LONDON — In this edition of the Old Firm, David Shapiro and Alec Hogg highlight some worrying issues for the South African economy which is taking little notice of the way the world is transforming. With divisive politics and an obsession with the past continuing to absorb SA attention, most of the world is positioning itself for a very different future. The Old Firm also unpack the corruption-associated problems faced by KPMG, McKinsey and the apparent raid on state pensioners’ retirement funds as a beleaguered finance minister looks for ways to bail out mismanaged state-owned enterprises. – Alec Hogg
Well, let’s cross to Johannesburg now and David Shapiro is awaiting. Dave, there’s been a lot happening in the news in the past week. Maybe, let’s start off on the South African front first with the South African Reserve Bank deciding not to cut interest rates. Quite a few economists thought they would. What was your feeling, going into that monetary policy committee meeting?
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I think I have to take the guidance from economists in the sense that they believe the economy is slowing in momentum and that there was a need, inflation was under control. I say under control, it was starting to ease and I think there was a very strong view that we needed to cut rates in order to give some boost to demand. Most economists believed it would be cut but the Reserve Bank decided, in fact, it was a split vote, Alec. They decided three against three and decided to keep rates unchanged.
The Rand improved on the strength that rates would remain where they were, but I think the market came back. Our consumer shares, our banking shares, all came back on worries that growth is not there and we needed some kind of boost and it’s a trend that we are seeing in the market at the moment and are concerned about where the growth is, what the health of the economy is. And even though you might not pick it up, because we’re still in relatively high territory, some of the smaller businesses that make up the JSE make up the bulk of the shares of the JSE have actually been under quite a lot of pressure. You know, retailers, consumer shares, construction shares and I think this is a trend that’s going to continue until we see signs that the economy is stabilising and starting to pick up.
You mentioned retailers. This past week also saw Steinhoff shaving off it’s, or unbundling its African assets, what happens to the Steinhoff share price? I see that’s come back, but is that just a combination of the shares you now get in Star, they call it?
Yes, it hardly made any difference. I think the whole intention was to unlock value. People weren’t factoring in the very strong South African assets into the share price of Steinhoff, it was being influenced by their offshore investments and I think the whole exercise was to allow, first of all, investors outside to participate in the South African assets, but also to give some value to Steinhoff. It didn’t work and it, it hadn’t worked because um, I mean, people are still struggling with Steinhoff. I was listening to Jack Ma and Julian last week and although it’s unconnected, he was talking about China and he said, you know when he said about China, you have to understand it’s a new (I’m going to use the word) democracy or it’s a new capitalistic society.
It says, they’ve only been doing this for 30 years as opposed to America 200 years, it’s going to take time. Now I used the same thing with Steinhoff. I still think Steinhoff is trying to find its way. I’ve got a lot of regard for Markus Jooste, I’ve always liked him, I’ve always liked his style and I think give it a chance, you know what I mean? Let’s give them a few more years before we knock them, so they’ve been under a bit of pressure as they’re trying to find their way into this global economy and find the right kind of company. So, I tend to be on the side of giving them a chance and not knocking them.
Also, it’s a good opportunity if you are looking for a Rand hedge because now it’s 100% a Rand hedge, isn’t it?
Yes, or virtually because they still have the stake in Star. I like Star, I really do like Star. I like it because it’s at the bottom end of the consumer market in South Africa and that’s where there’s more defensive spending. So, as a strategy I’m switching out of Woolworths and Truworths and Foschini where we did have. I wasn’t overexposed there and switching into Star, it was well oversubscribed and one’s got to be careful as to how you play this, but I think I like it very much and I think it’s the one area that I’d like to be exposed to.
Yes, I guess the social grants are continuing to be spent, the bottom end of the pyramid continued to be supported, so if you’re going to be anywhere in retailing it seems to make sense that, I suppose the Shoprite deal that they’re looking to do as well will also reinforce its position.
Yes, and Shoprite’s looking good. So, if you look at where that group is focused I still think it’s the more refractive side. You see, do you know what else is interesting Alec, we’re finding many of those businesses that we liked a year or two ago, Spur, Grand Parade, all of those who we’re exposed to and also Famous Brands which were exposed to – these quick service restaurants – we’re starting to see strains in those areas, growth isnnot there. I think there’s a lot of competition coming through and making it a lot more difficult for them to make those profits and also in this economy people are stretching their budgets, so you’ve got to look and say, “Where is the money being spent, you know, where is the safest area to be. I think that’s in areas like Pep and down at the bottom end of the buying chain, which would be Shoprite as well, so yes, it’s not easy to find places to go here, but I like Star.
Well, not such a safe area right now, it seems, is in the state-owned enterprises and there’s quite a bit of friction going on there. The view that Bloomberg has expressed in the past week is, people inside the Public Investment Corporation (PIC), which remember, is the retirement fund of former state employees. They are saying that Gigaba, the Minister of Finance wants to get R100bn out of that pot to bail out South African Airways, Eskom etc and there’s been a lot of kickback and then we’ve had Gigaba saying this is all lies and all speculation and there’s no truth whatsoever in it. David, it’s very hard to read the situation without being in the room when these things happen but you would have to believe that the people who were speaking to Bloomberg weren’t just making this up.
No, I don’t know, this is not new. Back in the days it took a slightly different form under the Apartheid companies or many years ago, where companies were forced to put 25% of their investment into guilt, into bonds which is another way of funding the government, so it’s not unusual for government to take taxpayers’ money or savers’ money and use it. That was scrapped and today you don’t have to do it, so we’ve seen it in the past but somehow it sticks with me, the PIC is a pension fund. It looks after pensioners’ money and therefore you have to act with the utmost care. When you play with pension money, you can’t afford to be frivolous or reckless with it and that concerns me.
Government now wants to get their hands on this one how many trillion Dollars or Rand that they actually manage and start using it to fund political ideals and certainly in this case SAA is under a huge amount of pressure and government is looking where they can. When we have the midterm budget, I think it’s going to reveal to us that tax receipts are lower, that the government finances are, I don’t want to say under pressure, but they’re under strain.
They’re not meeting the target and when you’re in a situation like this you start looking where can we fund from without upsetting their rating agencies and doing things like that and the one thing you don’t do is start taking pensioners’ money. I always explain it, it’s like using a kids’ piggy bank. You never rob your daughter or your son’s little piggy bank. You don’t go there and break it open and use that to fund your groceries or whatever it is. It’s the worst form of theft, so yes, I’m very sensitive about this and I think there’ll be a huge outcry if they do something like that.
Well, it’s a battlefield certainly that if not real, it’s certainly perceived to be at the moment. But another battleground is KPMG, McKinsey and SAP and we saw this week more pressure on KPMG. SAP’s chairman Hasso Plattner says that they are trying to get to the bottom of the corruption that happened between his company and the Guptas.
I know.
McKinsey is still very quiet, but I guess it’s just a matter of time.
Alec, this is huge. I mean this is much bigger than we think it is and I think it’s going to spread globally. I’m not sure why it hasn’t hit the international headlines and that, but if they do it here, why are they not doing it elsewhere and if you’re working at KPMG what’s going to happen is that you’re going to think about your articles, you’re going to think about your future there and I have no doubt people will start to abandon ship. It’s going to be very difficult for them to stop it and it’s going to hurt them globally. I don’t think they’ve answered the questions sufficiently enough. We haven’t heard from McKinsey. If you go into the whole issue around McKinsey’s association with Trillian and with the Guptas, the story with Eskom, this was just, what would you call it, it was taking from area to make sure, it went in a circle.
It went from Eskom to Trillian back to the Guptas, back to Eskom to buy their stake in Optimum and the fact that McKinsey’s had a partner or knew that they were sharing fees with another entity who were not doing in business or not adding value, you have to question those kinds of issues. I know you might turn a blind eye and say, “Well, this was an empowerment deal and therefore there’s nothing we could do about it” but I don’t think that answers the question so there’s a lot to be asked and I think we’re going to see more and more coming out of this whole issue and I think Eskom has to do something about it and we’ll see that very shortly. I’ve been in there Alec, I’ve seen this issue, we’ve lived through it. When these cracks start to open believe me they become fissures, they start to become huge issues and I don’t think KPMG is going to survive this.
David, the issue about all of this was how was it able to continue for as long as it did as just a matter of course. Remember, this has all been in the public domain for at least 18 months, that’s when Johan van Loggerenberg’s book on the supposed rogue unit at SARS was published and there’s lots of detail in there. The Sunday Times had admitted they’d made a mess by going along with the KPMG report etc. so it’s not like it hasn’t been out there. But only since Gupta leaks these guys are picking it.
Do you understand, when KPMG publishes the report you have to believe that an international firm of their standing has the integrity to publish a report like that, so you believe it and that’s the danger of that, here you are. No one would ever have questioned one of the big four, so you would automatically assume that they have the kind of standards and they put the time in and assessed it and had the people in to produce a report that had the authority that it did have and that’s the whole question, so Gordhan and the people that affected it, are entitled to question it and also entitled to compensation and of course you now have to question the firm and that goes right through.
These reports, Alec think of a board of directors, you’ve run a public company, you know what happens around a board, you know the decisions that are made. Everybody around that board around the table is implicated. They know what’s going on or it’s their duty of care to know what’s going on, so how do you escape the consequences. I find it absolutely intriguing and also in my view, it’s just thrown open many questions about the international businesses. Now we have to start questioning all of them. So, even if it happened in South Africa, who says it can’t be happening elsewhere? I’m thrown out by this, I really am.
We do know that Pravin Gordhan has met with the global chairman of KPMG and we do know that in his original response to it he said, “Okay, the way that you can compensate for this is by hiring all of the people who lost their jobs at SARS as a result of your report and making them into an anti-corruption unit”. I know I’m trying to find some upside in this whole debacle, but that surely is something that they must be considering now, given the hole they’re in.
They have to think of something and they have to save their international reputation. I think the positive, if you’re looking for a positive, I think it’s united the nation in a sense that everybody’s appalled by what they’re seeing now to the extent at which the Guptas and government have gone to control state funds to look after themselves. I think that’s one thing that has come out of it. I would like to see a lot more ANC people talking out about it. I still think there are too many that are very quiet and haven’t responded, I think for fear of actually breaking up the whole ANC, but I think we need a lot more voices in opposition, but also the international voices as well. I think we need some international response as well to change things. In the meantime Zuma remains intact and everybody’s waiting for December and the way things are going, I’m not sure which way it’s going to fall, it’s still 50/50.
It’ll be interesting to see how December actually works out but it’s not just South African politicians who are not covering themselves in glory. At the moment there’s Donald Trump and I know you follow that story quite carefully, given that your daughter lives there in the United States. This whole thing with American football players, what’s behind it?
What happened is, in fact it’s reaching enormous proportions. It can actually upset his whole plans and all his tax plans because it’s beginning to occupy headlines. What’s happened is that an NFL team, the Washington Warriors which are based in Washington DC, a couple of their players and I’m not sure the full details of it, have refused to stand when they play the American anthem which they do at every game. Instead, what they’ve done is they’ve knelt and it’s a protest against the discrimination against blacks. It’s really a racial issue and particularly with Trump’s white supremacist policies, those kinds of issues.
So, it’s a protest against that and Trump has responded in a very aggressive and nasty way to a point where the Commissioner of the NFL has come out in support of the players and also in support of the NFL, but it’s becoming a major political issue with Trump’s Tweets and it’s growing in proportion where it’s actually going to become and start occupying headlines and start occupying op-ed time against Trump once more and once more it’ll thwart his ability to actually put through his policies particularly in tax.
I have to read more about it, but it is a major issue now and obviously when people don’t want to stand for the flag you have to address those issues. American football, most of the players are black. Although most of the supporters are white and it’s at the heart of the American psyche, I mean football is a huge part of their lives, so this is bigger than we want to recognise at the moment, it’s going to become a big issue.
The whole right-wing or the rise is something that is bedevilling the world at the moment as well and we’ve just seen it with the German elections now, the right-wing party in Germany getting more votes than any right-wing party since the Nazis going back more than 50 years. David, is this something that should be concerning us?
Well, they’ve overcome it in Europe, but I think that this surge that we have seen has taken a little bit of the edge off her victory. She has to handle it. I think a lot has to do with their refugee policy. It was bound to anger people and I think they have expressed it by voting for the right-wing parties, but these right-wing parties are not the kind of parties you want to see have a voice in government, you know no matter how small. Simply that it’s just that we’ve worked so hard to move away from those kinds of politics, but it is an anger vote and it’s something the politicians have to sort out. They have to find some middle ground, but I must admit that it’s taken away from her victory.
We saw Macron’s win in France, in the Netherlands we’ve seen victories against the right-wing. Yes, she will be in for a fourth term, but I think she has to recognise their voice as well. So, it’s not turning out as easy as we thought it would be. Has it affected the market? I don’t think so. The Euro, I see is a under a little bit of pressure now, but not dramatically so. I still think that Europe is probably on the right track still, but it’s an issue. When I hear what they say, when I hear their attitudes and a person who loves to read about history is fun and we went through it you know. We’re a country that chucked it out and voted against it, so we know what it’s like, but I hope it doesn’t take grip and it doesn’t increase.
Yes, but radicalism in any form is always a concern and in South Africa now we see it more. I don’t know if you read Mmusi Maimane’s op-ed piece this week, but he’s also going now to the politics of race and going back into the past and saying that the cake needs to be divided up more equally etc. which you can kind of understand that, but surely at this point we should be looking into the future.
What’s the future? The future is growth. You can’t have politics or countries that can’t grow without an economy and I wish they would turn their attention more to growing the economy to trying to look into the future what’s the world going to look five, ten years down the line rather than pushing these ideologies. And I say that because the headlines over the last few weeks have been electric cars. All the kinds of issues that are not going to help South Africa, the platinum price has fallen all the way back and could go lower, the gold price and oil prices are coming under pressure as things stabilise. We’ve had a little bit of speculation in industrial metals. The lower those prices go, the harder it is for this economy to grow. We’re an economy that is actually behind the movement in the rest of the world. The rest of the world’s going tech and I think those are the issues we must be focusing on.
How do we build this economy to get in step with the rest of the world and also, there is an opportunity Alec, because we can use the talent that we have here to embrace this technology and sell it into Africa or help Africa advance. To me that’s a much better policy than going back to the past and worrying about issues like that. I know they’re important and that they might get votes, but they’re not going to help us and listen to Jack Ma, listen to what he says about the shape of the world, how the Chinese are becoming leaders in technology now. They’re a leading consumer nation, just see how that economy’s moving.
Yes, they have made mistakes, he admits it, but I think we have to take lessons from that and try and get growth here because if we are going to grow at below 1%, if we’re growing decimal points for the kind of population we have, things can only get worse. I saw a quote from your dear friend, Cees Bruggemans, who sadly passed away. In his last piece he just said, “The economy’s going into the teeth of a hurricane”. I was very sad to hear that, Alec when I heard that he’d passed away.
Yes, a big loss and he was young as well, relatively speaking. He’s only just turned 60 not long ago.
I know that he was a good friend of yours and often wrote pieces for you.
Yes, we’ve lost a giant in Cees Bruggemans. He always seemed somehow to find the glass half full, he found a little bit of optimism even in the darkest days and can we do that David. Clearly the world is going into the Fourth Industrial Revolution. Electric cars are going to put Platinum, well it won’t put Platinum out of business, but when you are dependent on auto catalysts for your major supply of your major export earner you have to be worried because electric cars don’t need auto catalysts.
The stuff that you need for electric cars is not the stuff South Africa has, we don’t have much copper, cobalt. We have a bit of nickel, but that’s not really the main thing and that’s just one part of the equation. As you say, people are getting smarter, artificial intelligence, technology, this whole talk around reindustrialisation has got to be a big question mark, but where’s the bright spot, what can we end of with a smile on our faces?
Okay, I tell you where the optimism is, is that South African people, if you walk in the roads and you greet people and you actually go down to the common factor, which is the South African, they’re actually very decent, hospitable, good people and we all want the same thing. It’s a country that’s blessed with so much. There’s just such opportunity here which we’re not using. We still have good institutions and our universities are still pretty good, so the foundations are here to actually grow this economy. I think the only thing holding us back and I have to say, has to be the politics here and we continue to push politics above other issues, which are, in my view, growing the economy.
Just put those things aside, but do we have the mechanism here and the opportunity? Of course, we do and I think that you don’t kill nations, you don’t kill them off, so I think that’s where the optimism is here. We have a very, very good private sector, a magnificent private sector, from our banking sector to the retail sector, to even the construction sector. If you look at the people who run them, that’s where the strength lies and the entrepreneurial spirit is still here. The problem is that we just have to sort the politics out.
David Shapiro talking to us from Johannesburg.
