Preparing for ANC meeting

IMPACT AND HOW TO PLAN Few will disagree that SA faces significant economic and investment challenges in the days, months and years ahead. These include low growth rates and stubbornly high unemployment.

What’s abundantly clear is the only way to get out of this conundrum is to prioritise economic growth. Politics and policy are key. The importance of the ANC’s December elective conference can’t be overstated. Here are scenarios worth considering:

1. A business-friendly outcome with the uncompromised promise of meaningful reform could catapult SA onto a higher potential growth trajectory. The rand would likely strengthen, bond yields decline, private sector investment rise and SA-sensitive equities rerate upwards. This is a high road outcome, but it carries a relatively low probability in its purest form.

2. A compromised outcome where unity is favoured and the patronage faction is protected is probably most likely. Matters don’t get worse but the outlook doesn’t brighten.

Potential growth remains sub-par and a credit rating downgrade is inevitable. The rand would continue to gradually weaken in line with inflation differentials. We think the market’s priced for this to a large degree.

3. A low road outcome where the patronage faction comes to the fore without any business-friendly compromise. We think this is a relatively low probability, but the investment implications are significant. Here, government becomes populist and there’d be meaningful fiscal erosion. We’d be firmly on a credit downgrade path (many downgrades). The rand would weaken, bond yields rise and Sarb, if it remains independent, would respond with a tightening monetary policy. SA-sensitive equities and property would derate.

Diversification, understanding driving influences, and ensuring efficient cross correlations are important.

From an asset allocation perspective, when going into a crucial but uncertain event, it’s important to ensure our asset class valuations are based on our assessment of the most likely outcome.

Our base case middle road outcome is reflected in asset class valuations to a large degree and weightings aren’t too far from their respective benchmarks.

Bond yields have already more than priced in junk status. We’re close to a neutral positioning here.

Equity positions (neutral weighting) are very well diversified. There’s a natural rand-hedge bias with 65% of the portfolio likely to benefit from a weakening rand.

Of this 57% reflects positions where assets, costs and revenues are derived from offshore, 6% reflect positions where costs are rand-based but revenues flow from offshore, and 2% where positions reflect an element of import substitution.

Exposure to SA economic sensitives where revenues and costs are SA-based make up 28% of the portfolio, while 8% reflects positions with an import cost component but where revenues are SA-based.

SA listed property reflects a slight underweight position given SA’s very challenging economic outlook.

However, there’s a significant randhedge component with 41% of the portfolio exposed to offshore assets.

Offshore exposures reflect a neutral stance going into the conference.

SA cash exposures are slightly elevated to ensure we have some dry powder to invest on any meaningful market-moving outcomes.

Mark Appleton is with Ashburton Investment.