Our views on the investment landscape: Analytics

Lance Vogel, Chief Investment Officer of Analytics, writes that as we head into the holiday season, it is instructive to reflect on some relevant events over the last few months that will have an important bearing on investment markets next year.

One of the positive elements to emerge from this process of reflection is one of optimism in areas of domestic policy where economic decision-making is directly affected.

In his Medium Term Budget Policy Statement (MTBPS) in October, new Finance Minister Pravin Gordhan made it quite clear that he would stick to the prudent fiscal policies that have been laid down for South Africa by his predecessor Trevor Manuel. His warnings of a future cash crunch as a result of the economic downturn seem to have been heeded by his colleagues in government and ambitious projects that were hatched over the last few years are being scaled down significantly, as is evident for example at Eskom and also with the proposed National Health Insurance System (NHI). Eskom, in particular, has been through a torrid time, shedding not only load, but more recently both its new Chairman and the incumbent CEO while proposing electricity tariff increases of 45% a year for the next three years. This number has subsequently been reduced to 35% while future projects are now being scaled back and positive talk is emerging of private investment being lured into the energy generation sector in South Africa.

All this while the city of Copenhagen starts to host the biggest ever gathering of interested parties and persons in the fields of global warming, climate change and emissions generation and management amid increasingly frequent and often violent changes in recent global weather patterns.

Our next area of reflection is the South African Reserve Bank. Early in November Gill Marcus took over the reigns from outgoing Governor Tito Mboweni. Even though interest rates remained unchanged after her first MPC meeting as Governor, Marcus has introduced some changes that suggest that her tenure will be characterized by more openness and wider consultation as she surrounded herself publicly with all the members of the Committee after she also announced staff promotions to strengthen the core decision-making team. The decision to keep rates unchanged was a clear message to the ANC's vocal alliance partners (Cosatu and the SA Communist Party) that she would not be bullied into making political choices on interest rates. By maintaining continuity in monetary policy, Marcus has reinforced the kind of stability that markets demand.

Just as Pravin Gordhan had suggested that debate on various aspects of fiscal policy would be encouraged, including Cosatu's calls for a weaker rand, Gill Marcus has stated that she is ready to discuss the possible expansion of the Reserve Bank's mandate to deal with pressing issues, such as inflation targeting, growth and job-creation. Gill Marcus made her intentions clear when she said: "I am not a political appointment and there will be no conflict of interest. The Reserve Bank seeks to do what is best for all South Africans".

After a great deal of noise from some areas of the ANC alliance around the power that seemed to be concentrating in the hands of Trevor Manuel, there has been a unusual calm since the Tripartite Alliance Summit that was held in Midrand recently. In the period leading up to the summit, Cosatu and the SACP promised to negotiate an equal role with the ANC in economic policy making. They emerged with nothing as the ANC reaffirmed itself as the centre of economic power and the force behind the new National Planning Commission headed by Mr Manuel. At the summit President Zuma reiterated his support for Trevor Manuel as the chair of the commission and for the way in which Manuel wanted it to be run, which includes a team of advisors from the private sector.

It is clear from these reflections that the well established fiscal and monetary policies of the past 14 years remain in evidence, even after vociferous attacks from the ruling party's left wing partners.

Negative news and specifically negative sentiment can have a devastating effect on investment markets when they are fragile. If ever our local currency was looking for an excuse to devalue in a historically spectacular fashion, the last 12 months has offered two opportunities. In the final quarter of 2008 the rand fell to just under 12 to the US dollar, and then reversed its direction and returned to around current levels and recently, when a Japanese trader allegedly left the room briefly, his computer pushed the rand to 8.25 to the dollar only to have it return to around the 7.30 level.

This kind of currency resilience (even though the weak dollar is a major driver) is a clear indication that our economy and investment markets are not under any kind of severe or abnormal pressure. The recent Bubble in the Desert around the debt servicing ability of Dubai World also offered an opportunity for emerging markets to get hammered as they historically would have been, but the element of resilience emerged once again and the fallout was brief and muted and the recovery was very sharp.

At the end of last week some good news emerged from the USA as US employers cut fewer jobs than expected last month leading to hopes that the economic recovery was indeed underway. The US dollar and global stocks rallied briefly on the good news. While the US economy seemed to have resumed growth after four consecutive quarters of decline, economists had been concerned that labour market weakness would stop any recovery from being self-sustaining. These jobs data were much better than expected and appear to point to a transition in the economy from deep recession to a modest recovery. On this basis, some commentators now expect the US Federal Reserve to become more vocal about an exit strategy from its current policy of extensive monetary easing.

We are by no means out of the woods yet (especially the golfers!). The ongoing local challenges of service delivery, credibility of some political appointments and deficit funding remain. The upward pressure on future inflation of electricity and possibly water tariff increases could accelerate if currency weakness returns to our economy. Equity, bond and currency markets have priced a lot of good news into domestic prices and as we head into 2010 a lot of this could be supported by the "feel good factor" of what promises to be a very successful 2010 World Cup Soccer extravaganza. However, markets are forward looking and so we must be alert for post-World Cup expectations.