Making Sense

2017-01-24T11:34:53+00:00 November 16th, 2016|

Seminal changes

When the British voted marginally in favour of leaving the European Union (Brexit as it was popularly known as); many, including me and even Brexit supporters were surprised. Even more surprising was Donald Trump’s stunning victory in the US presidential elections. We were all led to believe by the mainstream media, as well as most pollsters, that Hillary Clinton would win the election. In the recent local government elections in South Africa, we witnessed similar changes in voting behavior. Most of the major metropolitans are now run by parties in opposition to the ANC.

If you include in the mix the #FeesMustFall movement, the public service delivery demonstrations and other similar protests; it is becoming evident that there is a growing level of discontent with the current status quo in South Africa as well as in many other countries.

As citizens as well as investors, we try to understand what is happening and how this may affect us.

 

What is happening?

I would like to posit a theory that suggests that these changes in voting and the protests that are taking place reflect a deepening dissatisfaction by the majority of citizens on the current status quo:

  • Unemployment – unemployment levels are high, traditional long-term employment is being replaced by short-term contract type assignments. In South Africa, unemployment levels stand officially at 26.6% but does not take into account many who are in the informal sector who barely make ends meet.
  • Increasing levels of Inequality – a study by Anna Orthofer from Stellenbosch University, finds that 95% of the wealth in the country is owned by only 10% of the population. Interestingly, Orthofer also finds that there is a growing Black middle class which makes up approximately 40% of the population and that there is less disparity in incomes between top earners and the middle class. This Black middle class however, has very little assets (only 5% to 10% of the total wealth).
  • Poor policy choices – policy choices made those in power have not had the expected impact on unemployment and / or inequality. One can argue that these policies have exacerbated these issues. Low interest rates by central bankers have increased asset prices (stocks, bonds, property, etc.) widening the inequality gap. Where businesses have invested, these have been typically in capital intensive, labour saving machinery instead.
  • Disconnected elite – Elites (i.e. those in government, business and professionals) are disconnected and thus unable to understand and / or respond appropriately to the growing angst and dissatisfaction of the majority of the population.

The result is Brexit, Trump, Vuyani, #FeesMustFall, #RhodesMustFall, etc. Citizens are rejecting the status quo and are looking for alternatives. You may not agree with any or all of these movements, but they are capturing voters by understanding their fears and voicing these. Some of the words and actions may be racist or violent in nature, but this does not deter people from supporting them.

My view is that the underlying causes of the issues are not well understood and hence we find ourselves in this situation.

 

Some of the Underlying reasons for the issues

Several underlying issues are playing out causing the current dissatisfaction. I highlight two of these:

  • Technological Change – Technology innovations are increasingly decimating jobs. Most modern factories are highly automated. Similarly clerical or white collar jobs are also rapidly been replaced by automation. Recent developments in artificial intelligence are also beginning to impact on knowledge based professions (automated trading; robot advisors, medical diagnosis, legal research, language translation, etc.). Imagine the impact that driverless vehicles will have by thinking about how many earn their living by driving.
  • Globalisation – Globalisation also plays a significant role in the destruction of jobs. Offshoring, cheap manufacturing countries, low tax jurisdictions, all vie for more capital and / or jobs to move to their countries. The movement of people from countries with potentially lower economic prospects to countries with higher economic prospects (e.g. Mexico to USA; Zimbabwe to South Africa; Eastern Europeans to United Kingdom) also plays a role in employment changes.

But the world has gone through technological as well as globalisation changes before and by-and-large mankind has benefited from this. What is wrong this time?

 

Benefits not equally shared

Take a look at the graph below:

lunar-capital-graph

 

Source: Lawrence Mishel, The Wedges Between Productivity and Median Compensation Growth, Economic Policy Institute. http://www.epi.org/publication/ib330-productivity-vs-compensation/

What this graph shows is that the economic benefits of productivity gains has by-and-large only gone to others (shareholders, maybe tax authorities) and not to the workforce. This is perhaps the most telling picture of why we have the level to inequality that we have right now.

Jobs have been displaced from blue and white collar workers to technologists and from high cost countries to low cost countries. New jobs created have been insufficient in addressing the tide of unemployment or real wage growth. Further, the benefits of productivity improvements from 1975 onwards has not gone towards compensation (salaries and wages). Hence this growing inequality and unrest on the status quo.

 

South African specifics

In South Africa, with the challenges that we face in our education sector, we are not creating near enough new economy jobs or onshoring jobs to take advantage of these trends. Many of our school leavers and even university graduates are ill-equipped to cope with the demands of the new economy. We score poorly in Mathematics and Science when we benchmark our students against global peers. Many of our brightest minds are been lured to work overseas taking with them their skills and the opportunity to create jobs in South Africa.

Because our economy is not growing, those that are in employment, protect their jobs at every cost. Whether it is through subtle racism in the corporate world or by killing rival political candidates in government elections. All these actions reflect a fear of losing one’s income.

[To be clear, I’m neither an apologist for racists nor murderers.]

Arguably, even the Black Economic Empowerment (BEE) policies create an unintended consequence of white people desperately (yet subtly) hanging on to their jobs for fear of losing their incomes or protecting their lifestyles or fearful that their children will not be able to have a future in this country.

 

Policy Response

So what have the responses been from policy makers?

Central bankers have tried to stimulate the economy through low interest rates and quantitative easing programmes. However, this has not created the demand from consumers or stimulated investments that have created jobs in a sustainable manner. If anything, consumers have used lower interest rates to reduce debt levels. Asset prices (property, stock, bonds) have increased in value, benefiting the already wealthy and possibly creating an asset bubble.

In South Africa, government jobs have ballooned which has helped employment figures and in increasing the size of the Black middle class. But, this has not created a sustainable, structural change in the economy that creates jobs in a sustainable way. Fearful that these jobs are not sustainable, we have high levels of corruption and protectionism in our economy. This makes South Africa less attractive as an investment destination.

Business leadership is not playing its role in creating a more inclusive economy. Earlier, I talked about the wealth differentials between the richest (mostly White) and the rest (mostly Black). This is a sad indictment after 23 years of our democracy which has been a relatively peaceful transition. Given the atrocities of Apartheid and the privilege that this has afforded White communities and businesses, I do believe that White businesses can be more forthcoming on alleviating the discrepancies between Whites and Blacks in the country and redressing the ravages of Apartheid.

Earlier I also talked about BEE not having the impact that it was intended to have and in fact possibly also creating unintended consequences. Shouldn’t we take a cold look at this without the emotions that it evokes and ask ourselves how can this be improved?

 

Some thoughts on possible policy changes

Here are some of my thoughts on what we could do in South Africa:

  • Incentivise investments in new growth industries – we should be incentivising investments in growth industries like renewable energy, information technology; space exploration, driverless and electric motor vehicles; etc.
  • Fix the Basic education System – upscale teachers, provide high tech learning and teaching in our schools. Break the concept that all schools must have the same facilities – this is a noble objective but idealistic. Rather create champion schools initially and roll out the champion models to other schools on a phased approach as resources become available. Create a globally competitive mindset.
  • Revisit BEE – the current BEE model creates a mindset of limited resources rather than one of abundance. A few have benefited but we need to rethink how we can create access for the many who are left out in the cold. We need to rethink how we develop and retain critical skills and investments; and how we create more opportunities rather than trying to share from a shrinking pie.
  • Encourage entrepreneurship – make artisanal skills development a priority. Develop a plan to increase the quality and quantity of our STEM (Science, Technology, Engineering, and Mathematics) graduates. Incentivise them to stay in the country. Develop a plan to encourage entrepreneurs.

 

Investor responses

As investors, we understand that certain realities are here to stay: you cannot reverse the trends of technological advancements and globalisation. Similarly, you cannot miss out on the opportunities to create wealth that will not only benefit you and your family, but also the community at large. It is important to understand that you need to have a clear plan to build wealth for you and your family. You cannot rely only on your income to improve your standard of living. If you do have wealth, you will be able to influence where your investments go.

A philosophy that we follow is to invest in innovative businesses, because these businesses are generally more sustainable in the long-term. A strategy that we follow is to try and identify those companies that take advantage of trends such as technological innovation and if their valuations are reasonable, we invest in them. In this way, we participate in earning from productivity gains.

Lastly, we do not ignore the potential social implications of these irreversible trends and hence we play an active role as citizens in influencing policy debates and changes so that ultimately we can have a more inclusive economy. A more inclusive economy by definition is beneficial to all and certainly more sustainable. Ultimately, we all aim to improve our quality of life. Building wealth goes a long way in helping us improve our quality of life.