Special report

New ANC leader – too close to call

In three days, the fiercely contested ANC elective conference will begin. On 5 December, ANC branch nominations confirmed that the leading two candidates for the ANC presidency are and Nkosazana Dlamini-Zuma. More than 5 000 delegates will cast their votes at the 54th ANC National Conference at the Nasrec Expo Centre in from 16 to 20 December. The current leadership race is more closely contested than both the 2007 race when triumphed over , and the Mangaung 2012 race when Zuma beat then deputy Kgalema Motlanthe.

The outcome of the conference will have a significant Behind the scenes at PSG Wealth, our investment impact on the future of all South Africans. It’s thus no experts are working tirelessly to ensure we identify and surprise that all eyes are focused on this event. Investors use any positive investment opportunities, which are do not just wonder what to expect, and what the risks usually formed during the short-term volatility created by might be, but they are also wondering how to mitigate sovereign events, like this conference. any potential risks to their investments.

Nkosazana Dlamini-Zuma with President Jacob Zuma Cyril Ramaphosa

Source: GCIS Source: GCIS

What to expect Regardless of the outcome of this election, certain events • Investors feeling urged to act: as is the case when are inevitable, and you should expect: outcomes are uncertain, investors might be tempted to act just before, during or after an unexpected • Heightened noise around the conference: media sovereign event occurs. coverage is set to increase leading up to the conference, during the conference and after the Over this period, we see a landscape of heightened election results are released. political noise, speculation and the possibility for an unexpected outcome. This is a breeding ground of • Speculation and sensationalism: as media coverage uncertainty which usually leads to an increased risk of increases, so too will conjectures on the outcome, making emotional decisions. which could cause heightened sensationalism. What are the specific risks? • A shock outcome: there are a range of possible The ultimate risk is basing investment decisions, either outcomes, and with no candidate currently to invest or disinvest, on emotions. Often, emotional attracting the majority of branch votes, no specific decisions compromises investors' prospects of reaching outcome is clearly favoured. This sets the scene for their long-term goals. a surprise result either way.

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The insatiable need for certainty and security in the short We will continue to closely assess the potential impact term, ironically often leads to riskier decisions or actions of this event on our client portfolios and will act swiftly over the medium to long term. This is evident in recently if we deem any risks to our clients are unjustifiable. observed investment behaviours, where investments Apart from leaving the professional money managers have become overly conservative as investors are more to navigate this challenging landscape, investors may frequently bombarded by so-called bad news. wonder what else they can do to feel more at ease.

Yet, most major offshore markets are up by more than What else can I do? 30% this year alone. Even the FTSE/JSE All Share Index In addition to keeping emotional decisions in check, (ALSI) has gained more than 20% in the last 12 months. and trusting our professional money managers to best As such, we believe the biggest risks investors face are navigate markets, investors can follow these tips to cope rooted in investor behaviour. with events of this nature: Of course, there are a myriad of risks inherent in capital • Maintain focus on long-term objectives: don’t let markets that investors should be aware of. Fortunately, events which cause short-term uncertainty derail these risks are efficiently managed by the team of your long-term plans. investment professionals you have entrusted your • Maintain a diversified portfolio: this is a tried and savings to. tested approach to manage risk successfully.

What is happening behind the scenes to While it is important to know what to do during times make sure my savings are being looked of sovereign uncertainty, it is just as important to know after? what not to do. PSG Wealth regularly engages with their underlying managers to ensure that potential risks are appropriately What not to do considered and mitigated. In addition, we expect our Don’t wait for sovereign events which might cause managers will exploit any mispricing opportunities uncertainty before you ensure that your portfolio is which could arise over this time. positioned to achieve its long-term goals. Once the appropriate allocations have been made, you can leave it to your portfolio managers to do the heavy lifting.

What the political experts think Other nominations include ‚ Mathews By 5 December ANC party’s branches had largely Phosa‚ ‚ ANC chairperson and National spoken, and its provincial structures had combined Assembly Speaker and ANC treasurer the voting preferences of branch delegates. general Zweli Mkhize.

Read the article from political commentator and The branch votes amount to 3 171 of delegates’ newspaper columnist, Justice Malala, who dissected votes for both candidates, or around 2 000 less than the noise surrounding the conference. the total number of delegates who will vote at the conference. He also explains the importance of branch votes Prof. Susan Booysen from the Wits School of in choosing the next party leader. While some Governance at University of the Witwatersrand says: branch meetings are being contested in court, most branches voted for Ramaphosa as new “While Ramaphosa has a lead, the intricacies of the ANC President. He received 1 862 of all branch votes, election process caution against early celebrations: while Dlamini-Zuma received 1 309. there are black holes that could still devour the advantages he appears to have.”

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She continues to highlight “eight black holes” • Several branches and provincial structures representing the remaining 2000 votes. Booysen have taken their disputes to court. Prominent explains these uncertainties as follows: cases are in KwaZulu-Natal, Free State and the Eastern Cape. The national conference does not • The scores released by the ANC’s Provincial ultimately depend on the provincial structures, General Councils have a “margin of error”. but provincial leaders may have influenced their Due to scores representing branches and not branch-based underlings substantially, or have individual members. But big branches send covered up irregularities that affected whom the more than one delegate and are given more branches nominated. Disputes at the time of weight in the voting. This can substantially conference could exclude some from voting, or change the balance between leading candidates having their votes counted. when the election actually arrives. • The ballots of individual delegates are secret • Mpumalanga province brings its own uncertainty and it’s therefore uncertain to what extent with 736 voting delegates, of which 223 opted branch nominations will convert into matching to vote for unity at branch level. The biggest votes. Prior conference outcomes show that bloc of branches refused to endorse a particular the branch or provincial counts tended to hold: candidate and entered ‘unity’ on nomination delegates are inclined to vote according to their forms, following the instruction of provincial mandates. But political times have changed. leader DD Mabuza. These votes can therefore Beyond the scrutiny of the superiors and away go to either leading candidate should the from branch commissars, delegates might vote delegates cast their vote rather than waste it. according to “conscience”.

• A further uncertainty comes in the exact • Together with individual discretion in the voting number of branches that have missed the act, is the practice of “brown envelopes”, deadline for their branch general meetings. or bribes. Speculation is that bribes could be The deadline for convening these was a week enormously persuasive, going into six-figure ago. Missing the deadline means they have rewards for the right vote. missed the opportunity to be represented at the conference. The ANC, in an interview with the • The final big uncertainty comes via the three author, estimated that between 95% and 98% leagues - for women, youth and veterans - made the target date. Exclusions will lower the and the ANC’s executive structures. The large number of delegates. block of around 90 NEC and top-six votes, for example, could split relatively equally between • A few branches are caught up in disputes. the top candidates. It is this block that has kept Challenges centre on the lack of legality of the Zuma in power through a series of votes in the branch general meetings, some of which have National Executive Committee and interventions been chaotic. Some battled to reach quorums in parliamentary votes. But, they may by now (50% of members had to be present), or they see that the writing on the wall, given that faked quorums. In other instances, officials Zuma will cede his position as head of the party disappeared with meeting materials and in two weeks’ time, and his post as head of memberships lists, attendance registers were state in 2019. signed off-site, or bickering and fist-fights ruled. These branch delegates could still make it into Exact calculations will remain impossible and the the voting booths at the conference if the ANC result is likely only to be known by 17 or 18 December. task teams resolve the disputes. This article first appeared on The Conversation

3 | PAGE PSG Wealth | Special Report - December 2017 th ANC NATIONAL CONFERENCE 54 16 - 20 DECEMBER 2017

Except for debating and adopting new policies, the ANC also elects its president and the national leadership, the National Executive Committee (NEC) consisting of 80 members, at its 5-yearly national conference.

THE DELEGATES

This year the ANC will see over 5000 delegates in attendance. Provinces have been allocated a total of 4 731 delegates for This is about 500 more than at the last conference held in this year’s conference. After adding other blocs within the 2012 at Mangaung. ANC, the NEC and top six, provincial executive committee (PEC) members plus the women’s, youth and veterans’ leagues Delegates from the different branches (provinces), provincial (about 525) the total voting delegates will be close to 5 256. executive committees and leagues attend and cast their votes.

643 BRANCH VOTES 538 736 (223 unity)

409 508

Unity 870 197

Cyril Ramaphosa 648 182

525 = Provincial Executive Committee (PEC) + Leagues Nkosazana Dlamini-Zuma

About 90% of delegates at the conference come from ANC branches across the nine provinces. Delegates are allocated proportionately in terms of membership figures. Voting at the conference takes place on an individual basis and in secret. However, provinces usually agree beforehand on who they are going to vote for. In the past, members usually followed the mandate of their provinces. Sources: ANC Conference Prep Pack, The Conversation

THE VOTING PROCESS President

At the conference delegates will vote for the Top 6 and 80 National Executive Committee (NEC) members. Deputy National Treasurer Secretary Deputy Secretary A candidate needs a simple majority to win. Veterans and President Chairperson General General Genreal observers representing each province makes up the ANC’s 80 members of the National Executive Committee (NEC) own Electoral Commission. However, an independent electoral agency will administer the elections. If the voting outcome is disputed, which will only come from observers from the provinces, the independent electoral agency will make a judgement.

The new president will close the conference on 20 December 2017.

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What do some of our underlying managers think?

PSG ASSET MANAGEMENT “Investors should be aware that the stakes are high prices are high, we believe it is appropriate to continue and therefore they should prepare for a lot of noise diversifying our portfolios as much as possible before the conference. The news leading up to, and without compromising on our philosophy of avoiding during the conference (if it takes place) could have overpriced assets. Accordingly, our funds are close to a disproportionate and volatile impact on day-to-day maximum capacity offshore and generally have high movements in the rand and domestic asset prices. levels of cash. The outcome of the conference itself is inherently unpredictable. We view cash as dry powder that we could employ in the event of a panic. We do not own the dual- The range of outcomes could be positive, negative listed rand hedges, as we consider them overpriced or neutral for rand assets. The positive scenario and hence a poor source of portfolio insurance. Our is premised on the fact that when sentiment is as equity portfolios have a relatively high exposure to poor, as it currently is, it tends to be reflected in domestic equities and we have been finding better asset prices. A marginal improvement can have opportunities outside of the large cap universe.” a significant impact on asset prices. The negative scenario would likely result from ratings downgrades CORONATION and an expectation that state resources continue to “Things are very finely balanced. Anything could be mismanaged. We think it is very important to be happen and we have not positioned our portfolios aware of, and be prepared for the potential outcomes on the assumption that we know what will happen… and the different risks and opportunities that could Internal polling, available branch nomination numbers arise. Overall sentiment is very negative. The elevated and the behaviour of competing factions suggests levels of uncertainty almost inevitably result in a very close race between the ‘Zuma’ candidate, mispricing and very good opportunities for contrarian, Dr Nkosazana Dlamini Zuma (NDZ), and deputy long-term investors like ourselves.” president Cyril Ramaphosa (CR). By all accounts much can change at the conference itself, where delegates “We have been carefully reviewing and investing in may be persuaded to change their vote depending on opportunities where there is a lot of bad news in the the internal momentum at the time. price. We are confident that we can achieve excellent long-term returns for our clients at acceptable levels Secondly, there is a question of what happens to of risk. We have continued to add to some of our President Zuma – he will no longer be ANC president, domestic equity positions as share prices have but he will be country president until 2019. dropped due to poor sentiment and heavy selling by • If CR wins, it seems most likely that there will be investors, particularly foreign investors. a motion to recall the president, Cabinet will be dissolved, a new president elected and a new These stocks are of above-average quality and are Cabinet appointed; trading at valuation levels typically associated with • If NDZ wins, this is much less clear cut, and he times of the economic crisis. We have also been could remain country president until 2019. building a position in local government bonds in our • A third possibility is that he lingers with he multi-asset portfolios, with a preference for longer- negotiates the terms of his retirement. This sees dated issues. We feel the South African Reserve Bank Jacob Zuma in power – and possibly managing has built strong credibility around inflation targeting political, fiscal or other agreements – for some and, as a result, we have been able to lock in very months. attractive real yields for our clients.” There may also be a split in the party at or after the “Given the unpredictable nature of South African conference. It isn’t clear who will lead the split, but politics, combined with the fact that global asset certainly there have been ancillary comments from

5 | PAGE PSG Wealth | Special Report - December 2017 commentators and even members of the ANC that conference and no matter the outcome of the this is possible. The most sinister possibility is that he conference, there remains numerous other challenges suffers a vote of no confidence and refuses to leave. that will not be resolved overnight, like a potential downgrade after the 2018 Budget Speech… Financial markets will not just be affected by all the events outlined above, and the actual election We remain true to our investment philosophy and outcome, but further by the ability and willingness processes, especially in times of uncertainty. Market of each candidate to affect necessary leadership inefficiencies will provide investors with opportunities changes within the government. to invest in mispriced assets, due to the market reacting to the basic human emotions of fear and greed.” This is least likely to happen swiftly without an outright win for a reformist slate (and especially the OLD MUTUAL MACRO SOLUTIONS longer the country president remains in place), but “At this stage, the outcome seems very binary and it is possible to see key appointments to National although our analysis is a fair attempt at identifying Treasury, SARS and possibly visible parastatals like the market reaction for either outcomes, it is Eskom during 2018.” important to note that we won’t really know until the actual event occurs. Nkosazana Dlamini-Zuma It is (also) important to note that the market is not so much concerned about a particular name, but rather what the candidate represents in terms of economic policy. is currently at a tipping point where drastic policy reforms need to be implemented for us to prevent a fiscal crisis. [In] the minds of investors, Cyril Ramaphosa is purely seen as a Jacob Zuma alternative.

Although there are questions around what he can or cannot do to drive policy reform, particularly with him being so close to the labour unions, investor Source: GCIS sentiment has been so low in South Africa that an “anything-but-Zuma” win will be seen as a positive Cyril Ramaphosa outcome. A key determinant behind a Ramaphosa win, is the assumption that Zuma will be recalled by the newly elected ANC National Executive Committee (NEC)…

[While a Ramaphosa win is viewed a] positive outcome, in order to sustain that initial uplift in market sentiment, Ramaphosa will have to demonstrate some signs of intent to adopt measures to reign in on government’s debt, improve the governance of state owned entities and more importantly revive the economy…The market may be willing to give Ramaphosa some time to alter the trajectory of our path as opposed to Nkosazana Dlamini-Zuma (NDZ) Source: GCIS who would have to work hard and make drastic changes in order to gain the confidence of investors. SANLAM “It is very difficult to predict the outcome of political As the surname suggests, Dlamini-Zuma’s campaign events… There is and will be a lot ‘noise’ as we get has unfortunately been tainted by her ex-husband’s closer to the conference as the different candidates endorsement. [A] NDZ win will be seen as a negative and factions position themselves for the outcome that outcome mainly because NDZ’s policy stance has they would want. The fact that government seems to been largely around populist policies of land and move goalposts on a constant basis, doesn’t provide wealth re-distribution. the market with enough comfort that the country is What I do think can surprise investors is if NDZ, in her dealing with underlying issues effectively… pursuit of differentiating herself from Jacob Zuma, The elective conference cannot be looked at in becomes a ‘Ramaphosa’ and starts using her political isolation. The challenges that government needs capital to implement business-friendly reforms. The to solve goes beyond the outcome of the elective

6 | PAGE PSG Wealth | Special Report - December 2017 market won’t exactly warm up to her initially, but the PRUDENTIAL possibility of her becoming a reasonable successor is “At Prudential, we never attempt to forecast such not as far-fetched as many people would imagine. outcomes or base our investment decisions on likely political developments, given their unpredictable An alternative name has been surfacing lately: that of nature. Rather, we construct our portfolios using our the ANC Treasurer-General Zweli Mkhize. A Mkhize valuation-based, risk-conscious approach where we win would most likely be viewed as a better outcome seek to produce consistent and sustainable returns than a full-out Ramaphosa win as it limits the possibility over time. Extended valuations provide a buffer of an ANC breakaway which wouldn’t be ideal for against risk events; therefore, progressively adding the upcoming 2019 national elections. Coalition to positions as assets cheapen is a naturally risk- governments tend not to work very well. Just cast controlled approach. your eyes to Johannesburg and Tshwane, where it is extremely difficult for the DA to make any decisions We further maintain a full offshore weight in global as each of the party representative have their own funds as well as overweight positions to non-rand motives. The reality is that what South Africa really earners within our equity portfolios, both of which are needs to prosper is a unified and pragmatic ANC. defensive positions if risk aversion rises sharply around Mkhize has a good track record as the former premier of year end. Our approach has proved to be successful Kwa-Zulu Natal and appears to have a sensible over two decades: time has shown that buying assets relationship with the business community.” at levels below their long-term fair value, and selling them when they reach or exceed fair value, produces excess returns for our clients.”

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