Mudiwa Gavaza, host of Business Day Spotlight, talks with Andrew Duvenage, MD of NFB Private Wealth Management, about the possible effect of strikes on investor sentiment towards SA.

The discussion focuses on the potential impact of strikes on investment sentiment; the attitude of investors - both in and out of SA; the country’s current economic trajectory; NFB’s business model and an outlook for the rest of the year.

Listen to the podcast below or review the transcript for more detail.

This podcast was published online by Business Day spotlight. Subsequently Andrew was quoted by Business Report Journalist, Siphelele Dludla, in articles: "Fragile economy can’t afford more strikes, warn analysts", published online by iol, and printed in the Sunday Insider supplement in weekend titles - Sunday Weekend Argus, Sunday Independent and Sunday Tribune "Eskom wage talks could threaten electricity supply and knock economy", published online by iol and printed in Business Report.

TRANSCRIPT

Mudiwa Gavaza 0:00

Good morning, good afternoon and good evening to all our listeners. This is the business day spotlight your destination for African business Made Simple. My name is Mudiwa Gavaza and for today we are talking about getting South Africa back on to its economic growth path, clawing back the losses of the last year or so. Given what has been happening with the pandemic and the subsequent lockdowns, but more importantly, how do we get South Africa back to a sustainable growth path. Today we are going to be talking to someone who's no stranger to our platform that is, Andrew Duvenage is the managing director at NFB. It's actually quite interesting what the pandemic has done, because previously, we've had Andrew on the podcast, but it was in studio, but now everything seems to be happening remotely.

Andrew & Mudiwa 0:59

Andrew, greetings to you. Good morning. Thanks for having me again. Thank you so much for being with us. Now for today, we've already outlined the fact that we want to talk about getting South Africa back onto that growth path. But for today, the important part is discussing what's actually happening in terms of strike season, we get into this time of the year. And for today, we're trying to see how can or will that possibly impact investment into South Africa, whether locally or internationally. So that's the conversation that we are going to be having for today. But as we begin Andrew, perhaps just getting a sense of NFB, the business itself what you guys are up to and how operations have been affected by COVID-19? The business itself is a private wealth management business that runs somewhere around 35 billion rands worth of clients’ money. We primarily focus on private individuals, their trusts, companies, and are very much investment focus with asset management and a stock broking business underneath it.

Andrew 2:12

It's been a dramatic 15 months, is the results that we've seen for clients and investors have seen on aggregate have being good, but it certainly hasn't been a straight-line affair and certainly in my 20-year career, we've never seen a V shaped bounce like this, it's difficult at these market levels to think back to March when markets globally were off by 30 to 50%, depending on where you were, fast forward, the short space of eight or nine months and markets were back at their pre pandemic levels. And Fast Forward another three or four months and markets are significantly higher than those levels. So, it's been an absolutely extraordinary period of time. It's been difficult for investors, because naturally when markets sold off, the fear emotion came right to the fore understandably, and one thinks that when things when markets are selling off like they did is the natural reaction is to try and get out and sit on the side-lines. But the challenge for investors was if you did that, and you missed what was a very, very quick recovery is you could have capitalized significant losses and not benefited from the bounce, which we saw. So, all in all, while investors who stayed committed are in good positions at the moment is it was certainly an interesting year, and certainly an emotional one from both an advice perspective, as well as from a client perspective.

Andrew & Mudiwa 3:48

Given everything that you've just said, from a private wealth point of view, and I like the fact that you've been able to articulate to us what's happened over the last year and the type of assets that you guys have under management. What have you seen to be the attitude of the investors whose money you guys are taking care of, because like you said, those that held on and didn't sell off too quickly, have been able to realize some of the benefits of the bounce back that you're talking about, but those that were a bit too fidgety might have lost out on all of those things? So given that context, what is the current sentiment or mood from the investors that you guys are liaising with or working with at the moment.

Andrew 5:00

Let me talk more generally, as opposed to our specific clients. But I think in markets, the thing that worries me at the moment is we in that stage of a market where the focus is shifting almost myopically towards returns, and risk is being ignored. I think at these levels there certainly is risk in markets, we know and we think that interest rates will stay low for an extended period of time globally, and economic growth is coming back and earnings will come back into markets, which should support price levels to an extent. But I don't think anybody could deny the fact that this market is fraught with risk. And as I started off is when you see a market sell off, you often see that fear emotion come towards the fore. And that's something that you need to try and get your clients and investors to try and ignore to an extent is, don't be fearful, stick to your investment strategies, have patience, and try and ride out the volatility. But conversely, on the other side of the coin, is when you have a situation like this, where markets are so buoyant, is one needs to be very careful that almost that greed emotion now doesn't come to the fore and take over, where people disregard risk, where people disregard the potential for loss and people blindly stay in investments where potentially they should be looking at taking profit or exercising some caution. It's also a very difficult environment for investors when it comes to new money. What I mean by that is at these elevated market levels, what are your options with new money is, if you look at a South African investor is cash is giving you a sub inflationary return, certainly after tax, interest rates will probably not go lower from here, so they’ll only rise from here, which is typically not good for bonds or for property. Equity is at elevated levels, so certainly not an easy environment for investors, we're just trying to say to people is you need to be cognizant of risk, you need to be cognizant of time horizon, and you need to make sure that the strategy is appropriate for your risk profile, and for your ability to absorb risk. The challenge often is that in an environment like this where you hear of asset classes doing so fantastically well, double and triple digit returns on specific shares or asset classes themselves, is once again, as you can lose focus on risk. And that is often the most dangerous time in markets.

Mudiwa 7:24

And from what you can see, could you maybe talk to us about what you're seeing, because the strike action, we're definitely about to touch on it, but before that, I guess maybe contrasting the difference in attitudes about investment between foreign investors and the local ones.

Andrew 7:45

A lot of the appetite that we're seeing at the moment is for foreign investment. There are there still significant concerns around the South African picture. What we have seen almost counter intuitively is despite these issues, is the Rand has strengthened tremendously. I think if you if you'd asked me in, call it April or May of last year, when the Rand was sitting at around 19 to the Dollar, would we be seeing levels of low 14s? I don't think I would have believed that that would be the case. And so, with the Rand at this level, there certainly is a lot of appetite for global investment from local investors. And I think that makes sense and it is part of our advice, is we don't believe that South Africa is without hope, but there certainly is a lot of risk in the local picture and as such diversification is obviously key. When it comes to foreign investors themselves, the appetite towards South African investment, I think is fairly limited at the moment and we'll come to those reasons in a second. But certainly, the levels of the Rand at the moment do point towards opportunities to look at global diversification and risk mitigation.

Mudiwa 8:57

So, against that backdrop, the strengthening of the Rand, the interest rates that you spoke about just now, all of those different considerations, where does strike action or any labour related action actually fit into the spectrum when investors are thinking about the approach for South Africa? I'm guessing for foreign investors, it's their attitude towards bringing money into South Africa and then for local investors, it's a decision of whether to keep their money in South Africa versus sending it offshore.

Andrew 9:34

So strike season as you have so mystically called, is clearly a challenge because the thing that South Africa lacks at the moment is investor confidence. If you look at pretty much any of the confidence measures that we've seen recently come out, is investment investor confidence and business confidence at the moment is virtually at all-time lows. I think the last time you've tracked this type of confidence level was probably in the mid-80s, which was when apartheid was in its death knell. So the fact that we are at those levels of business confidence is a massively troubling statistic, and strike speed into that is investors, whether its local investors keeping their money here, or foreign investors bringing their money into South Africa is the thing that will improve confidence is a stable platform is South Africa being able to generate economic growth going forward, which really is the crux of the matter and we'll talk to that in a second. Strike action doesn't give confidence to any investors and clearly, if we can't ratchet up that confidence level, it's unlikely that you're going to find significant commitment of capital from global investors, or from local investors into investment projects. And that's exactly what South Africa needs to generate growth going forward. The challenge, as I said, and maybe we can touch on it now for South Africa really is a growth issue is we looked at minister Mboweni’s budget in March and if you looked at the budget in isolation, it was an excellent budget in that it addressed the issues that needed to be addressed. He didn't focus on trying to increase tax rates and we think that we're beyond that point, you're not going to tax your way out of this problem. He was looking at reigning in public expenditure, or public service expenditure and this is where a lot of the strike challenge will come from is that he's focusing on no increases in the public service sector for it looks like probably four years would be the previous year and three going forward and I think that's going to be a very bitter pill to swallow and it's going to be a very contentious issue. And then similarly, he was looking at, in general, bringing in expenditure around social wages and the like, however, those initiatives will help stabilise the debt position that the country has but unfortunately, it's a marginal sort of play, it's not going to bring its the debt position back significantly. The thing that will bring the debt position back significantly, is stabilising your debt trajectory, and then seeing economic growth and its economic growth which really the challenge is is, even before COVID is South African economic growth was lethargic at best, and I think maybe that's being generous, and certainly well below our peers in emerging markets in Sub Saharan Africa, and even in the rest of the world, is we were lagging significantly. Then if we fast forward is we had the COVID pandemic hit the world, but it hit South Africa worse than in most places. If you looked at 2020, global growth was it was at a negative three and a half percent number. On aggregate, South Africa was at minus seven. If you look at emerging markets, emerging markets took a minus 2% hit, South Africa minus seven, which means that we had a bigger impact from COVID than the rest of the world in terms of economic growth. But then the concerning thing is going forward, if you look at IMF for forecasts for the next two or three years, is South Africa is going to lag global growth. Global growth will roll back 6%, globally, this year, four and a half percent next year, where South Africa is looking at 3.1% then 2%. According to minister Mboweni below 2% the year there after, and that really is the fundamental challenge that we're going to sit with. Strikes are not going to help with that because if you have massive impasse between the public service sector and government, or inside the private sector, with the unions really flexing their muscles and demanding higher levels of increases, is that with further dent growth, further dent confidence, and that's not going to be good for South Africa, in attracting investment, which is what we desperately need at the moment.

Mudiwa 14:09

There's a lot that you've just said, and a lot of evidence that you've given to us, especially based around Minister Tito Mboweni’s budget and how all of that signals where the country actually is, first in terms of its own growth trajectory and within the global economy. And I feel like there's two big questions that didn't come up. And the first one is, where do you think the real strife lies? Because you've just mentioned that issue of the public sector wage bill and those contentions around no increases for the next couple of years, etc. So, firstly, the question that comes up, then is, do you see there being more of an issue on the public sector side or on the private sector side, because a strike action is an issue on both sides. And then the second one then becomes, from what you can see then, what makes our current situation any different from any other year, because as you said earlier on this is euphemistically called strike season and this because there's always been that tension between labour and government and the private sector in South Africa. So, despite the fact that there is a pandemic going on, if we haven't really been able to get labour relations right, or to a point where there's peaceful resolution to all of these labour issues, what makes us think that 2021 will be the year that we are suddenly able to just make everything flow smoothly.

Andrew 15:35

So let's start with the labour question first, if I may, where you say what's the difference. And the difference for me here is that we have this issue recur year after year, or in cycles. But this year it's so important because first of all, is we're in this recovery phase from the COVID crisis, we're seeing the initial bounce, which was to be expected as the economy opens up, as pent-up demand starts getting released, as you see the benefit of strong commodity prices and a strengthening of the rand. However, that initial momentum which we get is only going to be able to be sustained, if the economy can really start to grow and start to hit its straps. So, it's almost that we're in the bounce now. What is it that will take that bounce forward, and the risk that we have of strike season, as we call it, taking the wind out of the sails is a very significant risk, first of all. Second of all, under that point, the other challenge that we sit with is the debt picture. The debt picture is a fundamental issue that South Africa faces, some might say, an existential risk that we face at the moment because if that debt picture is not managed, we are on a trip towards the IMF or another funding agency of some sort, and that will have severe and significant ramifications for this country. So, the challenge that we sit with coming back to Minister Mboweni’s budget, is he has almost sort of nailed his flag to the mast around cost containment. And if they aren't able to get the public service issue, correctly managed, is it blows that budget out of the water, and therefore that debt level will continue to increase. The challenge that we sit with with the debt issue is if you rewind to 2010 somewhere or post the great financial crisis, is government debt to GDP was at quarter 35%. We currently sit with government debt to GDP, which is approaching 85% and it will continue to go north from there. So, the government has said that they believe that it will stabilise, and that we're going to contain costs. However, this strike issue is going to be a fundamental challenge is because if they don't get that right, and they're unable to manage that, is that immediately that budget is going to be under threat and that debt trajectory continues, and once you start going into the 90s and 100% debt to GDP, especially in a country with systemically higher interest rates than the rest of the world, you're in deep trouble. So, I think it's massively important. Then your first question was around the public versus the private sector is, for me, the public sector is massively far more important, given what I just said, is that given the challenge that South Africa faces is that we are at the tipping point of a debt crisis and we need to manage that date back quickly. We're not going to be able to do that unless the budget, which was produced, which as I said, I think was a good budget if you took it at face value, but unless that budget can actually be implemented, it's going to be very difficult for us and key to that budget is the public service sector wage bill. Whether it's possible for Minister Mboweni and for the ministers that are involved in the space to be able to negotiate three or four consecutive years of a zero increase in the public service sector remains to be seen, and in fairness to public servants is that's a very bitter pill to swallow and you can't put all of the ills that are or all of the faults at the at the feet of the public servants, a lot of those relate to mismanagement, poor allocation of capital, corruption and that's not the average person who's affected by these wage increases, that's not their fault. So, it's a very tricky thing and a very difficult thing to manage and I think it's going to be a big challenge to this budget.

Mudiwa 19:46

You know, as you're talking, the other thing that then comes to one's mind, whether we're talking on the public sector side or on the private sector side is, given the number of jobs that were lost over the last year, I think 2 million plus jobs that were lost over that time. One could realistically see a stance by organisations, whether public or private, a stance to say, well, why are we striking? In this current economy you should be thankful that you even have a job. Do you see anyone placing such an argument on the table? Because I think that’s the other thing as well, to say that given everything that there is, one might have expected that strike season this year might go a little bit differently, and simply because people have lost so many jobs, etc. Obviously, we're not labour experts, but still.

Andrew 20:44

No, we aren't but I think what you're saying is totally rational and one would hope for that is the situation that we find ourselves in from a fiscal perspective as a country, if it is not correctly managed and it heads towards a debt crisis that absolutely spirals out of control, is the consequences of that will be austerity, it will be severe, and certainly there will be ramifications and job losses that come from that. So, you hope the powers that be and the leadership, whether it's in the unions, or inside government, is just bear this in mind, because firstly, as you say, in the context of a post pandemic world is having a job firstly, is a good thing and secondly is we need to look at the concept of sustainability. And if that sustainability is not taken into account, and let's say the union's push through for significantly higher than inflationary increases, which there simply is not enough money for. That is the reality. Whatever one's stance is or politics is, the reality is we've  run out of runway in terms of money. It just does not exist anymore and if the position is too aggressive, is unfortunately the ramifications of that will be felt down the road. So, I absolutely agree with you, where it lands up in the end, one isn't sure. And we hope that they are creative ways that they can try and get it to a point where the net or the aggregate wage increase is nil. Minister Mboweni spoke about attrition, and not replacing certain jobs as people retires, those type of things. But unfortunately, I don't think on aggregate that would be enough to get this over the line and to have wage increases. So I think you do need rational heads for people to sit down and say we've got to look at the bigger picture because if we don't consider that bigger picture, and if we sort of once again myopically focused just on our narrow interests, is the ramifications could be severe for everyone, and hopefully, that sits inside the leadership's minds.

Mudiwa 22:47

Before we round up Andrew, I just want to get a sense from you, because we've just spoken about these job losses and there is that potential strike action, etc. But just on the side of economic strain and job losses, coming back to your business as a private wealth manager, how have you seen some of those trends because as you as you highlighted at the beginning there was, there was a selloff in the market, but at the same time at different runs of the of the society, people that are well off, people that are not so well off, a lot of people took strain over this time. So, did you see people I guess, pulling out their money out of investments, just so that they can make ends meet? From your point of view or would you say private wealth clients were sort of insulated in a different way?

Andrew 23:43

Yes, I think generally if you look at our specific client base is you find that a lot of people have got good planning around their portfolios and their financial well-being. And part of that planning comes planning around contingencies is if there is a situation where one was retrenched or a business needed to shut down or whatever it is, is you should have almost a pillar inside your portfolio that provides for those periods of time. And fortunately, we found that that most investors that was in place, and we didn't find, while there were the odd example is generally you didn't find people pulling out of their portfolios to meet their monthly obligations. But in saying that undeniably is you did see the impact of certain people being retrenched, of people shutting down businesses. So certainly you could see that it was there but fortunately the recovery was relatively swift. The other thing is, once again, and you point to it, you're absolutely correct is that there are almost different runs of society and of the economy, and I suppose one of the travesties with this whole pandemic is that certain industries and certain businesses are just far better suited for remote work that they could continue so much like we're having a conversation here, and we're not in each other's presence, is there are certain businesses that can continue to interface with their clients and continue to do what they did on a remote basis and those businesses were less affected is I think the people, unfortunately that were hardest hit, were probably in jobs and in positions where they needed to be physically present and I think you would have seen the impact there. But once again, what we do as a business is by structuring people's portfolios, you do need to realise that over time, there will always be events and issues that will come around. Hopefully, they never anything as dramatic as the COVID pandemic, which we saw, but there are times where people are unable to work for whatever reasons whether they might be laid off, change jobs, whatever it might be and that should be part of your planning and fortunately that was in place for most of our clients. But certainly, you can see the effects inside the economy, and I suppose the big question post the initial bounce back where you have this momentum in the economy is what are the residual effects in terms of unemployment? What jobs will not come into existence again? So, people who were initially laid off, do they get pulled back into the economy as it starts to grow again? Or is there a higher level of residual unemployment across the workforce? Our fear is that that will be the case, and it will probably take let's say 18 months until you start seeing that, and it's really that residual effect and how government deals with that is once the initial momentum starts to wane, as the economy opens up, is, how does the economy cope with that and how does it generate momentum going forward? You know, you look at things like tax collection is, how many years will it take us to get back to the level of tax collection pre pandemic, and it'll probably take three or four years, the quicker we can get back to that point, the better for the economy and the same applies with economic growth and that's really what we're going to be watching with a lot of interest. And coming back to the topic that we're talking about, is that’s exactly what local and foreign investors will be focused on is the economic growth picture going to change, is the government going to be able to implement structural reforms and I know that that's used as a buzzword, but are they going to be able to focus on things like regulation, on things like policy certainty on things like implementation and execution, on accessing private sector capital to help them where they simply don't have the funds to drive forward infrastructure projects and the like? Will we see tax reform will we see a more stable power grid that will give big investors the confidence to put money into bricks and mortar in this country and be confident that they'll have a stable labour supply and a stable power supply so that they can do their thing and have a decent return on investment and those will really be all of the challenges that government needs to face. But I'll end off by saying that we unfortunately, don't have the luxury of runways. 2010, you had low debt to GDP and government had the opportunity to use debt judiciously and to use that debt to try and get the economy to grow. Unfortunately, we now know with the benefit of hindsight that there was so much malfeasance and corruption and state capture that the debt level shot up, but we probably didn't see the benefit of the use of that debt correctly. Now, we sit in a position where we just don't have that runway anymore. So, government needs to act and needs to act fast and investors, both local and global will be looking and seeing what is the progress on those types of things or is it just sort of buzzwords and promises but no implementation and execution.

Mudiwa 28:51

So, Andrew, as we round up the discussion bringing everything that we've spoken about today, together, the attitude of investors in country, out of country, that decision to keep your money in South Africa versus sending it offshore, and labour, its effect on growth and all of these issues. Have you actually heard any either murmurs, mutterings amongst investors about the potential impact that strike action could have? Or are you sort of, at the moment sounding the alarm on something that could potentially happen?

Andrew 29:30

I think sounding the alarm more than anything else but I think we would be naive to think that that both local and foreign capital is not closely watching strike season as one of the risks, and as we have discussed through the conversation is it's not the only risk, there are a number of things, but once again, they need to see all if not most of those things being addressed relatively quickly, and in a way that gives confidence that if money is invested and committed to projects, committed to long term investment, is that it can be done with a high level of confidence and stability. And I think that is the challenge. Strike season is just one of the pieces of the puzzle, but certainly if it does go the direction where it is chaotic, and if it does go to the direction where blows minister Mboweni’s budget out of the water and takes away from his credibility in terms of him saying, this is what we're going to do and the outcome of wage negotiations is something totally different to that is if those things do go the wrong way, is unfortunately, that business confidence which we referenced earlier in the conversation is not going to be helped by that. And in the absence of business confidence is you can expect the capital votes with its feet, it basically goes in a direction where it thinks it has certainty and global capital, unfortunately, has multiple options, South Africa is not the only option it has available to itself. So, these are the strike season is one of the things that governments going to have to really focus on and the private sector to try and minimize the disruption because we are at such a fragile stage of our recovery right now that, that if you have something that really destabilises that it's not going to be good for anyone, including those who are striking.

Mudiwa 31:10

So that's been it we’re with the Andrew Duvenage, he is the managing director at NFB, they are a private wealth manager giving us some insight and sounding the alarm on the potential destabilising effect that labour relations or any labour action might have in the in this strike season, on the country's economic and growth path. Just talking about what all of that could mean for a country that's trying to claw back the losses of the pandemic to recover that and then get back to a stage where we can actually start growing again. And he's saying that anything that could destabilise that movement has the potential to either scare off local investors who want to then send their money offshore, or to scare off global investors, especially who have a lot of options available to them in terms of the type of countries and industries that they can invest in. I like what he says at the end when he says that capital votes with its feet, and basically just letting us know that at the end of the day, as a South Africa, South Africa is competing for all of these investment dollars from around the world. So, anything that can put any negative spin on investment might have a detrimental effect overall. So that's been Andrew. Thank you so much, hoping to have you again, in the next couple of months.

Andrew 32:40

I look forward to it and thanks very much for your time today, all the best.

Mudiwa 32:49

It's always good to see and hear people sounding the alarm about some of the potential issues that could be risks for the country. And this was a very fascinating discussion with Andrew, just around what's happening, or what could happen with the strike action and the type of dampening effect it could have on South Africa's investments. So really good having that chat. I think what's important going forward is addressing some of these issues is like what we spoke about earlier on to say that some of these issues, some of the strife that happens between labour, organised labour and private companies, and also government, these are long standing issues and it would be naive for us to think that just because there is a pandemic in place, that we're suddenly going to be able to just get over some of these stumbling blocks, because there's a lot of legacy issues that are involved here. At the same time it's also just making sure that you know, people align on some of these issues, just so that we can minimise the impact that strike action could have on that perception, because if at least the country and its various industries and companies etc, are able to demonstrate potentially higher returns or some type of stability, that then we will see more investment dollars come to South Africa or staying in South Africa. More than anything else it's just that fact of South Africa is competing with other parts of the world, other industries are the companies, places where those with capital can actually allocate that capital, so anything that we can do, as a country to just make it look more attractive, will work for the betterment of the country. And then the last part, when it comes to all of this, is looking at what labour action how labour action is going to change as a result of the pandemic. Does the pandemic now work to increase the tension that organised labour has with the government and also private sector players? Because the cost of living, things have really been hard so are we going to likely see unions or workers saying that we are demanding more, or is there going to be a conciliatory tone struck to say that everyone is going through this downturn at the moment. So we're going to give each other some room to breathe on some of these points. So all of those things are going to make for an interesting strike season ahead, and we just hope that at the end of the day people do come to the table, find ways to resolve issues so that the country can actually claw back those losses and recover once again and go back to growing economically.

Mudiwa 35:38

So that's been it for this edition of the Business Day spotlight. Remember that you can find our latest podcastS on BusinessLive that's under the podcast Business Day spotlight tab, on Twitter with hashtag BD spotlight and remember that you can review and subscribe for free on iono.fm, Spotify, Apple podcast, Google podcasts, pocket casts wherever you choose to get your pods casted. Thank you to our amazing team. Our producer is Paige Mola. I’m Mudiwa Gavaza of the Business Day and Financial Mail and this has been another edition of the Business Day spotlight which is a multimedia live production. So, for myself and the rest of the team. It is Good evening. Good afternoon and good morning.