raymondparson

Michael Avery

Time for The Week That Was with Professor Raymond Parsons from the North-West University Business School and University of the Western Cape, and occupying Warwick Lucas’s chair this week, independent analyst Stephen Meintjies.

We’ve spent much of the past few months marvelling at the market’s ability to absorb everything from war and oil shocks to extraordinary valuations around AI. This week perhaps reminds us that resilience and complacency can look remarkably similar, right up until they don’t.

South Korea’s KOSPI doubled in the first half of this year on the AI and semiconductor frenzy. It’s now down for seven consecutive weeks, another 5% this week. Is this healthy? Is this a healthy correction, some air coming out of an extraordinarily crowded trade? Or are you seeing the first serious questions being asked about the economics underlying the AI boom?

Stephen Meintjies

Well, it’s a whole lot, actually. There’s been, as you know, a huge amount of speculation. The Korean market has a very high level of retail participation, something that the JSE Limited can only envy. And then, of course, you’ve got SK Hynix and Samsung hogging the limelight. Plus, there have been some geared ETFs in those stocks.

So, yes, it’s done well. It’s still up on a year ago, up on the year.

Michael Avery

Yes. There’s another way -I guess there’s another way of looking at this as well. And that, you know, these are long-duration equities in the AI trade, the enormous amounts of future growth that are embedded in today’s prices. If bond yields stay higher for longer, doesn’t the discount rate eventually start doing some fairly brutal mathematics?

Stephen Meintjies

Well, absolutely. Still, I’m not going to argue with Jamie Dimon at JPMorgan, who says that the huge high demand for AI is going to keep inflation elevated. Higher-for-longer interest rates, and the huge infrastructure requirements are going to lead to global deficits. Global deficits and wars will add to inflationary pressure. And yes, the long-term – US Treasuries nudging over 5.2% is definitely a warning signal.

Michael Avery

Yes, a big one. Flashing red for me.

Raymond, it brings us neatly to the number everyone is waiting for today: US non-farm payrolls. Consensus, roughly 80,000 new jobs for July, unemployment holding at 4.2%. What we could do with that kind of number. But the market’s still entertaining the possibility of another Fed hike in September. There’s obviously this difficult macroeconomic combination lurking here. You’ve got softer employment growth, stubborn inflation risk, higher oil and a Fed that may conceivably tighten again.

For emerging markets, what is the bigger risk as you see it now, Raymond? Is it slower global demand or another upward adjustment in the global cost of capital?

RAYMOND PARSONS

Hi Michael. First, to look at the bigger economic scene in the US – it’s still a difficult call to make because there are these various economic cross-currents you’ve mentioned, and the job numbers we expect today will send another signal one way or another.

Then we also have an unknown factor with the new US Fed chairman Kevin Warsh, who’s backing off from ‘forward guidance’ and leaving the markets to set the pace as to what might happen at the next meeting. He’s still keeping his options open depending on the data. But remember that his constant theme so far has been, of course, ‘price stability’. There’s still another month of data to come, but if unemployment today is stable, the focus will obviously be on where prices are going – where inflation is going – and whether the time has come for an increase in US interest rates or not. The next US inflation data is due next week.

If we look at the broader economic picture in the world, the world economy, as we’ve indicated earlier, has absorbed a lot of shocks reasonably well. It’s shown itself to be quite resilient, although it has slowed down.

But the degree of vulnerability, as far as emerging markets are concerned regarding the cost of capital, well, that’s another story about debt levels. And one can’t generalize too much because it depends very much on the domestic economic buffers and the resilience that each domestic economy might show in responding to these global challenges,

From South Africa’s point of view, our sovereign debt, as you know, is denominated -at least 90% of it -in rands, and that’s one important buffer from a domestic point of view, And I would remind you that, in terms of domestic resilience, what our own SARB Governor said this week: ‘we are resilient, but we are not flourishing’. This brings it right home.

Michael Avery

That brings it right home. It really does. It was one of the better speeches -and he’s delivered some good ones over the years, has Lesetja Kganyago -that I’ve certainly seen from the Reserve Bank Governor for some time.

We’ll come to it. But before we get there, because we talk about market resilience and institutional resilience in that context, and Eskom has got to be at the centre of that conversation, the President announcing that he’s endorsed Phase One of the Eskom Restructuring Task Team’s work, which is a fully independent state. It’s not privatised, even though it’s independent. We need to stress that.

The Transmission System Operator – that’s ultimately going to own and control the grid and operate the electricity market independently of Eskom. Many market participants have said this is going to be the real acid test. We’ve heard the word “unbundling” for years. What has actually changed here, from where you’re sitting, Raymond?

Raymond Parsons

The important point here is whether it’s Eskom -that’s the big-ticket item, of course -is that all reforms must be seen to be, in fact, ‘irreversible’. Perceptions of irreversibility have often been the lacking. The problem has been that investors have not always known whether well-intentioned reforms which have been announced – whether they will stand the test of time, be capacitated, pass the test of politics in particular, and be implemented as indicated, And I think that the Eskom reform has been a protracted agony from that point of view.

Certainly, Eskom’s intended restructuring has in the past also encouraged rearguard actions by vested interests, who have encouraged procrastination in implementing what we’ve committed ourselves to as far as Eskom was concerned

And then there’s clearly always a political factor. Whatever the immediate political challenge, there’s also the chance that, if resistance can spin this out long enough, our current President will not be in office anymore. Could you then look for a new team to make different decisions about Eskom later. So, while the latest Eskom Cabinet announcement is a welcome definitive step, we must clearly build on it if this ‘unbundling’ process is to be a success. It still has to pass some serious market tests, and they still lie ahead.

Michael Avery

Stephen, put your investor hat on. If you were assessing South Africa’s ‘country risk’, how much credit would you give the government for this announcement? And how much would you hold back until we actually see asset transfers and great investment in a functioning wholesale market? Because we are already seeing -I mean, the likes of NUM, for example, want to challenge this in court. There’s a huge political battle still over this that’s to be played out.

Stephen Meintjies

Yes. As with all the reforms that our President has initiated, it’s going to take a long time. One of the keys will be the composition of the board of this transmission entity. You know, when you can see a really strong board with independent members, then you know it’s serious. And I’m afraid your assessment is not far off the mark.

Michael Avery

And then talk to me about the Public Investment Corporation. While we’re talking about institutions and governance, Raymond, it seems to be a victory for Patrick Dlamini. Had his suspension set aside. According to the court judgment reported this week, the board didn’t have the necessary ministerial approval. But also, there wasn’t really a quorum on the board to argue against his reinstatement either. We can’t forget that.

Let’s leave the personalities aside for a moment. Does this expose something structurally uncomfortable about the governance model itself? And we’ve had the Mpati Commission that said it shouldn’t be politically influenced. And what do we have again? A chair that is an ANC cadre?

Raymond Parsons

Michael, the important point here from a market angle is that this upheaval at the PIC goes beyond the purely technical aspects as to who should be appointed, or who should not be involved I think it’s raised and exposed some very key questions around corporate governance, the whole regulatory framework and market confidence around the PIC that must now be resolved.

So, what’s important here is that – whatever we decide now about the PIC, and the nature of its board and who should be the chairman, it must be possible to convince -you must be able to convince the market – that we can have confidence and credibility around the decisions that the future board at the PIC will take.

Because what is the bottom line here? We’ve had the Mpati Commission – and to what extent will the reforms and restructuring of the PIC reflect that those recommendations? Or on key political point – the appointment of the chair – that its recommendation not been met that it should be a non-political appointment?

So, it seems to me that the bottom line here for the markets, as they assess these changes at the PIC, is that the less there is political interference in the PIC, the better these changes will be accepted. And the important point is to now regain market confidence. We must accept there’s no perfect solution, but it’s got to be a convincing overhaul that rebuilds confidence in a major key structure like the PIC as soon as possible.

Michael Avery

And Stephen, if you were a trustee representing pensioners, would your immediate concern be who won the court case, or actually just getting an independently established account of what actually happened at Lanseria?

Stephen Meintjies

Lanseria is one of many investments and has come to the fore, which raises the question of their overall governance. So, adding to what Raymond has said, when Songezo Zibi’s SCOPA -and I mean, he’s called for -to investigate the PIC, let’s hope they also strengthen the case and cause for reform.

Michael Avery

And back to the speech by Lesetja Kganyago, the Reserve Bank Governor, earlier in the week. Extraordinary. Please get yourself a copy. Go onto the SARB’s website. It’s available there.

But the Governor describes South Africa as almost a textbook example of the emerging-market journey from fragility to resilience over the last two decades We’ve got an independent central bank, healthy inflation targeting. We’ve got a floating currency—roughly US$74 billion in reserves, strong financial regulation But then comes the hard part.

You know, ‘we’re resilient, but we’re not flourishing’.

And he puts his finger on exactly the issue: state capture, institutional destruction, really the real source of this growth crisis.

And his wonderfully provocative suggestion that we need ‘to gamble on growth’ -not recklessly, but becoming less protective of incumbents, less obsessed with permissions and controls, and more willing to allow competition. What would ‘gambling on growth’ actually mean in practical South African policy terms for you, Raymond?

Raymond Parsons

Well, let me first also applaud the overall key message we got from the Governor. I also welcome him to our ‘growth-enhancing club’ and make him a full member, not just a country member! His message needs to resonate widely.

Secondly, I also think he’s made the point more than once, and I think this is symptomatic, that the high cash balances of the corporates to which reference is often made -we need a growth strategy to translate that ‘liquidity preference’ into productive investment to get the job-rich growth going by reforming our institutions that must help to make this possible.

I greatly welcome his overall commitment and push on what is needed in the growth front. I would also mischievously add this supplementary message: when he talks about growth and ‘taking a gamble on growth’ – I would like to see growth also given a little more weight in our monetary policy decisions!

Michael Avery

Stephen, do you agree?

Stephen Meintjies

Yes, absolutely agree. I think he made out a case for what he’s been doing. But I agree. I think it is one of the most beautiful, brilliant, I shall say, history lessons in where we’ve gone over the past -well, more than two decades, actually. And I think it’s a must-read for every member of Parliament, certainly every member of the Cabinet, because he puts the blame right squarely where it belongs, very politely and in very objective, unarguable terms. I hope that the Cabinet does actually read these things.

Michael Avery

Somehow, I don’t think that all of our Cabinet ministers do.

Professor Raymond Parsons, thanks so much for joining. Stephan Meintjies, great insights. Thank you very much for your time. We’re going to have to leave it there.