To understand why South Africa (SA) will not become a failed state, it is important to understand how we differ from states that have failed. States like Yemen, Somalia, and Syria. According to research conducted by Fund for Peace, countries that we often ascribe failure to, like Zimbabwe and Venezuela, are not extreme cases of failed states. But before we address the question of SA’s failure, it might be worthwhile to distinguish between a state and a government.

A state consists of four elements: Citizens, territory, government, and sovereignty. The government exercises power and authority on behalf of the state by formulating the will of the state into laws, and then implementing and enforcing those laws. Therefore, even though they are distinguishable, the idea is that if the government fails, the state fails too. But when do governments and, by implication, states, fail? A failed state is a state that has lost its effective ability to govern its people; much like the position that SA is currently in. A failed state maintains legal sovereignty but experiences a breakdown in political power, law enforcement, and civil society, leading to a state of anarchy; some might say that SA ticks this box too.

But are we, in fact, a failed state, and, if not, are we going to become one? To answer this question, analysts often turn to the Fragile States Index (FSI), which considers key elements of a country, like cohesion, politics, economics, social well-being, and the level of external intervention. The FSI shows that while SA has been on a decline over recent years, we are still far from being a failed state, that is, being a country with a “very high alert”. Currently, we are the 79th most fragile country out of 179 and still better off than some of our peers, such as Brazil, India, and Turkey.

We maintain that SA will not deteriorate to the point of complete collapse because of five differentiating forces: Our love for democracy (freedom), freedom of speech, an independent central bank, an enforceable and equitable rule of law, and liquid and deep financial markets. But it does go deeper than that: At the heart of these five forces lies the “moral individual”. An individual who takes responsibility, who takes ownership of their own life, who is accountable and resilient. But also an individual who understands their responsibility towards the community. Collective individualists that drive stakeholder capitalism, not shareholder capitalism, where the current and future benefit of capital is enjoyed by more than just the few who own it now. Although these moral individuals are few, a remnant of them remains in SA. For this reason, even if our government should deteriorate further, as we expect it will, the remnant of moral individuals will ultimately produce constructive progress.

In many rich (successful) countries, governments ensure that the mentioned five forces, among others, move an economy towards equitable progress. But, because the South African government has failed, the moral individual must, once again, step up, as they have done so many times before.

What must the South African government do? The government must fundamentally change. Our current ruling party has been in power for too long, we have become too bureaucratic, too slow, and too fixed in our ways. We need a new growth mindset but, most importantly, we need accountable action. We need strong leadership and moral individuals in government.

A perfect example of the latter is the recent selloff in the local equity and bond markets. We are witnessing valuation metrics that are extremely depressed, with historic analysis pointing to multi-year double-digit returns should you buy local shares at these levels. This type of thinking reminds us of the wise words of Mark Twain: “History never repeats itself, but it often rhymes”. Similar trends are evident in the local government bond market, with yields far exceeding most of our emerging-markets peers – indicating that investors are clearly “fearful” of our assets. Does this, however, warrant us to become greedy as Buffett suggests?

Unfortunately, one does not have to look far to find compelling reasons why our local assets should be trading at discounts, relative to the rest of the world, the obvious one being left in the dark at night owing to load shedding. But will the picture look the same ten or more years from now? The argument can go both ways depending on your perspective. There are two schools of thought: On the one hand, the Bears think South Africa is heading for a collapse and there is no hope. On the other hand, the Bulls believe that South African tenacity can overcome overwhelming odds. As realistic optimists, we are inclined to side with the Bulls; far too often, when the outcome seems obvious, alternative scenarios prevail. The world is rapidly changing and none of us can predict where we, at the bottom-most-tip of Africa, might find ourselves on the global stage ten years from now, with many of our current “issues” in the rear-view mirror.

As always, we are confronted with uncertainty. But, given the data that is currently known to us, we can say with a reasonable degree of certainty that the current environment has, indeed, led investors to become “fearful” of our assets, which is creating a great buying opportunity for long-term investors that dare to venture off the beaten track. What should investors do? As always, we would recommend that investors stick to their long-term financial plan. Contrary to the Bears out there, we believe that investors should diversify their exposures between both local and global assets. After all, diversification is the only free lunch in investing.

Over the past year, the rand has been battered and it seems as if there will be no relief any time soon. Consequently, we have had to revise our year-end USD/ZAR forecast up from R16.50 to R17.50 and we will consider taking money offshore for our clients at R18.00 levels.

At first, it was the United States (US) Federal Reserve that started to increase interest rates, together with recession rumours that began to spread, which caused investors to run to the safety of US markets. As short-term capital flooded the US markets, the US dollar (USD) got stronger and stronger, and the rand, consequently, weaker and weaker. History told us that the USD usually started to depreciate again 12 to 18 months after its initial increase, as the US economy came under pressure. This usually causes investors to start looking for yield elsewhere, which, in turn, helps to support other emerging market currencies, like the rand. Unfortunately, 12 to 18 months later, the US economy is still the healthiest economy out there and shows very few signs of slowing down substantially. Because uncertainty scares investors, and because developed countries now offer even more attractive yields and their listed companies seem to be getting through tighter monetary conditions, emerging market currencies are bleeding (note that this is not something that can be sustained indefinitely). Unfortunately, owing to a failing state in South Africa (SA), the rand has not only been battered by global waves but local waves too. We all know about government’s inefficiencies but the rate of deterioration has recently weighed more heavily on the rand.

Failing state-owned enterprises, like Eskom, have led to rumours about rolling blackouts. In fact, many larger corporates have already started to plan for a “no-grid” eventuality, when Eskom will simply fail and take the economy back to the dark ages. We do not believe that we are close to this point but markets seem to be starting to price this in as a potential eventuality. Even if we do not have a total grid collapse, government’s persistent erosion of the business environment is weighing down any potential we have for growing our economy sustainably.

Failing state relationships, poor political allegiances, and news about SA’s support of Russia’s war in Ukraine have soured our association with important trade partners who represent the bulk of our annual trade volume. Markets fear that we will be excluded from important trade agreements, like the US-based African Growth and Opportunity Act, as well as that other trade partners will enforce trade restrictions against us, fuelling concerns about lower growth, more unemployment, and higher inflation.

Failing state finances mean that we continuously allocate scarce resources ineffectively and inefficiently. Ineffectively means that most of our budget is allocated to the wrong expenditure items, like salaries and grants, instead of to capital, which includes infrastructure, healthcare, and education. We also allocate resources inefficiently, which refers to wasteful and irregular expenditure, and the horrific performance of those items that we do spend on. Compared with most other countries, and on a range of performance indicators, we still have the weakest performing education and healthcare results in the world. Put this all together and it is no wonder the rand is having such a hard time!

For now, we believe that the rand will remain weak but that the recent fall to levels beyond R19.40 is a bit too much. Markets are a collective of emotional human beings and, therefore, tend to overreact. We should see the rand strengthen back towards levels closer to R17.50. However, the longer the rand stays above trend, the more it gets used to staying there.

“We believe in what people make possible.” This is the slogan of one of the fastest-growing companies in the world, Microsoft. Currently, Microsoft seems to be achieving feats beyond what is possible. Growth within the world’s largest economy, the United States, has recently slowed down. Gross domestic product figures show that the number of goods and services created in the last quarter registered the weakest pace of expansion since the second quarter of 2022. At a business level, the majority of corporate America is feeling the pinch of higher interest rates and slowing growth. The impact of higher interest rates is usually only felt 12 months after the original hiking decision was made. It is, therefore, apparent that the worst effects could still lie ahead. For the time being, however, tech stocks, such as Microsoft and Alphabet, seem to be bucking the trend. Since the start of 2023, their respective share prices are already up 28% and 23%. But, on an even broader scale, the top performers all seem to be tech-related stocks.

There are a few reasons why tech is performing strongly in 2023. One of these is investors hopping back into some of 2022’s worst-performing stocks, smelling a bargain. Investors also seem to like certain unique qualities in tech, such as resilient demand and growth, which stand in stark contrast to an environment filled with concerns about failing banks and inflation-strapped consumers. There are also company-specific reasons. For example, Microsoft has achieved a new 52-week high because of the current optimism around its artificial intelligence (AI) services, following its investment in OpenAI in 2022. This investment is already beginning to have an impact on market share and performance, and there is a lot more scope as Microsoft starts to merge its cloud (Azure) and AI (OpenAI) services. This combined service already has 2 500 customers, including Shell and Mercedes-Benz, with more customers being added at breakneck speed.

Investors’ attention has, therefore, been diverted away from the economically sensitive areas of big tech. For example, the weaker economic backdrop has resulted in consumers buying fewer personal computers (PCs) globally. This has not only affected Microsoft’s PC sales but also other areas of its business, i.e. the demand for its software. Other companies, such as Intel, have felt the effects of a softening in PC demand more acutely as many of those PCs are powered by Intel chips. Other segments of the market are also struggling. Google, for example, reported a second consecutive drop in advertising revenue, while Facebook informed its employees to expect a slower pace of hiring following the company’s latest round of layoffs amid uncertainty in advertising spending going forward.

Tech’s stellar performance over the last several months represents a unique problem for the market: Overdependence on big tech gains has done little to provide assurance about the health of the wider economy, which leaves investors especially vulnerable if tech should stumble again. Signs of this could not be reflected more clearly than by the ongoing layoffs at big tech, which serve to boost near-term figures but is also likely to signal a weakening in the intermediate-term outlook.

While investors have been rewarded for their contrary positioning in big tech, despite a weakening global economic backdrop, they will certainly have to exercise caution going forward as we continue to move into a stock pickers environment.