Special report - PSG

Special report New ANC leader – too close to call In three days, the fiercely contested ANC elective conference will begin. On 5 December, ANC branch nominations confirmed that the leading two candidates for the ANC presidency are Cyril Ramaphosa and Nkosazana Dlamini-Zuma. More than 5 000 delegates will cast their votes at the 54th ANC National Conference at the Nasrec Expo Centre in Johannesburg from 16 to 20 December. The current leadership race is more closely contested than both the 2007 Polokwane race when Jacob Zuma triumphed over Thabo Mbeki, and the Mangaung 2012 race when Zuma beat then deputy Kgalema Motlanthe. The outcome of the conference will have a significant impact on the future of all South Africans. It’s thus no surprise that all eyes are focused on this event. Investors do not just wonder what to expect, and what the risks might be, but they are also wondering how to mitigate any potential risks to their investments.

Behind the scenes at PSG Wealth, our investment experts are working tirelessly to ensure we identify and use any positive investment opportunities, which are usually formed during the short-term volatility created by sovereign events, like this conference.

Nkosazana Dlamini-Zuma with President Jacob Zuma

Cyril Ramaphosa

Source: GCIS

Source: GCIS

What to expect Regardless of the outcome of this election, certain events are inevitable, and you should expect: •

Heightened noise around the conference: media coverage is set to increase leading up to the conference, during the conference and after the election results are released.

•

Speculation and sensationalism: as media coverage increases, so too will conjectures on the outcome, which could cause heightened sensationalism.

•

A shock outcome: there are a range of possible outcomes, and with no candidate currently attracting the majority of branch votes, no specific outcome is clearly favoured. This sets the scene for a surprise result either way.

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•

Investors feeling urged to act: as is the case when outcomes are uncertain, investors might be tempted to act just before, during or after an unexpected sovereign event occurs.

Over this period, we see a landscape of heightened political noise, speculation and the possibility for an unexpected outcome. This is a breeding ground of uncertainty which usually leads to an increased risk of making emotional decisions.

What are the specific risks? The ultimate risk is basing investment decisions, either to invest or disinvest, on emotions. Often, emotional decisions compromises investors' prospects of reaching their long-term goals.

PSG Wealth | Special Report - December 2017

Special report The insatiable need for certainty and security in the short term, ironically often leads to riskier decisions or actions over the medium to long term. This is evident in recently observed investment behaviours, where investments have become overly conservative as investors are more frequently bombarded by so-called bad news.

We will continue to closely assess the potential impact of this event on our client portfolios and will act swiftly if we deem any risks to our clients are unjustifiable. Apart from leaving the professional money managers to navigate this challenging landscape, investors may wonder what else they can do to feel more at ease.

Yet, most major offshore markets are up by more than 30% this year alone. Even the FTSE/JSE All Share Index (ALSI) has gained more than 20% in the last 12 months. As such, we believe the biggest risks investors face are rooted in investor behaviour.

What else can I do?

Of course, there are a myriad of risks inherent in capital markets that investors should be aware of. Fortunately, these risks are efficiently managed by the team of investment professionals you have entrusted your savings to.

What is happening behind the scenes to make sure my savings are being looked after? PSG Wealth regularly engages with their underlying managers to ensure that potential risks are appropriately considered and mitigated. In addition, we expect our managers will exploit any mispricing opportunities which could arise over this time.

What the political experts think By 5 December ANC party’s branches had largely spoken, and its provincial structures had combined the voting preferences of branch delegates. Read the article from political commentator and newspaper columnist, Justice Malala, who dissected the noise surrounding the conference. He also explains the importance of branch votes in choosing the next party leader. While some branch meetings are being contested in court, most branches voted for Ramaphosa as new ANC President. He received 1 862 of all branch votes, while Dlamini-Zuma received 1 309.

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In addition to keeping emotional decisions in check, and trusting our professional money managers to best navigate markets, investors can follow these tips to cope with events of this nature: • •

Maintain focus on long-term objectives: don’t let events which cause short-term uncertainty derail your long-term plans. Maintain a diversified portfolio: this is a tried and tested approach to manage risk successfully.

While it is important to know what to do during times of sovereign uncertainty, it is just as important to know what not to do.

What not to do Don’t wait for sovereign events which might cause uncertainty before you ensure that your portfolio is positioned to achieve its long-term goals. Once the appropriate allocations have been made, you can leave it to your portfolio managers to do the heavy lifting. Other nominations include Lindiwe Sisulu‚ Mathews Phosa‚ Jeff Radebe‚ ANC chairperson and National Assembly Speaker Baleka Mbete and ANC treasurer general Zweli Mkhize. The branch votes amount to 3 171 of delegates’ votes for both candidates, or around 2 000 less than the total number of delegates who will vote at the conference. Prof. Susan Booysen from the Wits School of Governance at University of the Witwatersrand says: “While Ramaphosa has a lead, the intricacies of the election process caution against early celebrations: there are black holes that could still devour the advantages he appears to have.”


Special report She continues to highlight “eight black holes” representing the remaining 2000 votes. Booysen explains these uncertainties as follows: •

The scores released by the ANC’s Provincial General Councils have a “margin of error”. Due to scores representing branches and not individual members. But big branches send more than one delegate and are given more weight in the voting. This can substantially change the balance between leading candidates when the election actually arrives.

•

Mpumalanga province brings its own uncertainty with 736 voting delegates, of which 223 opted to vote for unity at branch level. The biggest bloc of branches refused to endorse a particular candidate and entered ‘unity’ on nomination forms, following the instruction of provincial leader DD Mabuza. These votes can therefore go to either leading candidate should the delegates cast their vote rather than waste it.

•

A further uncertainty comes in the exact number of branches that have missed the deadline for their branch general meetings. The deadline for convening these was a week ago. Missing the deadline means they have missed the opportunity to be represented at the conference. The ANC, in an interview with the author, estimated that between 95% and 98% made the target date. Exclusions will lower the number of delegates.

•

A few branches are caught up in disputes. Challenges centre on the lack of legality of the branch general meetings, some of which have been chaotic. Some battled to reach quorums (50% of members had to be present), or they faked quorums. In other instances, officials disappeared with meeting materials and memberships lists, attendance registers were signed off-site, or bickering and fist-fights ruled. These branch delegates could still make it into the voting booths at the conference if the ANC task teams resolve the disputes.

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•

Several branches and provincial structures have taken their disputes to court. Prominent cases are in KwaZulu-Natal, Free State and the Eastern Cape. The national conference does not ultimately depend on the provincial structures, but provincial leaders may have influenced their branch-based underlings substantially, or have covered up irregularities that affected whom the branches nominated. Disputes at the time of conference could exclude some from voting, or having their votes counted.

•

The ballots of individual delegates are secret and it’s therefore uncertain to what extent branch nominations will convert into matching votes. Prior conference outcomes show that the branch or provincial counts tended to hold: delegates are inclined to vote according to their mandates. But political times have changed. Beyond the scrutiny of the superiors and away from branch commissars, delegates might vote according to “conscience”.

•

Together with individual discretion in the voting act, is the practice of “brown envelopes”, or bribes. Speculation is that bribes could be enormously persuasive, going into six-figure rewards for the right vote.

•

The final big uncertainty comes via the three leagues - for women, youth and veterans and the ANC’s executive structures. The large block of around 90 NEC and top-six votes, for example, could split relatively equally between the top candidates. It is this block that has kept Zuma in power through a series of votes in the National Executive Committee and interventions in parliamentary votes. But, they may by now see that the writing on the wall, given that Zuma will cede his position as head of the party in two weeks’ time, and his post as head of state in 2019.

Exact calculations will remain impossible and the result is likely only to be known by 17 or 18 December. This article first appeared on The Conversation


ANC NATIONAL CONFERENCE

54

th

16 - 20 DECEMBER 2017

Except for debating and adopting new policies, the ANC also elects its president and the national leadership, the National Executive Committee (NEC) consisting of 80 members, at its 5-yearly national conference.

THE DELEGATES This year the ANC will see over 5000 delegates in attendance. This is about 500 more than at the last conference held in 2012 at Mangaung. Delegates from the different branches (provinces), provincial executive committees and leagues attend and cast their votes.

BRANCH VOTES

Provinces have been allocated a total of 4 731 delegates for this year’s conference. After adding other blocs within the ANC, the NEC and top six, provincial executive committee (PEC) members plus the women’s, youth and veterans’ leagues (about 525) the total voting delegates will be close to 5 256.

643

538

736

(223 unity)

409

508 Unity

870

197

Cyril Ramaphosa

648

182 525

= Provincial Executive Committee (PEC) + Leagues

Nkosazana Dlamini-Zuma

About 90% of delegates at the conference come from ANC branches across the nine provinces. Delegates are allocated proportionately in terms of membership figures. Voting at the conference takes place on an individual basis and in secret. However, provinces usually agree beforehand on who they are going to vote for. In the past, members usually followed the mandate of their provinces.

Sources: ANC Conference Prep Pack, The Conversation

THE VOTING PROCESS

President

At the conference delegates will vote for the Top 6 and 80 National Executive Committee (NEC) members. A candidate needs a simple majority to win. Veterans and observers representing each province makes up the ANC’s own Electoral Commission. However, an independent electoral agency will administer the elections. If the voting outcome is disputed, which will only come from observers from the provinces, the independent electoral agency will make a judgement. The new president 20 December 2017. 4 | PAGE

will

close

the

conference

Deputy President

National Chairperson

Treasurer General

Secretary General

Deputy Secretary Genreal

80 members of the National Executive Committee (NEC)

on


Special report What do some of our underlying managers think? PSG ASSET MANAGEMENT “Investors should be aware that the stakes are high and therefore they should prepare for a lot of noise before the conference. The news leading up to, and during the conference (if it takes place) could have a disproportionate and volatile impact on day-to-day movements in the rand and domestic asset prices. The outcome of the conference itself is inherently unpredictable. The range of outcomes could be positive, negative or neutral for rand assets. The positive scenario is premised on the fact that when sentiment is as poor, as it currently is, it tends to be reflected in asset prices. A marginal improvement can have a significant impact on asset prices. The negative scenario would likely result from ratings downgrades and an expectation that state resources continue to be mismanaged. We think it is very important to be aware of, and be prepared for the potential outcomes and the different risks and opportunities that could arise. Overall sentiment is very negative. The elevated levels of uncertainty almost inevitably result in mispricing and very good opportunities for contrarian, long-term investors like ourselves.” “We have been carefully reviewing and investing in opportunities where there is a lot of bad news in the price. We are confident that we can achieve excellent long-term returns for our clients at acceptable levels of risk. We have continued to add to some of our domestic equity positions as share prices have dropped due to poor sentiment and heavy selling by investors, particularly foreign investors. These stocks are of above-average quality and are trading at valuation levels typically associated with times of the economic crisis. We have also been building a position in local government bonds in our multi-asset portfolios, with a preference for longerdated issues. We feel the South African Reserve Bank has built strong credibility around inflation targeting and, as a result, we have been able to lock in very attractive real yields for our clients.” “Given the unpredictable nature of South African politics, combined with the fact that global asset

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prices are high, we believe it is appropriate to continue diversifying our portfolios as much as possible without compromising on our philosophy of avoiding overpriced assets. Accordingly, our funds are close to maximum capacity offshore and generally have high levels of cash. We view cash as dry powder that we could employ in the event of a panic. We do not own the duallisted rand hedges, as we consider them overpriced and hence a poor source of portfolio insurance. Our equity portfolios have a relatively high exposure to domestic equities and we have been finding better opportunities outside of the large cap universe.” CORONATION “Things are very finely balanced. Anything could happen and we have not positioned our portfolios on the assumption that we know what will happen… Internal polling, available branch nomination numbers and the behaviour of competing factions suggests a very close race between the ‘Zuma’ candidate, Dr Nkosazana Dlamini Zuma (NDZ), and deputy president Cyril Ramaphosa (CR). By all accounts much can change at the conference itself, where delegates may be persuaded to change their vote depending on the internal momentum at the time. Secondly, there is a question of what happens to President Zuma – he will no longer be ANC president, but he will be country president until 2019. • If CR wins, it seems most likely that there will be a motion to recall the president, Cabinet will be dissolved, a new president elected and a new Cabinet appointed; • If NDZ wins, this is much less clear cut, and he could remain country president until 2019. • A third possibility is that he lingers with he negotiates the terms of his retirement. This sees Jacob Zuma in power – and possibly managing political, fiscal or other agreements – for some months. There may also be a split in the party at or after the conference. It isn’t clear who will lead the split, but certainly there have been ancillary comments from


commentators and even members of the ANC that this is possible. The most sinister possibility is that he suffers a vote of no confidence and refuses to leave. Financial markets will not just be affected by all the events outlined above, and the actual election outcome, but further by the ability and willingness of each candidate to affect necessary leadership changes within the government. This is least likely to happen swiftly without an outright win for a reformist slate (and especially the longer the country president remains in place), but it is possible to see key appointments to National Treasury, SARS and possibly visible parastatals like Eskom during 2018.” Nkosazana Dlamini-Zuma

conference and no matter the outcome of the conference, there remains numerous other challenges that will not be resolved overnight, like a potential downgrade after the 2018 Budget Speech… We remain true to our investment philosophy and processes, especially in times of uncertainty. Market inefficiencies will provide investors with opportunities to invest in mispriced assets, due to the market reacting to the basic human emotions of fear and greed.” OLD MUTUAL MACRO SOLUTIONS “At this stage, the outcome seems very binary and although our analysis is a fair attempt at identifying the market reaction for either outcomes, it is important to note that we won’t really know until the actual event occurs. It is (also) important to note that the market is not so much concerned about a particular name, but rather what the candidate represents in terms of economic policy. South Africa is currently at a tipping point where drastic policy reforms need to be implemented for us to prevent a fiscal crisis. [In] the minds of investors, Cyril Ramaphosa is purely seen as a Jacob Zuma alternative.

Source: GCIS

Cyril Ramaphosa

Source: GCIS

SANLAM “It is very difficult to predict the outcome of political events… There is and will be a lot ‘noise’ as we get closer to the conference as the different candidates and factions position themselves for the outcome that they would want. The fact that government seems to move goalposts on a constant basis, doesn’t provide the market with enough comfort that the country is dealing with underlying issues effectively… The elective conference cannot be looked at in isolation. The challenges that government needs to solve goes beyond the outcome of the elective

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Although there are questions around what he can or cannot do to drive policy reform, particularly with him being so close to the labour unions, investor sentiment has been so low in South Africa that an “anything-but-Zuma” win will be seen as a positive outcome. A key determinant behind a Ramaphosa win, is the assumption that Zuma will be recalled by the newly elected ANC National Executive Committee (NEC)… [While a Ramaphosa win is viewed a] positive outcome, in order to sustain that initial uplift in market sentiment, Ramaphosa will have to demonstrate some signs of intent to adopt measures to reign in on government’s debt, improve the governance of state owned entities and more importantly revive the economy…The market may be willing to give Ramaphosa some time to alter the trajectory of our path as opposed to Nkosazana Dlamini-Zuma (NDZ) who would have to work hard and make drastic changes in order to gain the confidence of investors. As the surname suggests, Dlamini-Zuma’s campaign has unfortunately been tainted by her ex-husband’s endorsement. [A] NDZ win will be seen as a negative outcome mainly because NDZ’s policy stance has been largely around populist policies of land and wealth re-distribution. What I do think can surprise investors is if NDZ, in her pursuit of differentiating herself from Jacob Zuma, becomes a ‘Ramaphosa’ and starts using her political capital to implement business-friendly reforms. The


market won’t exactly warm up to her initially, but the possibility of her becoming a reasonable successor is not as far-fetched as many people would imagine. An alternative name has been surfacing lately: that of the ANC Treasurer-General Zweli Mkhize. A Mkhize win would most likely be viewed as a better outcome than a full-out Ramaphosa win as it limits the possibility of an ANC breakaway which wouldn’t be ideal for the upcoming 2019 national elections. Coalition governments tend not to work very well. Just cast your eyes to Johannesburg and Tshwane, where it is extremely difficult for the DA to make any decisions as each of the party representative have their own motives. The reality is that what South Africa really needs to prosper is a unified and pragmatic ANC. Mkhize has a good track record as the former premier of Kwa-Zulu Natal and appears to have a sensible relationship with the business community.”

PRUDENTIAL “At Prudential, we never attempt to forecast such outcomes or base our investment decisions on likely political developments, given their unpredictable nature. Rather, we construct our portfolios using our valuation-based, risk-conscious approach where we seek to produce consistent and sustainable returns over time. Extended valuations provide a buffer against risk events; therefore, progressively adding to positions as assets cheapen is a naturally riskcontrolled approach. We further maintain a full offshore weight in global funds as well as overweight positions to non-rand earners within our equity portfolios, both of which are defensive positions if risk aversion rises sharply around year end. Our approach has proved to be successful over two decades: time has shown that buying assets at levels below their long-term fair value, and selling them when they reach or exceed fair value, produces excess returns for our clients.”

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