Fundamentals

Vote of No Confidence Narrowly Defeated

8 Aug 2017

Political uncertainty has been cited as a key concern by sovereign credit rating agencies this year and inevitably impacts on confidence and, ultimately, the South African economy. While emerging markets have been rising on the back of a reflating global economy, South Africa has been held back from joining the ‘party’ by the local political turmoil.

All eyes were therefore fixed on Parliament yesterday (8 August 2017) as a motion of no confidence in President Jacob Zuma was voted on by way of a secret ballot. Old Mutual Investment Group economist Tinyiko Ngwenya explains the implications of the vote outcome:

WHAT HAPPENS NOW THAT THE MOTION HAS BEEN DEFEATED?

The vote of no confidence was narrowly defeated, as was largely expected. President Jacob Zuma retains his position and now all attention is on the party’s elective conference in December. What must be noted is that the motion was defeated by a notably narrow margin, which highlights the divisions within the ANC.

WHAT DOES THIS MEAN FOR THE ECONOMY?

It may come as a surprise to some that, after initially selling off, the rand has remained relatively stable after the vote of no confidence was defeated in parliament yesterday. This reflects the fact that this outcome was widely expected and thus there was likely to be a more muted response to this result.

However, even with the vote defeated and removing some of the short-term uncertainty, we still expect more political noise heading towards the ANC elective conference, which may continue to undermine the rand.

This is still a bond-friendly environment; inflation expectations have been drifting lower, with our year-end forecast sitting at 4.7%. Even so, a barbell investment strategy, which entails investing in short and long-term bonds, while steering clear of intermediate ones, is still warranted given the uncertainty around politics, the macro-economy and ratings outcomes over the next six to 12 months. The global economy and weak dollar should, however, still be supportive of the rand.

Since May last year we’ve held an out-of-consensus view that interest rates would be cut and that happened last month. And we expect three further cuts in this cycle, one before the end of the year and two next year. In light of this, we still like interest rate-sensitive investments.

We are always cautious about extrapolating any short-term sentiment rally. Any political changes would have to be backed up by meaningful government action for any such gains to be sustainable. SA faces considerable growth challenges that would not have been alleviated by the removal of the President.

WHAT SHOULD INVESTORS DO?

As always, it is important not to be distracted by short-term noise because the long-term performance of asset classes is driven by macro-economic fundamentals. However, you should ensure your financial plan is aligned to your long-term goals and, if you have any concerns or questions, you should consult your financial planner.

During periods of uncertainty, diversification across asset classes remains important, as is maintaining exposure to growth assets, such as equities, which have traditionally proven to be the assets most likely to help you achieve your long-term financial goals.

Our range of asset allocation funds are actively managed and diversified and aligned to our investors’ long-term strategic investment objectives.