Ashburton Investments comment on cabinet reshuffle

Mark Appleton, SA Head of Multi Asset & Strategy at Ashburton Investments.

Finance minister Pravin Gordhan and his deputy have been removed in a broad based cabinet reshuffle. They will be replaced by Malusi Gigaba the incumbent home affairs minister, and Sfiso Buthelezi who currently serves on the joint portfolio committee on finance. Mr Gigaba has a mixed record and is (apparently) a known Gupta associate. Mr Buthelezi has previously served as an economic advisor to Mr Zuma and as a previous chairman of the PRASA board.

These appointments are unlikely to be seen in a positive light by investors and add considerable uncertainty to the fiscal outlook. Mr Gordhan and his deputy were starting to implement measures to improve the fiscal position and enhance efficiency through greater transparency,the reduction of corruption, and the reform of SOE’s. Credit rating agencies will likely see this move as a threat to the strength of SA’s institutions and hence the heightened probability of an earlier than anticipated rating downgrade. This would unfortunately likely lead to a higher cost of funding and fiscal slippage. Up until these events there was a growing likelihood of short term interest rate cuts but with the increasingly uncertain outlook this looks somewhat less likely. This all serves to leave the market in an uneasy state. Bond yields have moved up and interest rate sensitive equities have weakened. Investors will be concerned that such moves could ultimately result in weaker economics.

Are there any silver linings?

Politics aside it should be noted that the economic outlook was starting to brighten. It should also be expected that these events may well elicit a strong response with the opposition already having tabled motions of no confidence in President Zuma and there could well be some support for this within ANC ranks. While the outcome may possibly be positive in the long term there could well be some short and medium term pain as the market adjusts to shorter term uncertainties.

So how does an investor react to these events?

We at Ashburton have long taken the view that there is event risk out there both globally and locally and this latest development would certainly count as that. We look for opportunity but we don’t like to invest in times of extreme unpredictability. While our asset allocation has recently reflected more exposure to growth assets against a backdrop of improving economics we have still been relatively cautious and conservative. We have emphasised diversification and have a good balance between rand hedge and interest rate sensitive investments. Our focus on quality should also hold us in good stead in these difficult times.