JOHANNESBURG – Political parties have furiously reacted to President Jacob Zuma’s Cabinet reshuffle, with the Economic Freedom Fighters (EFF) rejecting the changes outright and the South African Communist Party (SACP) warning new appointees to think twice before stealing from the public purse.

Zuma has fired Pravin Gordhan from the Ministry of Finance and replaced him with Malusi Gigaba.

Mcebisi Jonas is also out as deputy Finance Minister while Tourism Minister Derek Hanekom, who moved against Zuma in an African National Congress
(ANC) national executive committee meeting last year, has also been sacked.

Our Response to the SA Cabinet Reshuffle:

• The response of the SA bond market over the past few days where bond yields sold off to just close on 9%, before rallying back to close on 8.5% at markets close yesterday, goes a long way to reflect the difficulty that capital markets are having with regards to pricing in the current political risks.   The same behaviour was exhibited by the ZAR as well as the local financial sector.

• While we are not political experts to any extent, it is very clear to us that the range of political developments that could follow on from the recent SA Cabinet reshuffle is quite wide, suggesting extra heightened levels of political uncertainty.

• For this reason, we are drawing on our experiences of the recent major political events, these being:

o   Nene-Gate in December of 2015.

o   BREXIT of June 2016, and

o   The US elections of November 2016,

• …that panicked reactions during such uncertain times can unintentionally destroy capital on a permanent basis.  This is especially true where such decisions have no regard to underlying fundamental valuations.

• For this reason, we advise against drastic changes to portfolio strategies in response to the current political developments, mainly because for most SA investor Portfolios, Rand weakness, and its translation effect, has always been a very good buffer for domestic positions that are vulnerable to domestic social, political and economic shocks.

• This is because:

o   Nearly 60% of the local SA equity market earnings is comprised of offshore earnings, and thus tends to benefit well from periods of rand weakness.

o   Nearly 40% of the local SA listed property market earnings is comprised of offshore earnings, and thus tends to benefit well from periods of rand weakness.

o   Most SA Multi-Asset funds, including our client portfolios, hold near maximum offshore allocations as permitted by regulation (e.g. Regulation 28 limits), and this will again benefit from periods of rand weakness.

Overall, we are not panicking.  The range of political developments that could unfold from here on is too wide to speculate constructively about. We maintain this pragmatic stance because our client portfolios have the benefit of ZAR weakness being a reliable buffer across the strategies.

You are welcome to contact us for any additional information or to share your views with us.

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