Political awareness an imperative for professional financial advice

Jeremy Gardiner, director at Investec Asset Management

A deep awareness of the South African political landscape is important to financial planners due to its effect on the domestic economy and the knock-on impact on business and consumer confidence and investment returns.

“Your biggest role [as a financial planner] is to get your client’s risk profile right and then to prevent them from making investment decision based on emotion and feeling – what happens on the political stages has a huge impact in this regard,” said Jeremy Gardiner, director at Investec Asset Management. He presented the keynote address on the first day of the 2017 Financial Planning Institute’s (FPI) Professionals Convention being held in Cape Town from 19-20 October. 

SA is on the verge of a political transition with long term political allies such as the South African Communist Party reconsidering their options following President Zuma’s 17 October cabinet re-shuffle. “The ruling African National Congress will talk about ‘Unity in Action’ in the run-up to the December 2017 elective conference; but these will just be words – we are entering a time of fracture and disunity that will have consequences for all of us, for our investments and for many of your clients,” said Justice Malala, a political analyst who addressed conference attendees on the country’s political outlook. 

Political and policy uncertainty is largely responsible for the recent ratings agency downgrade to the country’s sovereign debt and can also be blamed for the economy missing out on the full potential of both global and emerging markets’ ongoing recoveries. The downside risk in this regard is that the agencies announce further downgrades in December 2017. Gardiner said that in the event of a sub-investment downgrade some R120 billion in capital would have to ‘leave’ SA as global pension funds withdrew funds to comply with their investment rules. The withdrawal of this yield-seeking capital would put huge pressure on the rand. 

The resurgence in emerging market economies has given the local economy some respite with the result we should see moderate economic growth over the next two years. The global synchronised recovery in the United States and Europe will further underpin emerging markets over the next few years. “After five tough years between 2011 and 2016 emerging markets bottomed last year and looked set to pick up, South Africa had a ticket to that party,” said Gardiner. “When emerging markets are in favour, money flows into SA with a range of positive consequences; but we missed our opportunity”. 

Although the JSE has been trending for the past three years, there are reasons for further optimism. Gardiner mentioned four factors that should lead a resurgence in local equities, including the fact that business confidence is at a four-decade low; inflation is heading lower; interest rates are falling; and around two thirds of JSE-earnings coming from offshore. “Despite all the bad news, our economy is still going to grow,” he said. SA is a commodity-based economy and the rand a commodity-based currency at a time when interest in commodities is finely reviving. 

Both Malala and Gardiner applauded SA’s civil society for its role in holding government accountable. “Our institutions are strong and continue to stand up against authoritarian figures in the ruling elite,” said Malala. They commended the country’s media for exposing and reporting on corruption and state capture and reminded all citizens to be thankful for the levels of media freedom. 

In closing, Gardiner warned financial planners to be wary of a risk-off environment… “Be thankful for our robust civil society, free press and watchful private sector – the big question is whether we want to start healing in two month’s or two years – we do not necessary want to change government; but we need to get the right people in charge”.