This is the least confident I have been that the ANC will do the right thing, writes political analyst Nic Borain.
For the past 20 years it has been a good bet to presume that South African markets will always overreact to negative political news.
My default position has been that the ANC is unlikely to behave worse than the market expects; that pessimism and panic about South African politics is always a buying opportunity for those with wise heads and steady hands.
Remember the leaked mining charter in 2002? The government and the mining industry had been arguing about a major new legal and regulatory framework for mining (which eventually became the Mineral and Petroleum Resources Development Act 2002 and the linked mining charter.)
The industry had been holding its breath as it waited to hear how high the government would set the targets for black economic empowerment. For the first time, the government was proposing to move beyond making polite suggestions. In short, mining companies that failed to meet the targets would be unable to renew their mining licences and therefore be out of business.
At the height of the behind-the-scenes wrangling, a document leaked into the public arena in which the government proposed making the target for black ownership 50%. What followed was a bloodbath as our resources index plummeted and R60-billion worth of investment headed for the hills.
I was shipped off by the global investment bank with whom I had a consultancy agreement to visit fund managers in Europe and the United States to tell them what I thought was "really" happening – as opposed to what was "apparently" happening.
I swallowed nervously and told about 50 of the bank's fund manager clients throughout the world that it was vanishingly unlikely that the ANC intended forcing such a steep transition, with such short time lines, on the industry.
The ANC had not behaved like that previously, why would it suddenly start now?
I suggested that the 50% equity ownership targets were probably a bargaining position – and even, possibly, that the document had been leaked by one of the mining houses to give the ANC a demonstration of what would happen if it attempted such radical and quick change.
In the end, the mining charter proposed 15% black ownership by October 2009 and 26% by 2014 – and the fund managers who bought at the height of the panic did very well indeed, thank you.
That general stance has worked for me since I started advising investors in South African financial markets.
But here's the thing: I feel I might be standing on the point of a pivot. Behind me, the consensus has consistently been too negative. My default advice that "things are never as bad as they seem" with regard to South African politics has worked since the ANC came to power in 1994.
Investors who insisted on too high a premium for political risk on South African assets ended up missing out on a lot of upside.
Investors who bought South African assets because it was patently obvious that the ANC consistently behaved in a way that followed both the discipline of global capital markets and a general respect for private property (much to the opprobrium of their allies, the trade union federation Cosatu and the South African Communist Party, by the way) made a good bet and, generally, bought cheap.
So what might have changed?
I am starting to think it is the ANC itself. If the party can elect a person as president who has always appeared unable to constrain his appetites for the goodies that powerful political office can bring, and if the state security agencies, the criminal justice system and the oversight mechanism of the Constitution seem unable to bring him to account because the ruling party and his Cabinet are protecting him, then there are new risks everywhere.
Putting a price on risk
Financial markets cope with risk by pricing it adequately. When the risk cannot be estimated it has to be given the highest possible price. Can investors rely on consistency and protection of the law, the Constitution and the criminal justice system when they invest in South African equities, bonds, currency and the financial instruments that derive from these?
The Nkandla crisis has made this question impossible to answer. This is the least confident I have been that the ANC will "do the right thing in the end" since the early 1990s.
Investors in each asset class or financial instrument have different considerations, but what they all require is predictability, the rule of law, a stable regulatory environment and mechanisms to appeal for justice in which they have confidence.
Thus I will be suggesting to fund managers in 2014 that they take careful note of any signs that the ANC and the government are able and willing to constrain, discipline and make accountable the president … and take equally careful note of the converse.
The national budget is a crucial moment. Will the government continue to shift away from consumption spending and towards investment spending – particularly with regard to the infrastructure programme? Will the treasury be able to continue moving towards "fiscal consolidation" (reducing the deficit)?
Will the government be able to hold the line on the tight and inflation-linked projected wage increases for public-sector employees in 2015? That is, after all, the biggest item of noninterest government spending.
All of this is crucial for those who invest in our government bond market and for the ratings agencies, which assess the ability and preparedness of our governments to repay their debts.
The election results will be important, but in ways that are difficult to predict. If the ANC's share of the national vote plummets to the low-50% range, will this force the party into a process of renewal or will it be panicked into populist measures? It probably depends on which parties take up the slack. If the ANC gets 65%, will it be "Nkandla business" as usual – with lashings of an unhealthy rural populism à la the Traditional Courts Bill?
If the Economic Freedom Fighters get 10% of the vote, will that mean ANC policy-making is paralysed until 2019 as the party attempts to appease angry and disenfranchised youth? Will it mean legislation relating to mining and land-ownership swerves into uncertain and dangerous territory?
If the Democratic Alliance wins 27% of the national vote (which I think unlikely) and if it is able to form a provincial government in alliance with other parties in Gauteng (which I also think unlikely), what will that cause the ANC to do? Behave better? Continue to allow the treasury to set the tone of probity and effectiveness, concentrate on fixing education and focus on economic growth as the only guarantor of electoral success in 2019?
Will this kind of threat cause the ruling party to attempt to make opposition strongholds ungovernable? I suspect different impulses are already at war in the ANC and how that battle is waged will be important for investors to watch.
But the elections are only part of what will be important next year as far as political risks and opportunities are concerned.
Will Lindiwe Sisulu's department of public service and administration continued its strong and welcome push into making a more accountable public service? Will she – or whoever replaces her – be able to hold the ground on the expansion of the public-sector wage bill in the public-sector wage round in 2015?
What will happen to the National Development Plan? Will it remain a jumbled shopping list and a matter of endless contention in the ruling alliance? Or will it focus the government's attention and activity in a way that stops the drift into the uncertainty we are currently experiencing?
Mining policy is perhaps the most adrift at the moment. Where are we going with beneficiation? Will the industry's precipitous decline accelerate if the minister is given the kind of agency, discretion and power envisaged by the Mineral and Petroleum Resources Development Amendment Bill? (I think so, yes.)
Will Cosatu fragment, and will this help or hinder the extremely "investment unfriendly" labour environment? This really could go one of several ways and it will be the arena I will continue to watch most closely.
Will the ANC go for the R100-billion nuclear building programme that appears to have been agreed on a handshake between President Jacob Zuma and Russian President Vladimir Putin? Could this be a rerun of the arms procurement scandal or could this be part of an effective build-out of diversified and generally cleaner generation capacity?
South Africa has a small open economy and we are tossed on the fortunes of the vast ebbs and flows of capital in the global economy.
It will always be difficult to know, for example, whether "Nkandla" (referring to a syndrome rather than a housing estate) is more important for our future than the timing of quantitative easing, or the ongoing consequences of the European debt crisis.
As long as we keep in mind that the money can flow out as easily as it flows in, and that our politics is some significant but difficult to estimate part of what drives those tides, we should remain on the right side of history.
Nic Borain is a political analyst in the financial markets. In the annual Financial Mail survey of the fund management industry, he has been top ranked in the Political Trends and Industrial Relations category for the past three years.