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South Africa’s new dawn starts with good governance

20 March 2018Johann Els, Old Mutual Investment Group
Johann Els, Head of Economic Research for Old Mutual Investment Group.

Johann Els, Head of Economic Research for Old Mutual Investment Group.

South Africa is currently riding the high of significantly improved sentiment following Jacob Zuma’s recent resignation and the election of market friendly Cyril Ramaphosa as president of the country. This has buoyed confidence for the country, reflected by the strong rand per dollar exchange rate, and further compounded by the recent Budget Speech, which announced plans for much needed fiscal consolidation.

While 2018 is shaping up to be one of the strongest years seen over the past five years, with growth potentially reaching 2.3%, the strongest since 2013, it remains part of a cyclical upswing, which needs to be converted to strong structural growth through policy reforms to remove bottlenecks to growth.

This was the view shared by Old Mutual Investment Group, at an investment briefing today, which emphasised the need for strong governance frameworks across both the public and private sector if South Africa’s new dawn is ever to see the light of day.

Speaking at the briefing, Head of Economic Research for Old Mutual Investment Group, Johann Els, said that while we have seen encouraging developments recently such as hugely improved economic policy balance (i.e. a tighter fiscal policy which should allow for looser monetary policy) better growth data and forecast upgrades, the likely avoidance of further ratings downgrades, strong global economic support for the South African economy as well as likely rate cuts from next week, these are all elements of a cyclical upswing.

“In order for South Africa to get a firm footing on the road to sustained strong growth, we need to see clear structural policy to support and further improve the current confidence boost,” he explains. “The risk is that we rest on our laurels given the current renewed confidence in the market, but without follow-through, this confidence will quickly fall again.

“We already have the National Development Plan on the shelf, which our current president was instrumental in drafting; however we now need to reaffirm and implement it.”

Also presenting at the briefing, Jon Duncan, Head of Responsible Investing at Old Mutual Investment Group, pointed to the role of leadership in the practice of good governance in order to enable sustained confidence and growth in the country.

“What we saw in the recent Budget Speech is the intention to reach out to the private sector and mend the trust between Government and Business,” he said. “In this space, we need strong leadership and at the heart of this sits a clear sense of purpose when it comes to ethics. We have an opportunity to reflect on the consequences of not prioritising this approach and we’ve seen what this looks like in both the SOE and private sector context.”

However, Duncan adds that while there is a tendency to point to governance to drive the clean-up of corruption, there is a need to draw the distinction between governance and the failings of human nature. “Governance allows for direction and control structures to be put in place, but it doesn’t immunise one against human nature,” he points out.

“Against this backdrop lies the role of the investment community as stewards of capital in the market. As asset managers, we can’t afford to be absent landlords and therefore need to prioritise the holding of company management to account and work collaboratively with co-investors, an approach that is relatively new and uncomfortable for asset managers.

“Ultimately, asset managers and company management have a shared interest when it comes to acting with a clear long-term view in order to ensure the sustainability of assets.”

Hywel George, Director of Investments at Old Mutual Investment Group, echoed this point by highlighting that governance is more than just a theoretical concept. “What recent events in the market have made evident is the fact that poor execution of governance has significant implications for companies when it comes to performance and share price impact,” he says.

“Recent events in South Africa, in both private and public enterprises have emphasised the need for deep and ethical leadership when it comes to good and effective corporate governance practice".

George adds that there is a need for responsible behaviour across the investment board. “Short sellers have come to prominence in South Africa recently as widely publicised research reports have led to profound volatility in a number of counters. While short sellers in their own right are not a bad thing, the market impact of short sellers with a particular agenda can be more prevalent in a less liquid market such as our own. The resultant volatility in share prices is unhealthy and can raise the cost of capital for the corporates in question and ultimately for corporate SA.

“For a long term, sustainable investment environment to thrive, we need to see responsible behaviour from all market participants, not just the companies we are investing in,” he concluded.

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