DUBLIN – It’s been a year since Cyril Ramaphosa took over leadership of South Africa and Malusi Gigaba gave his final budget speech. A lot has changed since then. Sometimes, when you’re very close to a situation, it can be hard to see changes when they happen slowly. But for outsiders, the changes can be crystal clear. Alec Hogg recently spent two weeks in South Africa, and he was struck by the meaningful and ongoing change he saw. In this episode, Alec Hogg and I discuss what a difference a year has made for South Africa, from the drama at Eskom to the new, pragmatic approach that Ramaphosa seems to be instilling at every level of government. As we head into the May elections, there are many reasons for optimism, despite the gloom that load shedding brings. We also explore why Warren Buffett is having such a hard time finding deals these days. – Felicity Duncan
Hello, and welcome to this week’s episode of The Editor’s Desk. This is BizNews Radio and I’m Felicity Duncan chatting now with Alec Hogg. Alec, you are just back from SA. You’ve spent two weeks there, a big trip. You saw a lot of things. You went to a number of cities. You sat in on Budget and you also got the full experience of the worst week of load-shedding in many years, and the following week where there was no load-shedding. So, you really got to see a wide span of what’s been going on in South Africa and I think you have some interesting impressions to talk through there. What a difference a year makes.
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Indeed, Felicity. A year ago, there was no load-shedding but there was a different mood entirely in the country. We had Ramaphoria, if you recall. We did, however have a Budget with Malusi Gigaba and this year we had a Budget with Tito Mboweni, and you can’t put the two of them in the same… If they were horses you wouldn’t have them on the racecourse, for instance. They really are completely different characters.
So, last year I think we were all caught up somewhat in the fact that we now had a sensible leader who had taken over, who was going to address policy uncertainty, he was going to address corruption, he was going to address the collapsing SOEs. This year we know exactly the extent or we know the extent of what those challenges are. Last year, by not knowing the challenges I guess we assumed that they weren’t as bad as they were. The challenges are there but they are now in the open. Including having load-shedding in one of the two weeks that I was there and in that week the mood was just so gloomy. The next week, I won’t say the mood was euphoric at all but it was certainly more normal and that is the sense that I had.
I come back inspired by South Africa. I always am inspired by the people of South Africa and the ability to get through incredible odd. The resilience of the Nation is extraordinary. When you’ve had the kind of abuse that people have bee subjected to at all kinds of levels for almost a decade. You’ve just got to admire the bounce back ability that is evident everywhere. People are starting to hope again. People are starting to feel that there is a light beyond the darkness.
It was interesting, in my presentations, I think the first one was in Durban and they had a flip board, well I certainly haven’t seen them before but they had a flip board in the room where the presentation was. Usually I show a few pictures and talk to it on slides, so it’s a bit like a slideshow from my holiday in Davos, which is anything but. But they had this flip board, and in Durban people arrive, if you say, 17h30 for 18h00 – they’re they at 17h30. So, the room was full at 17h45. So, I thought what’s the point in just waiting until 18h00. Of course, we must wait for the official presentation before people come there.
I went through the quadrant of change, which I learnt from my experience when I lost my son in 2008, to understand exactly how one comes to terms with the different stages of grief, as Elisabeth Kubler-Ross describes it, and those stages of grief are the same with change as well. And that how you start off with a changing world and there’s rejection, and then there’s resistance is in the second quadrant and then there’s acceptance and only finally is there commitment. Now, what I could see a year ago was it was almost like everybody was suddenly committed, which of course is not true. You can’t go through the quadrant of change immediately. You come from rejection of the Zuma regime, and total commitment to Ramaphosa.
But the reality now is that you’re seeing the Nation is moving through, and people are moving at different speeds, through that quadrant of change. There’s a certain move in the right direction. Lots of people still feeling resistant. You get the smattering of those who are rejecting it, and then increasing numbers, you’re coming to acceptance. You haven’t quite got as many in the commitment area but you can almost feel like it’s 93/94 all over again. That there’s a big task to be done. There’s rebuilding to be done. There is however light that you can see breaking at the end of tunnel. Although some are turning their heads away from it, and others are saying it’s a train that’s coming on.
For the most part, the rational approach towards it is, okay, we’re cleaning up, we’re cleaning house. It’s not going to be a quick fix but it’s worth investing again or it’s worth building again because you can see the future is looking better. So, if I were to sum up my assessment of the engagements that I had. The many people I spoke to, and spoke with, and listened to – that would be my feeling. Is that the normal outliers are out there and they’re already starting to invest or at least thinking of investing. The majority, the vast majority are still caught in the headlights of well, should we leave, should we stay, should we be committing?
Well, I say the vast majority of the people that I engaged with, which would clearly not be the vast majority of the population but people who are coming to the events and people that I was talking to. So, there’s a sense though that… Everybody knows that the tide has turned. Everybody knows that the country is on a different trajectory. Not everybody accepts what the conclusion of that trajectory is going to be and not everybody accepts yet that Zimbabwe is not SA’s future. So, anyway, it’s a land of great opportunity right now and I’m inspired and excited about the potential. Â
Yes, it’s an exciting time and we’re heading into the election in May, and I saw some interesting results from a survey – and of course obviously with surveys, we always take them with a grain of salt. But it was a very interesting thing, which showed quite clearly that there’s been a real improvement of sentiment among voters towards the ANC. So, just over the last six months peoples’ attitude and opinion towards the ANC has really turned around and they’ve started to feel much, more positively towards it. I think that really illustrates the value of Ramaphosa’s approach, which I would describe as fundamentally a pragmatic approach.
A lot of the people that he’s put in place are grafters, right. They go in, they do the job, they say what needs to be said, the do what needs to be done – let’s fix this up. Very practical people and I think this new pragmatism that Ramaphosa is really bringing to the politics of the ANC has actually resonated a lot with the voters.
So, going into this election it looks like the ANC is going to have a very strong showing and I think that’s a good thing, right. That is a thing that will say to any of the naysayers and the detractors within the ANC… they will see the Ramaphosa approach is working. People are responding. People like to see an ANC that’s doing things, that’s getting the job done, that’s fixing things up. As opposed to an ANC that’s sort of talking a lot of ideological talk. It will give him a stronger mandate to continue on the path that he’s on.
So, I think that your sense that you have people moving through the quadrant. I think you can see some evidence out there that that’s true that people have moved from a lot more suspicion towards the ruling party and the government, into a place where they’re like, okay, maybe this is going to work. And I think that is a good thing for the country.
I remember Cyril, at one of the events in Davos, talking about being a peddler of hope and that is clearly what he’s in the process of doing. When you read through the very lengthy State of the Nation Address (SONA) or when you experienced the Budget Address, which was compressed. In fact, I looked at the word count and the word count from Gigaba’s last mini-Budget was nearly 12.000 words, to his last Budget, which was tightly scripted by those higher up, it was about 9.000. To Tito’s Budget now, which was under 6.000 words.
He doesn’t need a lot of words to get the message across.
No, but in the press conference he went on for an hour-and-a-half. Very didactic. Very, trying to teach, if you like, trying to explain in the press conference to the media people who, time and again say, ‘I’m not a financial journalist but…’ It’s almost like a disclaimer well, that’s why I can’t understand this. He picked that up and then tried to explain the process. But you know, what you’ve just said now about pragmatism is probably… you’ve put your finger on it because if you look at China and the Chinese miracle. If you’re somebody who wants to pull SA into the future today, you would be looking around the world at your role models, and the old Washington consensus, we know he’s out of favour and certainly Donald Trump is not a great advert for the American way. So, you certainly aren’t going to be chasing that side.
What’s going on in the UK is not exactly a role model for anybody either. But when you look to China and what China has done, as a developing country, it’s been pragmatic. It’s been a very strong political drive, but as far as the working of the economy is concerned, the Mandarins have always been, for 1000’s of years the Chinese have had a very strong civil service and that’s one part of what the Government in SA is wanting to put together – have efficient, competent people running the SOE’s and weed out the excess. But on the other hand, is to open up the economy to public private partnerships, as the Chinese have done brilliantly, and in that way, apply the pragmatism that gets things going, that gets people working, that gets the economy running.
If you get this right you achieve a Chinese miracle. Now of course, there are many naysayers. There will be many people who’d find a 1000’s reasons why SA cannot replicate the Chinese success story. But on the other hand, at least if you’re shooting for it you won’t be condemning yourself to a 1.5% to 2% economic growth rate, when you have a population growth rate of 1.5% to 2% so, in other words, a long-term penury. I think that when we step away from it, we can see a lot of that starting to come through. And I agree with you, as much as we need a strong opposition in every, single democracy. On other hand the more dominant the ANC is in this election, the more it will be able apply those Chinese-type policies, from an economic sense, which will help the economy flourish in the long-term. You’ve got the people. You’ve got the enterprising – as enterprising people in SA, as there are in China. All you now need is the platform, perhaps, to give the spark. So, I love your description of pragmatism.
Yeah, and another pragmatist, just as we wrap up here, that I wanted to talk about before we ran out of time, is I would say, a friend of BizNews, Warren Buffett or at least a personal hero here at BizNews. We had an interesting week. Some news there out of Berkshire Hathaway – they actually registered quite a substantial loss in the fourth quarter, but that was due to a write-down at Kraft, which is one of their big investments in their portfolio, and then some unrealised investment losses. Basically, what that means is that new accounting rules are that if you lose money on stocks you own, you have to book that as earnings or a loss, regardless of whether its realised. So, even if you still have the stock, and it could recover in the future, you still book the loss. So, it’s a bit of an accounting rule issue happening here in the earnings.
But it does point to an interesting phenomenon, and that is the fact that since 2016 Berkshire has not done a huge acquisition. Now, they’ve done a lot of stock buying. They’ve built a big stake in Apple, for example, but none of the huge scale, all out acquisitions that really drove a lot of the profitability and the growth at Berkshire for a long time. I’m thinking of things like Geico and See’s Candy– those big deals that Warren Buffett did that really contributed so much to the performance of Berkshire. Now, he hasn’t done any of those for at least three years and what he says is, ‘the issue is prices are just too high right now.’ People out there who are in the acquisitions business are willing to pay almost anything just for a decent company, it doesn’t have to be a great one. Just a decent company – they’re willing to pay multiples of earnings. For him, that’s just too rich. He says, ‘I’m not going to pay those prices because the future cashflows are not there.’ So, Berkshire is sitting on enormous cash pile right now, it’s over $100bn, waiting, essentially, for prices to get back to a level where he feels comfortable, and I think that says some interesting things about where the global economy is right now.
It does, indeed. In the Fourth Industrial Revolution, and I know it’s becoming a big of a hackney term now, but if you have a look at the landscape, as he would. He does not invest in exponential companies, which takes off his radar the Amazons, Googles, and Netflix, and Twitter – all of these that are emerging because he says, ‘he cannot understand – he cannot work out.’ If he can’t work out what a company’s earnings are going to be in five-years’ time then he doesn’t want any part of it so, as far as that is concerned, he’s actually eliminated for himself a big chunk of the winners of the Fourth Industrial Revolution. So, he’s having a look at, if you like, the losers of the 4IR and he cannot make a case for the earnings that he’s seeing into the future because a lot of these companies – their profits are contracting as they are getting eaten up by smaller enterprises or newer ones. As a consequence of that he can’t see the value in the them so, he’s caught in a little bit of a trap there.
Either the Fourth Industrial Revolution stocks are going to start becoming… Or he’s going to get his head around exponentiality and start investing there, which looks very unlikely. Although, you have to admit that Buffett did invest in Apple and Apple is a very extremely Fourth Industrial Revolution stock so, that’s the one perspective. Although he would argue Apple on a value case just on it’s iPhones or just on its hardware – on its normal annuity revenue. Either he’s going to have to do that or he’s going to wait for these other stocks, like Walmart, the traditional businesses that he invests in, for their values to get to a level where they are, once again, offering great opportunities given what their future looks like.
I know he has bee investing in banks again and banks are, for the value investor, are a big opportunity, particular US banks, and hence we’ve added Morgan Stanley and JP Morgan into our Global Portfolio because of the concern that Google, in particular, and Facebook are now having this kickback from the regulators and life is going to get a lot tougher for them because they’ve just got too big. Whereas the great value opportunity now, which is where Buffett would be looking, would be in banking stocks. But he’s so full of banking stocks – he can’t keep putting into that are. He has to look elsewhere so, it’s a dilemma for him, which is also a reflection of lower interest rates and it’s a reflection of the age – of the way the economy is having these seismic shifts.
That’s why I would say, you go look in parts of the world, where stocks are cheap, where there are turnarounds in the economy and I’m very excited about SA stocks at the moment. You’ve got to do your homework. You’ve got to find the right ones but there you’ve got a bombed-out economy and a bombed-out values and big opportunities.
