Issue 32...Durban Metro were also arrested. A mayor of Newcastle was arrested for an alleged (political) murder; as was a former mayor of Endumeni for alleged conspiracy to murder

thelighthousethelighthouseIssue 32 | July/August 2019

www.stonewealthmanagement.co.za | 1

H E L LO !

R E C L A I M T H E S TAT E A C T 1

These are tricky times

for us South Africans.

Many of us feel fearful

and uncertain of the

country’s future, as the

bad news seems to

keep rolling in. Our way

of dealing with this is to

avoid getting caught

up in fearmongering

and naysaying, to keep

informed and to read

opinions and reports of

the people who give us a

calmer viewpoint. We’re

just a phone call or email

away should you need

to bounce off any ideas,

concerns or decisions

with our team.

Stone Wealth Management

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a licensed Financial Services

Provider FSP 29494

“Just do something” is the cry now rising from

all over SA, a plea to the President and government

in general to take some action to break the logjam in

which the country finds itself. Confidence is low,

growth sluggish and emigration high. It is useful to

recapture what has been done.

The Ramaphosa administration has set itself two tasks: to

rebuild the ethical foundations of the state and revitalise

the economy. The two topics are too much to cover in

one note, so I will discuss ethical renewal in this note (Act 1)

and assess economic renewal in the next one (Act 2).

An analysis by JP Landman, Political & Trend Analyst

continued on page 2

2 | our expertise, your financial future

Cleaning up and re-building ethics

The country first and foremost had to

be reclaimed from the forces of state

capture. Ramaphosa appointed four

commissions of enquiry to help with the

clean-up offensive. Two are still in session

(the ubiquitous Zondo Commission and

the Mpati Commission into the PIC) and

two have finished their work. Between

them the four have sparked considerable

action – a lot of which we have already

forgotten about.

Freeing critical institutions

It is useful to remember that both the

erstwhile number 1 and 2 in SARS, Tom

Moyane and Jonas Makwakwa, are gone.

So is that embarrassing former head of

IT at SARS, Ms Makhekhe-Mokhuane,

who made such a spectacle of herself

on national television that she publicly

apologised for it. That is not all: in the last

week of July, three SARS executives were

suspended. The clean-up continues. The

EFF and the Public Protector are fighting

a rear-guard action against SARS renewal

with old allegations of rogue units and

attacks on new Commissioner Kieswetter.

He is forging ahead unperturbed and can

leave the Public Protector to the courts.

At the NPA, the erstwhile top three

have also departed and a woman with

experience at the International Court in

The Hague has returned to SA to take up

the baton. The departure of the three

has freed the NPA from its era of Zuma

capture and it is being rebuilt. (One is

fighting her dismissal in court and two

have appealed to Parliament not to be

fired. It will be an interesting test case for

who is in charge in Parliament.)

Director Batohi took office in February.

In March, a special investigative unit to

focus on cases arising from state capture

revelations was formed. In May, Batohi

brought in well-known corruption buster

Hermione Cronjé to lead the new unit.

Like Batohi herself, Cronjé has international

experience and returned to SA to take

up the role. A senior advocate from the

Cape Town Bar, Geoff Budlender, has


Issue 32 | July/August 2019

been appointed as strategic advisor to

this unit. Batohi has re-appointed Willie

Hofmeyr as head of the asset forfeiture

unit after he was side-lined three years

ago by the Zuma squad. I wrote in this

newsletter in April that 2020 will be the

year of prosecutions and I explained why

then. I stick with that call.

Over at the Hawks, both the former head

and acting head have been fired and

replaced by the soft-spoken and highly

regarded general Godfrey Lebeya.

His influence is showing: two captains

and a warrant officer from the Hawks

were arrested for bribes. In Durban,

both the mayor and a councillor have

been arrested by the Hawks and have

appeared in court (with the usual tweet

from Zuma supporting the mayor and

with her supporters protesting outside the

courthouse). Two senior officials from the

Durban Metro were also arrested. A mayor

of Newcastle was arrested for an alleged

(political) murder; as was a former mayor

of Endumeni for alleged conspiracy to

murder. Not bad for an erstwhile Zuma

and current ANC stronghold. In the Free

State, nine civil servants and a director of

a company were arrested and charged

– one for interfering with the work of

the Hawks. In Mpumalanga, a former

local ANC chief whip was arrested on

corruption and fraud. The Hawks are

clearly at work. In Limpopo, the VBS

report claimed the scalps of five mayors

who resigned, four more who were fired

and three who were suspended. In North

West, three mayors resigned, one was

suspended and three have taken legal

advice to try and avoid dismissal. Public

opinion counts – especially in the run-up

to an election.

At SAPS, a deputy-commissioner has been

fired and six officers of general or brigadier

rank have been charged. As recent as last

week, seven junior officers were arrested

for selling confiscated goods back to

hawkers. In a significant ruling, one of the

“untouchables”, former head of Crime

Intelligence Richard Mdluli, was convicted

in July on several charges for offences

committed twenty years ago in 1999. The

wheels of justice turn slowly, but they turn.

(As John Block, the former ANC strongman


in the Northern Cape and Zuma acolyte

also discovered – after many legal

manoeuvres he is now serving a 15-year

jail sentence.)

The ubiquitous SOEs

The SOEs are still burning cash and their

balance sheets are shocking, but on the

ethical front, a lot has happened.

At Eskom, former big bosses Brian Molefe,

Anoj Singh and Matshela Koko are

gone. Molefe has also been pursued by

Solidariteit and must now repay

R10 million to the Eskom pension fund.

365 Eskom managers were subjected to

lifestyle audits, resulting in 44 cases being

referred to the Special Investigating Unit.

More than 1 000 disciplinary cases were

instituted, and 116 employees decided to

resign, including 14 senior executives. Of

25 employees who had “business interest

in suppliers dealing with Eskom” seven

resigned and the rest terminated their

interests. Eskom has seen a serious clean-up.

A year after the notorious Hlaudi

Motsoeneng was dismissed from the SABC,

three of his erstwhile henchmen are gone

too. (The verbose Hlaudi failed with court

challenges to regain his job and then

went on to fail again in his election efforts

to get into Parliament.) In an important

self-initiated report published last week,

compiled by veteran journalist Joe

Thloloe, the broadcaster laid bare political

interference in its editorial policy. Former

minister Faith Muthambi complained she

was “rubbished” in the report... could not

happen to a nicer person. Expect further

fallout from the Thloloe report. A Zuma-

appointed chairman is still in place at the

SABC and the corporation wants a mere

R3 billion to stay afloat, but cleaning up

has certainly taken place.

The PIC saga is still on-going before the

Mpati Commission, but already a new

board is in place, the CEO is gone, and so

are two senior executives. A number are

on suspension. In an important break with

the past, cabinet reversed the practice

of a politician chairing the board. Under

new chair Reuel Khoza’s experienced

leadership and rock-solid integrity, the

PIC will, with a little help from the Mpati

Commission, clean up properly and head

in a new direction.

At SAA, the former Zuma acolyte Dudu

Myeni is gone – in his second stint as

Minister of Finance Pravin Gordhan

desperately tried to get rid of her.

Now Zuma is gone, Myeni is gone, as

are several former senior executives.

Everybody can see how the once-mighty

have fallen. Now there is only the small

matter of staying afloat. At Transnet, five

executives, including the CEO, departed

and eight more are on suspension. At

Denel, the CEO, finance chief and chair

are all gone. Both organisations have new

boards. It may not be enough to save them

financially, especially Denel, but action

has been taken against weak ethics.



Cabinet

Perhaps the biggest clean up took place

in cabinet. Ramaphosa inherited a

cabinet of 36 ministers. There are now 28.

At most five of those can be described

as Zuma- or Magashule-supporting (and

even some of those will deny it). 40

government departments have been

reduced to 35. For all the publicity that

was given to erstwhile Zuma ministers who

were appointed chairs of parliamentary

committees, the numbers speak for

themselves. There are 36 committees

in Parliament. Traditionally, the Select

Committee on Public Finance (Scopa)

has an opposition party member as chair.

That is the case again in this parliament.

Of the remaining 35 committee chairs,

11 may be regarded as Zuma- or

Magashule-supporting people. Most of

these are ministers who were kicked out

of cabinet. From a minister to a chair of

a parliamentary committee where every

move is watched by opposition parties…

and now we are asked to believe that

they are paralysing government…?

So What?

• Part of Ramaphoria was the belief

that the bad guys would lose. That is

certainly happening.

• People who were once untouchable

have fallen from grace for all to see.

Some have even been convicted

already. The impunity of the Zuma

years is slowly being reversed.

• The process is not over with the

Zondo Commission still in session and

almost weekly revelations of bad-

guy behaviour.

• Getting convictions in court is very

different from revealing things at

a commission. Despite that many

people have already fallen on their

swords.

• Civil society organisations have

helped in this clean-up and that

speaks volumes for SA’s democratic

activism.

In the next edition we will focus on

the second priority of the Ramaphosa

government – economic renewal

(Act 2).


T R A D E WA R T H E N E W N O R M A L ?

The IMF warned recently that the main

risk factors to the global economy

currently are that further US-China tariffs,

US auto tariffs, or a no-deal Brexit – could

sap confidence, investment and global

growth. It warned that these trade wars

needed to end urgently, in order to boost

confidence, investment and growth.

So, therefore, your financial fate over the

next couple of years lies largely in the

hands of two people, Boris Johnson and

Donald Trump.

In terms of Brexit, a no-deal exit would

be ‘an event’ in global financial markets,

which would scare foreign investors and

result in emerging markets, including South

Africa, being punished. Not to mention,

the UK and Europe are significant trading

partners of ours, plus the UK is responsible

for approximately a third of our foreign

direct investment inflows.

Boris, however, does not have an easy

road ahead. He must do in three months

what Teresa May couldn’t achieve in

three years. Although committed to

leaving on 31 October without a deal if

necessary, Boris realises this route carries

significant risk and could be ‘bumpy’.

Ideally, he would like to reach an

agreement with the EU, but given that

the previous deal failed repeatedly in

parliament, he needs a new, improved

deal. The problem is, the Europeans told

Teresa May months ago that it’s not up for

renegotiation, and they’re sticking to that.

So Boris finds himself leading a

government committed to a ‘no-deal’

exit, should the Europeans refuse to

negotiate a new deal (which they may

well do). He is up against a parliament

vehemently opposed to a ‘no-deal’ Brexit,

and the Tories have a parliamentary

majority of one. This is very likely to result

in decision-making paralysis, followed

quite possibly by a vote of no confidence

and fresh UK elections. Boris will obviously

be hoping for a stronger mandate, but

anything, including a Labour/Lib Dem

coalition victory, however unlikely, is

possible.

By Jeremy Gardiner

Brexit aside, I believe tariff wars are

something we’re going to have to get

used to, because that’s how Trump

fights. The Mexicans are safe (for now),

India is under pressure, and Europe,

particularly the automobile industry, is

next. Just as markets were enjoying a

pause in the conflict over the past month,

President Trump, completely disregarding

the ongoing efforts of his negotiators,

implemented more tariffs, by tweet.

Investors panicked – again! – and world

markets including emerging markets (and

SA), suffered.

I’ve written before that he has a strategy,

that analysts believe that he is deliberately

stoking global tensions in order to get

the Chinese to stimulate more and the

US Federal Reserve to cut more. Then,

when he eventually does a deal with

the Chinese, the US economy and stock

markets will crescendo, peaking just in

time for the US elections. The result? A

booming economy should ensure his

re-election next year. Apparently, that’s

how the US works. A strong economy

equals almost certain re-election for

an incumbent president. It seems the

economy is all that counts, all other

negativity is just ‘noise’.

I’ve been told that this theory gives too

much credit to Trump, that he is irrational

and acts impulsively with little thought

of the consequences. If this is the case,

we better hold on tight because there’s

a very real chance that the global

economy is going into recession.

The risk to his strategy is that the Chinese

understand how much he needs a

strong economy for re-election and may

well play hardball in order to try and

strike a better deal with a Democrat

president. Also, Jerome Powell, Chair of

the US Federal Reserve, is not yielding to

Trump’s pressure to accelerate rate cuts,

infuriating Trump and unsettling markets.

I’m pretty sure his strategy is to get

re-elected. If that is the case, and he

manages to artificially stimulate the US

economy (and therefore also the global

economy), the result will be a ‘risk-on’

environment which would be very positive

for emerging markets, including SA.

And my goodness, at the moment we

need every bit of help we can get.




For the period ended June 2019

The following market review looks at

the performance over the past quarter

of local and global asset classes and

currencies, and puts this into perspective

relative to longer-term performance.

The purpose of this review is to provide

a context in which the performance of

the investment solutions in which you are

invested can be assessed.

Note: All quarterly data is quoted in

US dollar terms unless otherwise stated.

International

Global markets bounced back strongly

after the sell-off in May despite many of

the market’s pressing issues remaining

unresolved. Firstly, while the trade

negotiations between the US and China

are back on track it will take compromise

from both sides to reach an agreement.

Geopolitical risks rose after UK Prime

Minister Theresa May resigned and Brexit

hardliner Boris Johnson emerged as

Tory leadership front runner, while Iran’s

downing of a US surveillance drone,

suspected attacks on oil tankers in the

Strait of Hormuz and announcement of

uranium enrichment exceeding previously

agreed limits tested Trump’s appetite for

conflict.

The global economy is currently going

through a synchronised slowdown that

has seen developed central banks

pivot towards more accommodative

monetary policy. This more dovish stance

by developed central banks has meant

that emerging markets may be able to

also cut rates. Given the limited room

for the conventional monetary policy,

we may yet see central banks turn more

aggressively toward fiscal policy, in an

attempt to avoid a recession in the years

ahead. Demand for sovereign debt

soared, with Austria successfully placing

a 100-year bond at a 1.1% yield and an

astounding $12 trillion of government debt

now negative yielding. The US yield curve

inverted, with 10-year yields lower than

3-month yields, which suggests a weaker

growth outlook and commensurately

E C O N O M I C & M A R K E T O V E R V I E WQ U A RT E R 2 , 2 0 1 9



lower policy rates. The Reserve Bank of

Australia (RBA) has enacted interest rate

cuts in two sequential meetings for the first

time in seven years.

The S&P 500 Index advanced 6.9% in June,

being one of the strongest rebounds seen

in recent times, driven mainly, by the

change on interest rate policy from the

US Fed. For the quarter, global equities

returned 3.6% in USD while global bonds

had a fairly similar return of 3.3% in USD.

The strengthening of the Rand resulted

in slightly diluted returns for South African

investors. Much has been said about the

demise of the current global equity bull

market that, by many measures, is very

mature. Having been in place for over a

decade, it will rank as one of the longest

in history. However, the excesses that

normally signal the end of the cycle are

not that apparent. But earnings have

already enjoyed a very strong advance

over the last number of years and are

looking like they are in top-of-cycle range.

It is unlikely that earnings growth on its

own can sustain further equity gains.

Local

In June the JSE All Share Index produced

a total return of 4.8%, having fallen by

4.8% in May. This brings the year-to-

date return of the ALSI to 12.2%, while

the one year return still lags at 4.4% due

to the particularly weak Q4 2018. All

sectors contributed to the performance

in June, although the Financial sector

and the Resource sector outperformed

the Industrial sector by 3% and 2%

respectively. The more broadly-based

SWIX experienced a more pedestrian

advance but was still up 3.1% in the

month and by 9.0% year-to-date. For the

quarter, the ALSI had a return of 3.9% while

domestic property had a return of 4.5%.

Bonds too enjoyed a good month with

yields at the long end softening by about

20bp. Real yields remain high by historical

standards. The Property index continues

to lag, being barely in positive territory

year-to-date. As the sector generally lags

the economy, distribution growth is likely

to disappoint for several years to come.

Inflation should rise at the margin in the

coming months as petrol, water and

electricity prices accelerate.

Poor consumption expenditure by

households and increasing competition

by retailers for consumers’ wallets should

constrain inflation to the midpoint of

the 3-6% inflation target, leaving further

scope for future rate cuts. The All Bond

Index had a return of 3.7% for the

quarter, outperforming domestic cash

comfortably.

Both gold and PGM’s had a strong June

and no doubt was a significant factor

behind the good performance from the


Resource sector. Equity returns could

have been even better were it not for the

currency strengthening by 3.5% against

the US$. The gold price breached the

1400 $/oz mark for the first time in six years

and the prices of the entire PGM basket

rose, possibly indicating a change in

sentiment regarding precious metals that

could signal a more sustained move.

The SA economy is currently trapped in a

cycle of low economic growth and high

unemployment that, if not arrested soon,

could result in a major crisis. The current

trajectory is leading to greater levels of

poverty and inequality that increase the

probability of economic instability.

Recent statistics on credit growth and

retail sales suggest that the currently

employed SA consumers are at their limits

and are unable to meaningfully take on

more debt.

Spending on badly needed infrastructure

is also declining as seen in the demise of

the local construction industry. Barring an

export-led windfall the only sustainable

path to higher economic prosperity is to

increase employment, bringing in more

people into the consumer economy.

Despite President Ramaphosa’s positive

message at the State of the Nation

Address, we have yet to see decisive

action taken on critical structural reforms

that are necessary to move us out of the

low growth environment.

In May 2019, SA manufacturing

production declined by a disappointing

-1.5%m/m, after growing by a solid

2.5%m/m in April 2019. The market was

expecting production to decline by a

more modest -0.6%m/m. In the first quarter

of 2019, manufacturing activity recorded

a substantial drop of -2.1%q/q, which

obviously hurt the Q1 2019 estimate of SA

GDP growth. At this stage, the Q2 2019

performance is likely to record positive

growth, despite the larger than expected

decline in May. This will help South Africa

avoid falling back into a technical

recession. (Manufacturing activity

comprises about 13% of the SA economy).

The ongoing weakness in SA PMI data

is a concern, since it suggests that the

underlying trend in SA manufacturing

remains extremely weak.

Source: 2IP, I-Net Bridge, BER, RMB

Global Markets, Bloomberg, Stanlib Asset

Management



The tables below provide a review of key local and international investment indicators for the past quarter, as well as over longer periods.

(Performance over periods to 30 June 2019)

South African Asset Classes (ZAR)

Asset class Indicator 3 months 1 year 3 years 5 years LT-average*

Equities All Share Index 3.9% 4.4% 6.9% 5.8% 12.3%

Shareholder Weighted Index 2.9% 1.2% 4.3% 5.4%

Property Listed Property Index 4.5% 0.8% -2.3% 5.6% 11.8%

Bonds All Bond Index 3.7% 11.5% 9.9% 8.6% 6.9%

Cash STeFI Call 1.6% 6.6% 6.8% 6.4% 5.9%

Inflation CPI (one month in arrear) 1.7% 4.5% 4.8% 5.0% 5.7%

Source: Morningstar

Global Asset Classes ($)

(Performance over periods to 30 June 2019)

Asset class Indicator 3 months 1 year 3 years 5 years LT-average*

Equities MSCI AC World Index 3.8% 6.3% 12.2% 6.7% 8.5%

Property FTSE EPRA/NAREIT

Developed Property Index 0.2% 8.6% 5.5% 5.8% 6.7%

Bonds Barclays Global Bond Index 3.3% 5.8% 1.6% 1.2% 4.6%

Cash US 3-month deposits 0.6% 2.5% 1.6% 1.1% 4.3%

Inflation US CPI (one month in arrear) 1.3% 1.8% 2.2% 1.5% 3.0%

Source: Morningstar

Currencies

(Movements over periods to 30 June 2019)

Currency Value at month-end 3 months 1 year 3 years 5 years LT-average*

Rand / Dollar 14.10 2.3% -2.8% 1.3% -5.5% -5.5%

Rand / Euro 17.95 4.7% 0.8% 2.9% 0.3% -4.1%

Rand / Sterling 16.06 0.8% -0.3% 0.4% -1.9% -5.5%

Source: Morningstar

* Updated annually from 1900, or longest available period Returns for periods longer than 12 months are annualised.

M A R K E T O V E R V I E WQ U A RT E R 2 , 2 0 1 9

Documents

Issue 32...Durban Metro were also arrested. A mayor of Newcastle was arrested for an alleged (political) murder; as was a former mayor of Endumeni for alleged conspiracy to murder