There has been speculation for a while of a possible cabinet reshuffle. Key ministries that would be targeted by this impending reshuffle would include National Treasury. These rumours have now been confirmed, with Minister Pravin Gordhan and his deputy, Mcebisi Jonas, being removed from their positions. Of course there were other changes – affecting almost a third of our cabinet – but these are less relevant to financial markets, albeit not necessarily for our country over the long term. This time there was no façade of a possible alternative position at the BRICS bank, so this was in effect not a “re-deployment”. The message was not subtle and there were no nuances. The message was clear – the President simply wanted them gone.
Discussing politics or making decisions based on the outcomes of politics, is however, a mug’s game, so let’s focus on what is important.
At Glacier, we prefer to avoid the noise and rather focus on fundamentals, as opposed to debating politics too much, even if we do have very strong views and opinions on this.
Politics does have an impact on financial markets, however these are mostly short term. People get spooked and they sell out of risky investments, take their money offshore and prefer to invest in US- domiciled equities, managed by overlord Trump, or UK-domiciled equities, currently going through Brexit. Bond yields may spike, financials might get sold off and our currency will weaken.
Over a longer term, however, fundamentals tend to drive markets. Our currency tends to be driven by commodity prices, equity markets tend to be driven by earnings and bond markets by interest rates and inflation expectations. As an investor with a long-term investment horizon, these are some of the things you should be concerned about. Let’s look at our currency first:
Clearly the relationship is very clear. I will concede that politics does have an impact (look at December 2015), but the longer-term relationship with commodity prices is far more explanatory.
Next we shall turn our attention to the JSE. It is clear that short-term political events had a benign impact on the market. The market has been going sideways, but based on poor local fundamental conditions. One could argue that this is due to a climate very much influenced and created by politics, but these are longer-term structural impacts.
What about bond markets? This is probably the one asset class where politics can have a bigger and more persistent impact than the other asset classes in the form of a higher risk premium (this higher risk premium is also present in the other asset classes, however, the effect is more nuanced and not as direct). Luckily this was already priced into a certain extent. Since Nenegate, bond markets have become increasingly wary of political risk. So while we can expect bonds to be sold off, the effect might not be as severe as previously. This time it is slightly different, it is not as unexpected as was the case with Minister Nene, if we are perfectly honest.
Some opportunistic investors will use this time to seek out buying opportunities as was the case in December 2015. Those investors who kept a cool head and used December 2015 as a buying opportunity were handsomely rewarded, leading to bonds being the best performing asset class of 2016.
As always, if you have a well thought-through portfolio that is well diversified, with good quality managers you should stick to your portfolio. If your risk profile or goals have not changed, now is not the time to overreact.