Cabinet reshuffle – How will this affect your investments?
President Jacob Zuma announced a significant cabinet reshuffle that saw Finance Minister Pravin Gordhan and Deputy Finance Minister Mcebisi Jonas lose their jobs. This was the biggest cabinet reshuffle yet since the President assumed office in 2009.
In times of uncertainty, it is natural to be anxious about investments and ask whether there is not some action that should be taken to protect them. However, these are exactly the impulses that need to be resisted and composure maintained.
|Short term implications
The Rand reacted sharply following news of the cabinet reshuffle, after reaching a 20-month high of R12.31 to the dollar as recently as 7 days ago, the Rand initially retreated on the news that Finance Minister Pravin Gordhan was recalled from a global investor road show, which resulted in the Rand trading at around R13.89 to the Dollar.
|A positive point to counter this movement was the increase in the SA bond yield to close to 9% is positive for potential foreign inflows seeking higher yield. This should also help the currency in terms of mitigating some weakness.
Medium term implications
The cabinet reshuffle has other implications for the South African economy. The possibility of a breakdown of fiscal discipline has lead to the credit rating downgrade. This will keep GDP growth subdued for longer.
Uncertain times require diversification
We feel it’s imperative to be more focused on diversification in portfolios. In a subdued domestic environment, when earnings are expected to remain low, the fund managers look to assets outside of South Africa. If money is invested locally in shares, in most cases derive their income from operations outside of South Africa.
We feel that there is hope that Pravin and private business can and will push back. This has been felt as the JSE has strengthened since Zuma’s announcement and currencies have not reversed back to late 2015 levels. The biggest impact will be on national morale as people and business could become more defensive rather than having the optimism required at this time. We don’t believe it’s possible to avoid all risks, we prefer the strategy of managing risk, therein lies the opportunity.
Please note that we will be doing an article on the rating agencies downgrade that happened last night. We feel that this topic deserves its own report.Ascent Adviser April 2017