STUART THEOBALD: Chance of better government opens door for investors

Investors should ask the following questions in digesting the election results: what does it mean for the economic drivers of company performance, and for the fiscal outlook? Some positive answers are not yet reflecting in the value of assets.

From all reports, is seems the ANC is inching towards a coalition with the DA, perhaps with the IFP on board too. Much can still go wrong in the discussions, but the entreaties on both sides have been positive. On one area the engagement has seen a lot of nodding and agreement: structural economic reforms.

The DA has endorsed the Operation Vulindlela delivery unit that operates between the presidency and the National Treasury and that is responsible for the strides forward on restructuring the electricity sector and the early positive interventions on the logistics system.

Regular readers of corporate results announcements will know how much of a factor poor rail and port performance is for miners and others. Volumes are down because output cannot reach markets.

Companies such as Kumba Iron Ore, Thungela, African Rainbow Minerals and ArcelorMittal have faced material earnings impact due to the underperformance of Transnet. Electricity availability has also been a material issue, from large industrial users to retailers which have carried the costs of burning huge amounts of diesel. Pharmacy group Dis-Chem, hotels group Southern Sun, Pick n Pay, food producer RFG, Netcare, Sun International, Libstar, Shoprite, City Lodge and many others are all spending tens of millions annually on diesel.

Fixing electricity supply and Transnet can have a material earnings impact on these and other companies. So, the question is whether the next administration will improve performance. The best answer is, “yes”.

Much of the important work has already been done, with the national electricity crisis committee (Necom) and the national logistics crisis committee both having set out good plans and started implementation. Necom is much more advanced. From the end of this year and into next year, load-shedding will become a thing of the past as billions in private sector investment result in new generation coming on stream. A competitive open market in electricity supply will emerge that could start reducing prices, which have escalated enormously in recent years.

The logistics system is being tackled through the freight logistics road map through which quick wins have been delivered through partnerships between Transnet and the private sector on several key logistics corridors. The road map envisages important reforms to the logistics system including enabling Transnet to grant concessions for private companies to run ports and train services.

You can envisage a future in which SA’s major ports are all run by private sector consortia in competition, trying to outdo each other by offering better prices and services. That is a brave new world compared to the present dismal performance in which the country’s ports are near the bottom of global league tables.

The key concern politically has been whether a future administration will block this progress. The answer right now is “no” — in fact, there is a reasonable prospect of the progress being endorsed and accelerated. The performance effect on company earnings will be meaningful.

Then there is the fiscal outlook. Since the end of the Zuma era, the National Treasury has been fighting a sometimes lonely battle to rescue the public finances. While it has managed to hold the line, it has done so at times against the political winds.

Fiscal consolidation is important to reduce the alarming debt burden the country has built since 2009, which resulted in the loss of investment grade credit rating and far higher interest rates than before. Servicing that debt consumes much of the national budget. It is a macro risk to the economy — a national debt crisis quickly becomes a real economy crisis. There is good news on this front too, with the Treasury’s efforts set to find a fairer wind.

There are though also downsides in the results, and the biggest is KwaZulu-Natal. The exceptional performance of uMkhonto weSizwe (MK) in the province caught everyone by surprise. It is not far off a majority (45%), and it is not at all clear that the remaining parties will be able to form a government. It will require a coalition of all parties other than MK and the EFF to do it. It looks difficult and unstable.

While MK is untested as a governing party, its key figures including Jacob Zuma and Sars nemesis Tom Moyane do not inspire confidence. KwaZulu-Natal’s history of political violence and local government dysfunction is a major concern and could worsen. The province is the second-biggest contributor to GDP at about 16%. The Durban and Richards Bay ports are critical pieces of economic infrastructure. The province is also home to large manufacturing and mining activities and is therefore the one critical risk that stands out in the outlook.

Markets have not factored in this relatively positive view. The rand is about 3% weaker since the election and bond yields have inched upwards. The JSE is down about 2.4%. With the probabilities as they stand, it is a buying opportunity.