Bruce Whitfield: SA is a basket case. Really?
- Moody’s is warning the economy is in trouble due to populist policy posturing
- Despite the best efforts of the state, inequality remains among the highest in the world
- But investor returns challenge the “SA is a basket case” braai fire analysis.
What’s worth R14.8 trillion?
That’s the value of all of the shares listed on the JSE.
It’s also very nearly the value of Apple, which is worth nearly R13 trillion. At $907bn, it’s the worlds’ most valuable company and is very nearly the size of all of the companies on the JSE put together.
That’s a sobering thought.
Either that gives you a sense of the scale of Apple or it makes you realise that despite it being one of the 15 or 20 biggest stock markets in the world, the JSE is really very small.
It emphasises the point that if you want your money to hold its value globally, you have to identify great international companies or indices in which to invest. Keeping all your money invested just in South Africa makes you guilty of falling for the age-old adage: “Never put all your eggs in one basket.”
Yes and no, as it turns out.
Creating a basket-case scenario for South Africa is easy.
Two out of three ratings agencies have the country listed as sub-investment grade, scores of our state-owned companies are bankrupt, our society is one of the most unequal in the world, our politics deeply divisive – all of this is true.
Research carried out by Credit Suisse and the London Business School last year examined data going back 117 years to 1900. Commodity-rich economies dominated stock market performance and delivered superlative returns. Best performing stock market in the world over that time? The United States, you say? Good guess. It was third. Australia was second and in first place, South Africa. It delivered an average annual return of 7.2% - two percentage points above the global average.
Researchers pointed out that the commodities we produced during that time provided a buffer against global turbulence. But now it’s the economies that are relying on newer industries such as financials, technology and services that are delivering higher returns.
Bloomberg reported at the time: “The study shows that no single industry can provide a lasting competitive advantage. In 1900, more than 80% of the US stock market’s value was in businesses such as railroads, which are today small or extinct. Nearly half of UK companies by value are in sectors that didn’t exist a century ago. Gold, once key to South Africa’s wealth, has waned in importance and the biggest Australian companies are now banks.”
That is so true of South Africa too. On the day Nelson Mandela was released from prison more than three quarters of the companies on the JSE top 40 were resources counters. 23 of them were gold mining companies. That is just a quarter of a century ago. Today an index once dominated by resources is considerably more diversified and reflects technology via Naspers and the cellphone firms, services by the likes of Bidvest and financial services through all of the big banks, one of which, Capitec, had not even been dreamt of 25 years ago.
“Because it has performed well in the past, however, this does not mean it will continue to be a world beating performer over the next century,” Bloomberg quoted researcher Professor Paul Marsh.
Markets don’t reflect the lived reality of most people in a society. While its performance right now is poor and reflective of the negative sentiment creeping back into investment markets, asset prices on the JSE remain quite elevated considering the amount of political and policy uncertainty there is in our environment.
This is why. If you invest in just the JSE Top 40. you would have some quite remarkable global diversification built into your portfolio. The biggest companies on the JSE earn more than 70% of their revenues outside of the country. That average is increased by South Africa’s most valuable company, Naspers, worth just one tenth of the mighty Apple, but with a market value of R1.36 trillion.
Naspers most recent results showed that it earns 84% of its profits outside of South Africa’s borders courtesy mainly of the mighty scale of Tencent, in which it has a one third stake. A growing number of its internet businesses around the world are making a contribution to the bottom line as its dependence on its home market and its old media assets wanes.
You can’t, however, just throw money at big companies and expect to make a return, no matter how good the story sounds. Until six months ago Steinhoff was one of the ten biggest companies on the JSE. Then came its collapse and fall from grace and it recently moved into the small cap sector of the JSE. At 125c its worth just 2% of its valuation at its peak at over 7,100c a share.
The JSE is down about 7% in rand terms so far this year. Up to the end of 2017, the JSE was being driven by a handful of so-called rand-hedge counters – companies that make more money outside of South Africa than in it. This year’s performance has been dire. But your starting point matters. If you compare the value of shares on the JSE to 12 months ago, you are up 11%.
What’s more scary for our real-world lived experience, is the selling of South African bonds. This is the real litmus test for foreign confidence in South Africa’s ability to pull its economy back from the brink. South Africa borrows money through the bond market and foreign investor appetite is best measured through the bond market. Their holdings have dropped 10% to their lowest levels in 12 months thanks largely to a record sell-off since May.
Non-residents held 38.9% of government debt on June 22. In March, that number was at nearly 43% according to Bloomberg research. The so-called Ramaphoria phenomenon saw foreigners invest heavily in SA debt but since it emerged that the economy contracted by more than 2% in the first quarter, investor appetite has dwindled.
While it doesn’t change the fact that a sell-off its happening – the reasons appear more global than domestic although ratings agency Moody’s this week warned South Africa against populist political posturing.
There has been a sell-off in emerging market assets generally. That’s due to a resurgent dollar and the prospect of rising American interest rates. South Africa’s current account deficit has widened to its biggest level in two years and that too puts pressure on the country’s finances – we simply need to remain attractive to foreign investors to allow their inflows to finance the deficit. As I pointed out in a recent piece on Business Insider, South Africa’s mining sector has always depended on foreign capital for its growth and policies like the Mining Charter threaten the willingness of capital to invest in the sector.
Moody’s – so upbeat in January about SA’s prospects under new political leadership is now warning the country not to squander the opportunity that is being presented for a turnaround in the economy.
It warned on Tuesday that South Africa's economic growth prospects will be limited by weak business confidence while uncertainty around land and mining reforms remain a concern for investors.
You have no investments? You think this stuff doesn’t affect you. It does. Money indeed does make the world go round. And it chooses where to go. South Africa has long proved an attractive investment destination and can remain so. It’s a choice. To torture a World Cup analogy: it’s time to stop scoring own goals.
Bruce Whitfield is a multi-platform award winning financial journalist and broadcaster.
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