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Post-elections confidence is critical

21 May 2019 Old Mutual Investment Group

With the national elections behind us, improving confidence is the most urgent need for South Africa’s economy right now if the ANC are going to make the most of the final reprieve that the electorate have given them. This was the message from Old Mutual Investment Group Chief Economist, Johann Els, at the Group’s latest investment briefing. However, he believes that this confidence is likely to come through and the next three to five years are going to see a marked improvement.

“South Africa is experiencing dismal growth, with a downward trend since the fifties and sixties, aside from a brief uptick post 1994. The past five years have been particularly poor, having performed feebly compared to the rest of the world,” he explains. According to Els, the final election results showed that there is strong enough support for the centre to accelerate reform. “This should entrench Cyril Ramaphosa’s position as ANC president into a second term and therefore my base case assumption is that the election outcome is positive for policy reform,” he says.

Els says that confidence is a precondition for growth and that we need to see the urgent implementation of policy and general reforms for confidence in the country to return. “Despite a relatively unclear political picture, we have already seen some slow, but steady progress in this regard, but more action is needed,” he adds. “The first step is obviously the appointment of a smaller and improved cabinet,” he says. “We would also like to see continued commitment to anti-corruption measures, decisive action on Eskom, mitigation of investor damaging statements/policies such as prescribed assets and land expropriation, and a move towards more private sector involvement in all areas of the economy. We also need continued rebuilding of state institutions and improvement of public sector wage bill as well as the cutting of expenditure in the Budget,” he adds.

Els says the current backdrop includes global support based on better quality global growth, as well as the Fed’s policy pivot, a weaker dollar and a better Emerging Markets environment. He also expects low inflation to continue into 2020, unchanged interest rates for the remainder of the year and a more stable rand over the next two years – likely surprising on the strong side over the short term. “Ultimately, the SA environment is looking a lot better over the next three to five years, compared to the last five,” he says. The theme of reform has emerged out of the private sector too over the last two years. Also presenting at the briefing, Robert Lewenson, Head of ESG Engagement at Old Mutual Investment Group, says that the role of asset managers as responsible stewards of assets is becoming increasingly important.

“Active ownership – where shareholders exercise their rights, actively engaging with investee companies to reduce investment risk – is always important, but even more so within the context of the current SA environment,” he says. “Crucial to this approach is Stewardship, which is based on the fiduciary duty to our clients to reduce the risk of Environmental, Social and Governance (ESG) factors.” This includes activity such as proxy voting, engagement with companies and market collaboration on transparency and disclosure. “As an asset manager, we have a clear position concerning our expectations of listed companies in relation to ethical leadership, tackling transformation and integrating ESG issues into their long-term business strategies. We continue to build on this position and assess the impact of our approach on our shareholdings,” he explains.

“In 2018 we partnered with the University of Stellenbosch to prove if Stewardship actually does matter. A unique database was constructed using proprietary data for our 283 private engagements with 69 listed companies over a five year period,” he says. “The key findings were that 81.6% of these engagements centred on corporate governance concerns and that close to two thirds of the considered private engagements could be regarded as successful. In addition, a significant positive link was revealed between engagement success and investee companies’ wage gaps.”

Lewenson adds that the success of this approach can be evidenced in some of the higher profile company engagements with the likes of Glencore of Naspers. “We continue to engage with Glencore on material ESG issues such as the US Department of Justice, the issue of stranded asset risks associated with coal operations and governance concerning its board,” he explains. “Executive remuneration is one of our key focus areas, where we have been vocal at both a market and company level in terms of introducing a binding vote on ‘say on pay’ at company AGMs. An example is Naspers, where we pushed for more transparency from its remuneration policy to ensure the relevant remuneration outcomes are effectively linked to company performance.”

Going forward, Lewenson expects the industry to see more shareholder resolutions and activism on key ESG issues. “We’re likely to see better disclosure from companies on key risks such as climate change, a binding vote on executive remuneration, a Sustainability Directive coming into force from the Financial Services Conduct Authority, and asset owners taking a bolder stance of key ESG issues.”

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