The Consequences of Mayhem

A remarkable phenomenon during the recent looting and vandalism that rocked our country is that our financial markets remained relatively untouched amid all the mayhem. The JSE All Share Index dipped from 68,000 to 64,000 but soon recovered and is now even slightly higher. And the Rand, which was already strengthening, stood firm. Why? And what lessons can investors learn?

We don’t need to dwell too long on the causes of what President Cyril Ramaphosa characterises as an attempted insurrection. Yes, it was prompted by the imprisonment of former President Jacob Zuma, but the general consensus seems to be that it was not a demonstration of widespread support for him. The four-day upheaval was clearly driven by a toxic mix of deep frustration over continued economic and social exclusion such as joblessness and poverty, and lack of basic service delivery, much of it under laid by unbridled free-for-all.

The negative impact, according to government estimates, is that more than 330 people were killed; some 40, 000 businesses, big and small, were looted, vandalised or burned down; and damage of about R50 billion was inflicted. Tragically, more lives and livelihoods were lost, swelling the numbers affected by Covid-19 lockdowns. Economic recovery after the Covid-19 battering will be more challenging. Some citizens may see the looting as a portend of what’s to come and slide into pessimism. Some talented people may leave the country; others might think more seriously about following suit.

While many citizens were shaken to the core and as the woefully ill-prepared security forces floundered to regain control of law and order, many communities fought back to defend their streets and malls and businesses with support from what many may regard as unlikely allies in the form of legions of taxi drivers. And when police and the army finally managed to quell the mayhem, citizens took up their spades and shovels to clean up the mess. The call went out: Let’s Rebuild.

The so-called “moderate middle” seemed to stand firm, quickly resuming their lives and their pursuit of better livelihoods. Here at Veritas Wealth, it was reasonable to expect that many clients whose money we manage would call on us to discuss their concerns, but we had only one caller. They were clearly shaken by events, but he was not panicking.

The fact that our financial markets also remained remarkably calm was a far cry from the last time we had a major political upheaval. Remember how the market reacted when then-President Zuma fired finance minister Nhlanhla Nene, replacing him with the unheralded Des van Rooyen and then being forced to side-line him three days later amid market mayhem?

So, what’s the upshot of all of this?

• The strengthening Rand stood relatively firm. It’s always worth remembering that the Rand/Dollar rate is primarily determined by what is happening in the US rather than by events in RSA.
• The Rand also stayed strong because we are importing substantially less during the Covid-19 pandemic disruptions while our exports, particularly of minerals and metals, soared. This is an artificial situation that will remain only while Covid-19 lasts, but it gives us a much-needed breathing space. Taxes from buoyant mining exports have also swelled South African Revenue Service’s coffers, giving us additional breathing space.
• Our sovereign credit rating was downgraded to junk about a year ago, and the market has priced this in. Bonds and the Rand have held much of their recent gains.
• Buildings damaged or destroyed during the looting and vandalism constitute only 1.7% of listed property portfolios, and all of them are insured.
• Sectors affected by the rioting were mainly banks and retailers.
• There was a lot of dry tinder on the ground when the violence started. It took a few days to find the fire lighters and a while for fire fighters to find the hose and extinguish the flames, but already four of an identified 12 instigators have been arrested. The markets have taken confidence that the rule of law is being implemented to deal with instigators of the violence.
• Former President Zuma remains incarcerated. His key supporter, suspended ANC Secretary General Ace Magashule, will soon be tried on corruption-related charges, and the Zondo commission is completing its painstaking probe of State capture.
• Local asset managers are generally positive about our country. Many have been selling offshore assets in recent months to bring it back and it seems for the moment they continue to hold this view.
• Of course, there are still many unknowns. For example, will President Ramaphosa be emboldened to move forward with real reforms, or will recent events weaken him?

What can investors learn from the mayhem?

A key lesson is that we can never know what is going to happen. We can’t predict the future.

Let’s go back to January 2020 when reports started circulating about a virus outbreak in a relatively remote Chinese city. It seemed too farfetched to predict that just three months later the world would go into lockdown to defend itself against a devastating pandemic and that stock markets would go into tailspin.

Who would have predicted that by Christmas 2020 markets would have recovered and rebounded? Who would have predicted that in 2021 commodity prices would rocket and that SARS would be raking in the cash; that the Rand would go from 19.20 to about 13.50/US$; that many local asset managers would be bringing back to South Africa their offshore investments, believing that our country had begun a turnaround; and that Mr Zuma would be in prison? And while it was possible that his incarceration would lead to some unhappiness, who would have predicted what happened next? Just as you do not expect anything, or very much, to go wrong, it goes properly wrong?

Our advice to investors remains the same: continue to diversify your investment portfolio and take advantage of retirement fund tax benefits. The remarkable thing is that people were badly shaken by the recent unrest, but they did not panic. Acknowledge that the situation in our country remains volatile and watch events closely. And by diversifying your investment portfolio, across asset classes and jurisdictions, you will be providing yourself with a good measure of protection.