Corospondent - April 2018
Notes from my inbox - April 2018
This year began with a political reboot in South Africa – ‘Ramaphoria’ has taken hold among both the local and international community. And rightly so. The main reason is that the country’s leadership changes have taken place faster than expected and that president Cyril Ramaphosa has been able to act on difficult issues more quickly than even the most optimistic among us could have predicted. He has replaced a third of the cabinet and appointed respected and experienced individuals to key economic and policy positions. The process to shake up and transform the ailing public sector enterprises has also begun in earnest.
Part of the solutions introduced was a value-added tax increase from 1 April – the first in 25 years – a politically challenging decision but one that signals the serious intention to bring about change. This helped significantly towards South Africa avoiding a ratings downgrade as Moody’s kept our investment grade rating unchanged and raised its outlook from negative to stable. Wow, what a turn of events!
But while all these developments are good news and steering things in the right direction, we know that our country has a long road ahead to correct the incompetence, corruption and lack of accountability of previous years. This is why the president has repeatedly made it clear that the righting of our country is a task for us all. But South Africans are resilient, we persevere and we muck in. These attributes will always help us prevail in the end.
Looking back is also nostalgic for us at Coronation as we mark our 25th year since launch. From humble beginnings, through years of working hard to earn the trust of our clients, we are proud of the meaningful role we play in the industry, managing the long-term savings of millions of South Africans and global investors. A big thank you to our clients for your support over the years.
And certainly, there is no way one can write about the last quarter without some words on the Day Zero threat that put Cape Town in the headlines around the world – but not for the right reason. The real and tangible implications of climate change are being experienced by millions of Capetonians who have had to change water consumption habits quite drastically over the past few months to fend off the crisis. The two-minute shower is a real thing – and boy, I must confess, is it hard. Thankfully, the efforts have been successful and Day Zero has been averted for 2018. Now all we need is rain!
Given the long sporting rivalry between South Africa and Australia, there is simply no way I could avoid speaking about the cricket cheating scandal which broke during the test match series between the two nations in March. For those of you who do not follow cricket, the ball tampering issue is akin to doping in cycling – it is a serious transgression in the sport. But perhaps the most notable matter for me is the commonality this moral transgression in leadership shares with many organisations – both in government and the corporate sector in the last while.
It is a reminder of the fine line between justifiable pride and arrogance, and of the importance of diversity in ’sounding boards’ and decision-making groups. If you have a closed leadership grouping of individuals who always think the same way, some of the unchallenged ideas formed are bound to be bad. In the eye of the storm, they may even be ethically wrong. We talk about some of the failures in value later in an article on the audit profession.
Looking away from home, we certainly have not been short on news and activity this quarter. Volatility in the markets has returned – in a big way – and it looks set to stay. And on 6 February, SpaceX made history with a successful launch of Falcon Heavy, the most powerful commercial rocket in the world. The maiden flight also marked the first time a privately financed venture ever attempted to launch a rocket so powerful that it was capable of hoisting a payload out of Earth's orbit. And in keeping with what we have come to understand about Elon Musk, the Falcon Heavy was loaded with his cherry-red Tesla Roadster carrying a spacesuit-clad mannequin named ’Starman’ in the driver's seat, broadcasting the tunes of David Bowie’s ‘Space Oddity’.
But all has not gone well for the technology giants. March concluded with a big fall in the well-known grouping FAANGS (Facebook, Apple, Amazon, Netflix and Alphabet's Google). A number of catalysts, including Facebook’s Cambridge Analytica scandal, president Trump’s attacks via Twitter on Amazon and well-publicised accidents involving self-driving cars, all contributed. The Facebook privacy scandal was a serious development. Facebook CEO Mark Zuckerberg’s robotic and unconvincing testimony to the US Congress in early April was disappointing. The result is a corporate crisis and paves the way for potential political reckoning. And when things get nasty, they do so quickly – we saw even Facebook allies ’unfriend it’ in the promotion of the ‘#DeleteFacebook’ campaign. (Full disclosure here, I deleted my account. And yes, I did feel self-righteous in that moment). We suspect we are in for a new era in the regulation of the technology giants, especially around data control and privacy. It will be an interesting time as the internet moves into a whole new phase, Web 3.0.
IN THIS EDITION
In this edition, we look at the very emotive and challenging issue of land reform in South Africa. Marie Antelme, Coronation’s economist, offers insight into the open debate on land expropriation, how policy has evolved over time and what approach is needed going forward.
The article on the audit profession I mentioned also puts moral issues under the spotlight. We address the failures of audit firms to fulfil their roles as trusted guardians and the growing repercussions for their long-term relevance and survival. Neville Chester, a chartered accountant, covers this on page 10.
As the world embraces the dress code defined by athleisure, we delve into the global sportswear industry with an investment case for the world-class premium sports brand Adidas. As a counter-balance, we also share our view on British American Tobacco – a share which has been under enormous pressure in the short term - but has delivered significant value for its shareholders over time, despite its highly regulated industry.
It is clear from our comparison of Vietnam and Egypt that everything that glitters is not gold. Vietnam’s appealing macro-environment does not translate into no-brainer investment ideas, while there are great opportunities behind Egypt’s bad headlines.
The long-term economic challenges are serious here at home in South Africa. But growth last year was a little stronger than expected and this, coupled with our recent political changes, bodes well for an improvement in growth over the next couple of years, as you can read in the South Africa economy comment. We hope president Ramaphosa and his new government can do enough of the right things to sustain it. It will be a welcome relief.
The current investment climate is far from traditional or normal. To survive and have our portfolios thrive in such an environment requires a resilience to our investment approach that is strongly anchored on our core principles of being long term and valuation driven.
There is no doubt that this approach can lead to intense short term performance pressures – as being experienced currently – but we also strongly believe that it offers the greatest opportunities – provided that one has a long term perspective. Much of this is outlined and discussed in the articles in this edition. With the volumes there is to digest, we wish you a rewarding read.