Glacier Quarterly 4 - 2018

GLACIER
QUARTERLY
NOVEMBER 2018 QUARTER 04 | NEWS, VIEWS AND INVESTOR INSIGHTS | WWW.GLACIER.CO.ZA
GLACIER FINANCIAL SOLUTIONS (PTY) LTD AND SANLAM LIFE INSURANCE LTD ARE LICENSED FINANCIAL SERVICES PROVIDERS

CE’S NOTE
Will the New Year augur
a new dawn?
It’s that time of year when we take stock of what’s been,
and cast our gaze to the New Year, with its promise of new
beginnings.
No one is denying that times are tough – both
economically and politically. We know there’s work to be
done and a long road ahead. Yet, positivity still shines
through.
In this issue of Glacier Quarterly, former Editor at Large
at Tiso Blackstar Group, Peter Bruce, writes that ‘hope and
revival are in sight’. Strategist Clem Sunter echoes this,
stating that we’re seeing attempts to turn our situation
around. In his latest ‘flags and scenarios’ article, he gives a
60% probability of SA achieving the ‘Premier League’ – the
best of three possible scenarios.
Of course to do this we need higher growth and
employment. Also in this issue, Dr Roelof Botha of GIBS
argues the case for lower interest rates in order to achieve
the level of growth needed.
From an investment point of view, Alwyn van der Merwe
of Sanlam Private Wealth and Francis Marais of Glacier
Research both agree that while markets are currently
volatile, now is not the time to panic and sell.
We hope you enjoy the read.
Thank you for the role you’ve played in looking after your
clients’ investments during a difficult year in the markets.
We appreciate your support and look forward to working
with you in 2019.
Khanyi Nzukuma
Chief Executive:
Glacier by Sanlam
1

INVESTMENTS
Finding balance
in a world of extremes
2

3

INVESTMENTS
We as South Africans sometimes
tend to be overly pessimistic or
anxious. In fact, according to the latest
2017 perception index as compiled
by Ipsos, South Africans ranked highest
in terms of misperceptions. This can
go both ways of course. However,
our misperceptions tend to be more
negative, and according to
Consultancy.co.za ‘demonstrate a
rather pessimistic national outlook’.
Considering where we came from
and the difficult period we’ve
Wes experienced over the previous
nine years, who can blame us?
Knock-on effect of pessimism
It is, however, interesting to observe
how these experiences permeate to
other spheres of our lives. A recent
case in point was a client who requested
that we build him a portfolio
based on the dual assumptions that
the rand depreciates to R20 against
the dollar and the JSE loses 31% of
its value to end at an index level of
40 000. Either of these could be
seen as extreme tail events – however,
both are entirely possible.
While most clients might not articulate
their anxieties as succinctly, it’s clear
many investors are concerned about
the global and local investment
environment. So how do we go
about building a solution that’s
essentially future proof?
Sitting in cash is still a bad idea
At Glacier we’ve released a number
of presentations and articles over
the past three years arguing why
disinvesting or completely avoiding
risk and sitting in cash is a bad idea.
It is a bad idea mainly because we
haven’t yet been able to identify
anyone who’s consistently good at
timing the market. You might be
lucky to get the original decision
right and miss the crash, but you
also need to get the decision right to
move back to growth assets. For this
strategy to be successful you need
to get both right, which is far more
unlikely. You’re far more likely to be
successful in your investment strategy
if you stay invested, by sticking to
your investment plan and not making
short-term tactical decisions.
The graph below shows a previous
extreme systemic event, the Global
Financial Crisis (GFC). When would
you have switched out of equities
and into cash? When would you have
switched back to equities? The
problem with a crash is that it very
rarely happens all at once; it’s a process
and there are a series of decisions to
get 100% right. The recovery, how-
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
-15.00%
JSE All Share Index -
Monthly Returns
Source: Glacier Research
4

Source: Glacier Research
ever, is unannounced – and missing
those initial upswings will have a
major impact on your future wealth.
Getting decisions 100% right
consistently is almost impossible.
If it does occur, it’s much the same
as getting the correct sequence of
numbers on your lottery ticket correct
– it’s mostly luck, or extreme skill,
which is very rare and seldom
consistent.
Behavioural biases affect decisionmaking
By now most of us investors must
be aware that we suffer from certain
behavioural biases. These biases are
very powerful and have a strong
influence on how we invest and make
decisions. Experimental psychologists
have found that human beings very
rarely make decisions as forecast by
classical economic theories.
I like using the following framework
when looking at my own investments,
especially my retirement savings, as
it challenges me to determine how
certain I really am of anything.
For instance if I’m 100% certain
of my negative hypothesis, then I
should have 0% exposure to risk, or
growth assets. On the other hand,
if I’m 100% certain of my positive
hypothesis then I should have 100%
exposure to risk. In between these
certainty levels lies a continuum of
infinite possibilities and therefore an
infinite amount of combinations of
exposure to risk versus no risk.
The crucial part of this exercise is
that you need to be very honest (and
humble!) with yourself in questioning
how certain you really are. I doubt
many of us will ever be 100% certain
of anything, ie, 100% certain of your
bad prognosis or 100% certain
of your positive expectation. This
means that I need to always have
some exposure to risk, in other
5

INVESTMENTS
words, a diversified portfolio.
Questions to ask before making
short-term tactical changes
‘The little incidents and accidents of
every day fill us with emotion, anxiety,
annoyance, passion, as long as they
are close to us… they were big only
because they were near’, wrote Arthur
Schopenhauer in Studies In Pessimism.
His point is that when we’re unable
to take a step back to gain perspective,
our short-term experiences are
challenging because we experience
them intimately. However, when we
do take that step back and gain
perspective, we might look at risk
differently. We might see that things
move in cycles, the rand depreciates
but also appreciates, shares become
expensive, but also become cheap,
and bond yields blow out and then
come back down again. We might
even see opportunity. A wise man
might lead a powerful nation, followed
by a clown – and then vice versa.
So, ask yourself whether you’re 100%
sure of your convictions. Are you
100% sure South Africa is going to
become a failed state? Are you 100%
sure about when the next market
correction might happen? Are you
6

100% sure that cash is your best
alternative? If you’re honest with
yourself and you’re not sure, then
you should be careful of short-term
tactical decisions.
To build portfolios that are futureproof,
investors need to have a longterm
investment plan with a welldiversified
investment portfolio and
stick to this plan. Enlisting the help
of a qualified financial adviser provides
an objective voice of reason, which
can provide invaluable guidance
during times of increased market
volatility.
What about new investments?
What about new investments,
especially for those investors who
are transitioning from pre-retirement
to post-retirement? This is a particularly
vulnerable period, where the sequence
of returns can have a powerful
impact on the sustainability of their
retirement savings pot.
Here they can use a variety of
strategies:
1. Use the Sanlam Monthly Bonus
Fund as part of their investment
strategy (Sequencing-of-returns
risk)
2. Phasing-in – I know about all the
literature out there that points to
the negative aspects of this
strategy, but this research very
rarely specifically addresses
sequence-of-return
risk and the accompanying
behavioural benefits. It’s much
better assisting a client to get
their strategic asset allocation
right than a client who avoids risk
by staying invested in cash.
3. Multi-asset income funds also
provide a good alternative to pure
cash, especially in terms of more
diversified risk exposures, while
offering good yields. Should the
client be totally unwilling to take
on equity risk, these funds can be
utilised, and risk can be slowly
introduced as the client becomes
more comfortable with additional
risk exposure in future.
Conclusion
From a balance of probabilities
perspective, considering the long,
extended bull market we’ve
experienced, it makes sense to be
cognisant of risk inherent in the
markets. The difficult part, though,
is getting the exact time of both the
drawdown and recovery correct. The
focus should therefore be on the
long term, together with a welldiversified
portfolio and prudent
financial advice from a qualified
financial adviser, which can go a
long way in mitigating these risks. If
the investor is, however, transitioning
into the post-retirement phase
of their life, a long-term investment
plan together with some smart risk
management techniques and uniquely
positioned products might be the
best way to go.
Francis Marais,
Head of Research at
Glacier by Sanlam
7

INVESTMENTS
EQUITIES:
is it time to panic?
8

9

INVESTMENTS
There’s a saying in financial markets,
‘If you panic, panic first.’ This certainly
seems to be the prevailing sentiment
right now on both global and local
equity markets. Since late August,
share prices have come under severe
pressure, and many jittery investors
are questioning whether they should
remain invested in equities at all. In
our view, the markets may be a scary
place at the moment, but now is not
the time to panic and bail out.
Following an almost uninterrupted
surge in share prices since February
2016, global equities have declined
by 7% in US dollar terms over the
past two months till the end of October.
On our own stock market, the picture
is also rather gloomy. As measured
by the FTSE/JSE All Share Index
(ALSI), shares sold off aggressively
and are on average trading 15% below
their values recorded late in August
(see the graph below). Unfortunately
for local investors, this decline has
come after an almost four-year
period during which local share
prices moved sideways against a
very pedestrian economic backdrop.
The issues associated with volatile
and lower share prices, both globally
and locally, are of course not new.
In June this year, we argued that
investors got overly excited with the
positive story after the election of
Cyril Ramaphosa as our country’s
new president, and that banking and
retail shares became too expensive
as a result – they later retreated to
more realistic valuations. We therefore
trimmed Standard Bank in our
portfolios. On the other hand, rand
hedge shares were, in our view, too
cheap at that time.
The poor performance of local shares
since mid-2014 has more than once
led to analysts questioning the
wisdom of continued investment in
this asset class. In our view, however,
history suggests that over time, the
relationship between risk and returns
will continue to hold (see our article
in August this year, in which we
make the case for equities). In simple
terms, if investors buy decent-quality
companies at a reasonable price, it
would be fair to expect that the
return on investment will beat cash
over the longer term. Investors often
ignore this ‘law’ when equities
underperform or when the news flow
is particularly dismal.
GLOBAL AND LOCAL EQUITY PRICES (OCT ’17 TO OCT ’18)
Source: IRESS; SPW research
10

Of course we’re not for one moment
suggesting that investors shouldn’t
manage the asset allocation of their
portfolios actively. Four years ago,
we argued, for instance, that South
African shares were too expensive
and that we preferred offshore to
local equities. We started to change
our view early this year, however,
when our analysis suggested that the
valuations of local equities are on
average starting to look more
attractive. This is the crucial point:
our view is that based on price, local
shares are starting to offer attractive
long-term, inflation- beating
investment return prospects.
Price, perspective and pattern
In August, we said ‘investors
considering leaving [SA] equities at
this stage are ignoring the lessons of
history at their own peril’. Since we
expressed this view, equity prices have
fallen by 12%. So were we wrong? It’s
simply too early to tell. We like to be
measured over the longer term, or
through an investment cycle, as
sentiment can drive asset prices way
off their intrinsic values.
We still maintain that price, perspective
and pattern will drive future
performance. Perhaps the most tangible
way to explain this is by using the
example of Standard Bank to illustrate
how these three factors combine to
produce future returns.
We believe Standard Bank is cheap –
the price is low – in terms of its own
history when the share is trading at a
price-earnings (P/E) multiple of nine
times. If we monitor the five-year
share price performance of Standard
Bank after each time it traded at a
nine-times P/E multiple, over the
past 40 years, we should be able to
determine if there’s a pattern in the
share price performance following
periods of low prices. The table below
provides the evidence:
The table clearly illustrates that every
time Standard Bank traded below a
P/E ratio of nine times, the ensuing
five-year returns comfortably and
sometimes spectacularly outperformed
inflation. We would argue that the
likelihood of this pattern continuing is
high.
Many cynical investors will be quick to
point out that we’re ignoring the current
perspective of a local environment
with extreme policy uncertainty
and low economic growth. This
observation is true – which is exactly
why we won’t venture a strong view
of what will happen to the Standard
Bank share price over the next 12
months. We simply can’t forecast
events over the short term, let alone
in a year in which we’re holding
general elections.
Dates (when SBK
traded below 9x P/E)
Average 5-yr return pa Average 5-yr inflation rate Average 5-yr real return
Feb 1987 31% 15% 16%
Nov 1987 39% 14% 25%
Aug 1998 22% 6% 16%
Jan 2002 32% 5% 27%
May 2008 9% 5% 4%
Source: Bloomberg; SPW research
11

12

However, what we can say is that each time
the Standard Bank share traded at low levels
in the past, the cheap valuation was largely
influenced by negative news flow. November
1987 saw a global market meltdown following
significant interest rate increases in the US.
In 1998, the South African banking industry
had to navigate its way through exceptionally
sharp interest rate hikes after the emerging
market crisis. The sell-off in global shares in
2002 weighed on our equities, and in 2008
we had to wrestle our way through the biggest
economic crisis since the 1930s Great
Depression.
It’s thus safe to argue that in the past the
best buying opportunities have been created
by negative news flow. It should be pointed
out, however, that these dates didn’t
represent the bottoming out of the Standard
Bank share price. They were simply arbitrary
points (nine times P/E) that we picked as a
low price.
Enough upside for equities
Is the current equity market slump different
this time? If South Africa doesn’t fall over
the proverbial cliff, we don’t think so. We
believe there’s a strong likelihood that
history will repeat itself – unlike scientists,
investors tend not to learn from and build
on lessons from the past. Standard Bank
isn’t the only example – there are plenty
of South African listed shares that offer
inflation-beating prospective returns. On
average our equity market offers enough
upside over the cycle to compensate for
the risk investors take. To put it bluntly:
now is not the time to panic!
Alwyn van der
Merwe, Director of
Investments, Sanlam
Private Wealth
13

INVESTMENT INSIGHTS
URGENT NEED
for lower interest rates
14

South Africans are justified in their
concern over the Reserve Bank
Monetary Policy Committee’s (MPC’s)
refusal to lower the country’s benchmark
lending rate further.
The apparent obsession with keeping
inflation as low as possible has
undoubtedly contributed to the rising
unemployment rate in the country,
as well as the declining economic
growth trend.
In most countries, a logical monetary
policy response to a combination
of lower inflation and lethargic or
negative economic growth – as is the
case in SA – is to lower the official
bank rate, which automatically leads
to lower commercial bank lending
rates and relief for consumers and
businesses with debt.
The monetary policy mission
statements of virtually all the world’s
central banks clearly state the need
to strike a balance between maintaining
price stability on the one hand, and
ensuring adequate levels of economic
growth and employment creation on
the other. It defies comprehension
that the MPC and its economic
advisers seem to ignore the following
facts: Inflation has been comfortably
within the target range of 3% to 6%
for 19 successive quarters, while the
negative gross domestic product
(GDP)growth rate of the past two
quarters (quarter-on-quarter basis)
is placing undue pressure on the
country’s public finances.
Several reasons exist for increasing
frustration at the MPC’s failure to
understand the dire need for interest
rate relief, including:
• The average rate of inflation, as
measured by the consumer price
index (CPI), is at its lowest level in
eight years
• Manufacturers have stated that the
high level of unutilised productive
capacity in this crucial sector is the
result of insufficient demand in the
economy
Average rate of consumer inflation in SA
(Source; Stats SA)
AVERAGE RATE OF CONSUMER INFLATION IN SA
6.4
%
6.1
Upper range CPI target
5.8
5.5
5.2
4.9
4.6
CPI
4.3
4
2010 2011 2012 2013 2014 2015 2016 2017 2018
(Source; Stats SA)
15

INVESTMENT INSIGHTS
• An inverse correlation exists
between interest rates and
economic growth, with the restrictive
monetary policy stance since 2014
having been accompanied by a
declining GDP growth trend
• There is no consistency in the
approach towards monetary policy.
Ever since the departure of Gill
Marcus, the previous Governor of
the Reserve Bank, a shift has occurred
from an alignment with the nearuniversal
trend for accommodating
monetary policy to a restrictive one
• From 2012 to 2014, the real prime
rate averaged 3%. Since then, it’s
increased to just below 5%,
representing an increase in debt
service costs (at prime rate) of 64%
• Since December 2016, CPI has
declined by 190 basis points, while
the repo rate has only been lowered
by 50 basis points. This means the
Reserve Bank is 140 basis points
behind the curve
• When inflation targeting was officially
adopted 18 years ago, it was never
the intention to fix the chosen target
range of 3% to 6%, but to consider
future adjustments, depending on
the overall state of the economy. It
should be abundantly clear that the
policy objectives of job creation
and growth currently far outweigh
the need for further reductions of
a relatively stable and low inflation
rate.
At no point in South Africa’s modern
history has there been such an urgent
need to shift the economic policy
emphasis to higher growth and
employment creation. The country
is still experiencing low levels of
confidence caused by the lingering
effects of state capture, large-scale
corruption and public sector mismanagement
that occurred under
the Zuma administration, while job
growth is lethargic.
Growing GROWING gap since GAP 2015 SINCE between 2015 real GDP BETWEEN growth & REAL
the real GDP prime GROWTH rate & THE REAL (Sources: Stats PRIME SA; own calculations) RATE
6
%
Note: Year-on-year GDP growth rates
5
4
Real prime rate
3
2
GDP growth rate
1
0
Q2'12
4
Q2'13
4
Q2'14
4
Q2'15
4
Q2'16
4
Q2'17
4
Q2'18
-1
(Sources: Stats SA; own calculations)
16

Rising unemployment creates a fertile
breeding ground for elevating the
already high level of civil unrest in
the country, a phenomenon that plays
into the hands of radically minded
organisations. This further hampers
the country’s ability to expand
productive capacity and attract
foreign direct investment.
Against this background, the MPC’s
dogged insistence on keeping
interest rates high remains a mystery.
Inflation is low and relatively stable,
while South Africa’s future growth
prospects have improved on a
structural basis as a result of the
new-found pragmatism of President
Cyril Ramaphosa.
Corruption is now being laid bare,
with a view to establishing sound
standards of corporate governance
in the public sector, while closer cooperation
is being established with
the private sector in an attempt to
reduce policy uncertainty. Hopefully,
these efforts will assist in identifying
and removing obstacles to higher
growth and employment creation.
The early stage of the Ramaphosa
era has also provided South Africa
with a huge dividend in the form of
the country’s sovereign bonds retaining
investment-grade status and Moody’s
Investor Services upgrading the outlook
from negative to stable.
Unfortunately, the leeway for
significant short-term fiscal stimulation
remains constrained by slow taxation
revenue growth. The other key policy
option, namely accommodating
monetary policy, remains available,
but is in limbo.
The case for stimulating the economy
via lower interest rates is compelling.
If 50% of holders of total private
sector credit lower their monthly repayments
in response to a one
percentage drop in the prime rate,
it will unleash more than R17 billion
of demand via increased capital
formation and household consumption
expenditure.
This could ultimately create more
than 200 000 jobs and significantly
broaden the tax base (based on the
ratio of GDP to total employment
and input/output table multipliers).
The current monetary policy stance
of the Reserve Bank is akin to selfinflicted
economic sanctions. It’s
time to deal decisively with South
Africa’s most pressing economic
policy priority, namely higher growth
and employment creation. Lower
interest rates will facilitate this.
Dr Roelof Botha,
Adjunct Faculty, GIBS
(University of Pretoria)
17

SA 2019
STICK AROUND:
SA turnaround is coming
18

It’s doom and gloom in South
Africa at the moment amid political
uncertainty and an economy in
recession. But hope and revival are
in sight, writes Peter Bruce, former
Editor at Large at Tiso Blackstar
Group.
There’s no getting away from the
fact that South Africa is in trouble.
Or, if not actually in trouble then
extremely close to it. Our politics
are nerve-wracking and our
economy seldom makes for a good
headline. That we’re in recession is
almost incidental.
The political stage is being set for
a general election around April
next year. Some people still say
President Cyril Ramaphosa should
call one now and catch his internal
ANC critics off guard. But there
are two problems with that: The
party doesn’t yet have the money
to run a campaign and the
Independent Electoral Commission
(IEC) still has work to do on the
voters roll.
An early poll commissioned by the
South African Institute of Race
Relations has the ANC winning
52% of the vote, the Democratic
Alliance (DA) 24% and the Economic
Freedom Fighters (EFF) 13%.
That poll may be misleading, though,
because it assumes an 83% voter
turnout, which is unnaturally high.
Dawie Scholtz, who analyses voting
patterns and is generally reliable,
says this more likely than not
understates support for the ANC
and overstates that for the EFF. So,
for now, and before any
19

SA 2019
campaigning, we’re probably looking
at around 57% for the ANC and 11%
for the EFF, with the DA more or less
stable at 23%.
Without any doubt, the ANC will
lose its majority in Gauteng and the
province will have to go into coalition
or a minority government. The DA’s
role where it can keep the ANC in
power will be fascinating, not only
in Gauteng, but also in other target
provinces for the DA, such as the
Northern Cape. The DA should easily
hold the Western Cape.
Under pressure
All of that said, the debate about
the expropriation of land without
compensation (although Ramaphosa
will do his best to limit severely the
conditions under which that can
happen), rising unemployment and
rising oil prices are putting severe
pressure on the economy and business
confidence.
Ramaphosa has launched a stimulus
package that contains some good
ideas – on tourism and easier visa
regulations, for instance – but the
government has no new money itself
and will have to get the private sector
on board. If properly done and with
enthusiastic private sector participation,
many job-creating projects could
actually get off the ground.
Crime and corruption
Yet a growing number of South Africans
feel it’s already too late. Skilled people
are leaving the country in significant
numbers. You hear it all the time. The
future is just too uncertain and the
levels of crime and corruption are
unimaginable. In the absence of even
one significant political arrest or at
least a trial where the public is able
to cheer a capable state doing its
job, why stay?
One can understand the gloom.
And yet, for as long as I can remember,
South Africa has always been on the
edge, one way or another. My dad
bought a gun when I was 10 after a
family was murdered in a caravan
near the Mbashe Bridge in Transkei.
We were going to go to Australia.
Then my sister and her family had
to leave the country because her
husband had been banned by the
apartheid government and had
escaped to Botswana. My parents
subsequently left to look after her
children before I departed too – and
stayed away for 20 years.
I came back in 1996 and I’m not
moving again. This is home. Of
course I get nervous. Whenever I
have money to spare, I invest it offshore
like anyone with some savings
should. But I don’t underestimate the
power of the South African economy.
It may be skewed in all sorts of disgraceful
ways but it is rich and our
markets are deep.
Embracing land reform
We’re well regulated financially and
fiscally – and that means a lot in the
world. We’re not Argentina or Turkey
– and certainly not Zimbabwe. In
Johannesburg or Cape Town we’re
appalled when the rand falls and delighted
when it strengthens again. In
21

Buenos Aires, Argentines don’t give
a hoot about the value of their
currency, the peso. All they want are
US dollars.
Of course we should be doing much
better. But I’m always comforted by
the certain knowledge that we’re a
fundamentally conservative people.
South Africans aren’t revolutionaries.
We want peace and security for our
families. Despite what politicians try
to pretend, black and white people
are finding each other. The land reform
process will make that happen
even faster – on the farms and in
towns. It’s something to embrace,
not to fear. People aren’t going to be
hauled out of their homes.
The outgoing Premier of the Western
Cape and former DA leader, Helen
Zille, once told me our politics was
like a pyramid. At the top was the
ANC, with the DA and EFF at the
bottom corners. Slowly the latter
two would eat away at the ANC, she
said. That is indeed happening and
it doesn’t have to result in a horrible
ending.
No place like home
For the middle classes worldwide,
life is tougher than ever. Not only
here. Yes, if you can afford it, send
your children to the best school you
can find, not forgetting that many
of these are fee-paying government
schools. Yes, encourage them to go
overseas and get jobs and learn skills
they can one day bring back home.
I promise you, even at R15 to the
dollar there’s no place like South
Africa. We’re still turning out doctors
and engineers. We still have fantastic
weather and a beautiful country. We
beat the All Blacks! We have some of
the finest infrastructure in the world.
There’s a lot to fix but once you get
the thieves out of the way, the fixing
is easy.
And they are out of the way, although,
sadly, not yet in jail. But stick around.
There are going to be some great
criminal trials coming up. It’s been
a miserable political decade but the
friends and colleagues who are leaving
now are going to miss the best part.
The revival.
Peter Bruce,
former Editor at Large
at Tiso Blackstar Group
22

SCENARIO PLANNING
Breaking
the latest South African flags and
scenarios
Experience is something you get the
moment after you need it. This witty
comment came from the guy sipping
his coffee at the table next to me in a
café recently. However, in reviewing
South Africa’s future, the wisdom in
the comment can be turned on its
head as we’ve had so much experience
of both the highs and lows in
our recent past. Surely we can learn
from that.
So, let’s go through the six principal
flags identified by various august
institutions as the ones most likely to
influence our future:
23

futures:
Corruption: Venezuela is the latest
victim of this flag, with food and
medical supplies running out and life
becoming hellish for ordinary citizens.
By contrast, here in South Africa, we’re
seeing attempts to turn the situation
around with the Commission on State
Capture now in action and the
President voicing his determination
to root out corrupt practices. This is
a good sign, but for the flag to turn
really green the perpetrators must
see their day in court and, if found
guilty, suffer the consequences.
24

SCENARIO PLANNING
Quality of Infrastructure: We
haven’t had another round of major
Eskom load-shedding this past winter
season and serious attempts are being
made to improve management of
state-owned enterprises. However,
it’s worrying to see so many
construction companies with their
backs against the wall. This implies
that the multi-billion rand government
programme to improve infrastructure
isn’t yet seriously under way. The
manner in which National Health
Insurance in South Africa is
implemented will provide considerable
guidance on the prospects of this
flag turning green.
Style of leadership: South Africa
works very well when it has a leader or
purpose uniting it. Witness the years
of economic growth under Mandela
and the outstanding reception given
to soccer players and foreign fans
during the 2010 World Cup. President
Cyril Ramaphosa is definitely a
person who can exercise the right
kind of inclusive leadership to put us
on our feet again, but he’ll have to
handle the final flag of land reform
very carefully in order to avoid a
mutiny on deck.
Pockets of excellence: We have so
many pockets of excellence in South
Africa in both the public and private
sector, but the past 10 years have
taken their toll, and sadly, many people
who would have formed the next
generation of excellence have left
the country. The most important area
in which to watch this flag is education
because only high-quality education
is capable of reducing social
inequality in the long run. We have
some of the best schools and university
faculties in the world. If we can learn
from them in order to uplift the rest,
we’ll be on our way to becoming a
winning nation.
Entrepreneurial spark: By common
consent, this flag is the one that can
change the country’s economic destiny
the most and create a genuine state
of economic freedom. We need:
• An enterprise summit rather than a
jobs summit to tackle the exclusive
ness that still persists in our daily
lives
• To integrate the township economies
into the mainstream economy
• To come up with innovative solutions
to convert rural communities into
thriving networks of local activity.
At the heart of all this will lie the goal
of multiplying the number of youthful
entrepreneurs in our country.
Land reform: A tweet by Donald
Trump is not helpful on this issue, but
it goes to show that only the kind
of team approach that caused the
political miracle of the early 1990s
can turn this flag green. The positive
meeting of agricultural players in
Bela-Bela in August should be seen
as a forerunner to a full-scale Agridesa
that can take place once the
government has completed its
consultations with the public. Any
move to impose a top-down remedy
on land redistribution that sparks
widespread resistance among existing
land owners is bound to have immense
downside on both the local and
25

international fronts. The injustices of
the past must be corrected, but in a
way that involves consensus from all
sides on the best way forward.
Otherwise this will be the most
disruptive flag of all.
The six flags lead to three possible
scenarios for South Africa’s future:
Premier League: This is the scenario
where we reverse the negative economic
trends of recent times by turning all six
flags green. We start regularly hitting
an economic growth rate between 3%
and 5% per annum while at the same
time moving away from being one of
the world’s most unequal societies.
Critically, we serve as an inspiring
example to other nations of how racial
divisions can be healed by implementing
a vision based on ethics and common
sense.
Second Division: In this scenario we relinquish
our position as the number one
economy in Africa that we’ve held for
150 years to become just another thirdworld
destination. The decline is peaceful
although all the flags stay reddish in
colour. The problems prove too hard
for even the most talented leadership
to resolve and we remain a racially
divided country from which the best
talent emigrates in the hope of a more
peaceful and better life elsewhere.
Failed State: This is the scenario where
the wheels come off completely in the
near future, mainly as a result of the
last flag turning really nasty and violence
rearing its head on a wide scale.
Nobody overseas even thinks of investing
here as we descend into that group of
nations that for one reason or another is
regarded as a wasteland with no hope
of redemption.
At the moment, the probabilities I
attach to these three scenarios are 60%
for the first one, 30% for the second
and 10% for the third. Nevertheless, I
respect the fact that each reader may
have a completely different spectrum
of probabilities given that this country
is at a tipping point.
Whichever way the future breaks, be
sure to anticipate it by watching the
flags! Better still, roll up your sleeves to
help turn the flags green and raise the
probability of staying in the Premier
League.
This article was originally published
on News24 on 29 August 2018
Clem Sunter, Strategist and
Author
26

TRENDS
SOUTH AFRICA 2019:
investing in interesting times
27

There is a Chinese curse that says,
“May he live in interesting times.”
Like it or not we live in interesting
times. They are times of danger and
uncertainty; but they are also more
open to the creative energy of men
than any other time in history.’
Robert Kennedy may have spoken
those words in Cape Town back in June
1966, but he could well have been
speaking of South Africa today.
South African investors live in nothing
but interesting times.
We have two particularly interesting
potential pivot points to look forward
to in 2019. First, the outcome of the
2019 General Election will determine
the direction of near-term economic
policy and indicate whether we’re
headed for a season of liberal reforms
or a period of more extreme populist
policy. Second, we’ll find out whether
or not we’ll make it another year without
the rand being downgraded to
(real) junk status.
As individual investors, we don’t have
much power over either of these outcomes.
Fortunately, we do have power
over our own investment choices.
We’re also living in a very interesting
time of technological development
that opens up a whole range of
investment choices and opportunities
previously unavailable to South Africans.
Playing defence – opportunities amid
chaos
In the worst-case scenario for the year
ahead, if South Africa’s political situation
destabilises after the 2019 elections and
28

economic growth stagnates – perhaps
even plunging the economy into full
junk status –investors can look to fintech
for innovative ways to protect
their wealth.
Alternative currencies
In times of trouble, people look to
alternative currencies to protect
their interests from hyper-inflation
and poor investment returns. If the
rand gets downgraded to junk status
and plummets as inflation increases,
South Africans could turn to crypto
currencies to preserve at least some
of their purchasing power. No, crypto
currencies have not had a good year
as far as investment returns go, but
still, in a dire economic environment
they do provide people with trade
options, which would otherwise be
impossible, In Venezuela and
Zimbabwe, for example, individuals
have been quick to adopt crypto
currencies such as bitcoin and dash
as a better (even if imperfect) store
of value and means of exchange
amid their countries’ fiat currency
collapses.
A couple of interesting crypto
currencies right now include Monero,
a South Africa-originated ‘privacy
coin’, and Tezos, a new – and smarter
– smart-contract coin rival to Ethereum
that’s attracted more than 100 million
dollars in start-up funding.
Alternative economies
Going even further, if economic
times get really tough, people could
turn to completely off-grid alternative
informal economies that operate outside
of the existing financial system.
Dwala and Project UBU are two
examples of blockchain-based
alternative economies. Both these
projects are designed to digitise the
informal economy and reduce global
inequality by issuing their own decentralised
currencies that can be
traded among users and exchanged
for goods and services from partner
companies.
Alternative investments
Alternative assets offer another
opportunity for ‘interesting’ investment
times and currency crises. Hard luxury
alternative assets, such as fine wine,
classic cars and fine art are well
known to outperform stock market
equities over the mid term. Platforms
such as Macenas and Dream Block
facilitate trade in alternative assets
– Macenas focusing on fine art, and
Dream Block on investment properties.
Both platforms use blockchain
tokenisation technology to
democratise ownership in hard assets,
allowing retail investors to benefit
from direct, fractional, crowd-funded
ownership in the underlying assets
for a small initial outlay. In South
Africa, we now even have ‘crowd farm’
platforms that facilitate fractional
ownership of cattle.
Playing offence – opportunities for
a new dawn
In the best-case scenario for the year
ahead, if South Africa’s political
situation stabilises and economic
growth recovers, local investors will
be in an excellent position to take
advantage of investing in the ‘Silicon
Cape’s’ thriving fintech scene as it
29

solves Africa’s biggest problems.
All the best fintech start-ups focus
on solving problems for their target
audiences. South Africa may have no
shortage of challenges, but each of
our country’s challenges represent a
viable start-up opportunity. Savvy
investors have the chance to invest in
these solutions.
Access to social credit
Banking the unbanked is one of sub-
Saharan Africa’s biggest challenges.
Although banking penetration is
improving rapidly, the majority of
adults in the region are still unbanked.
One of the biggest challenges is the
issue of credit history and credit ratings;
without a credit history, people
have severely limited access to financial
services. Start-ups that succeed
in banking the unbanked represent a
huge investment opportunity.
InVenture, for example, is an African
start-up that uses consumers’ cellular
data to create a financial identity
that can be used to open bank
accounts and access credit. Similarly,
Absa now uses people’s social media
presence to determine credit scores
for people without a financial history.
Access to actual credit
Of course, a credit score is only half
the battle. Actually accessing capital
is an even bigger challenge to solve.
Alternative funding platforms, such
as the crowd-funding platform Rainfin,
which now lends more than R1 million
a day to small- and medium-sized
enterprises, have great potential
across the African continent.
In India there are even crowd-funded
mortgage platforms that allow
communities to invest in their collective
future. Prodigy Finance, likewise, is a
crowdfunded MBA platform started
by South African-born Cameron
Stevens. Prodigy has attracted in
excess of $100 million in funding and
offers lenders decent interest rates in
exchange for financing the studies of
strangers.
Access to Africa
Another of Africa’s biggest challenges
is access to Africa itself – international
remittances across the continent are
notoriously expensive and complex.
Start-ups with solutions to this problem,
including BitPesa, which facilitates
cross-border payments by using
bitcoin as a clearing currency, have
massive potential for early investors
– and for South Africans looking to
move their own money around the
world.
Looking to the future
No one can predict the future. We
can’t be sure of what lies ahead, but
we can be prepared to take
advantage of any future South Africa
throws at us in the year ahead.
Bronwyn Williams,
Trend Translator and
Future Finance Speciaist at
FluxTrends
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