitable.

It is the age-old battle between economic pragmatism and populism. The polls suggest that at the moment the forces of economic pragmatism are dominant – and that is making international investors positive about the rand.

As usual, we pass no judgment on whether these measures are right or wrong. Our concern is only with what is likely to happen at any given time. In other words, we are not interested in what should happen – only in what will happen.

 

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