HILTON TARRANT: Chris Becker, market strategist at ETM Analytics, joins us now.
Chris, last year you published an interesting comparison, comparing the price of a King Steer Burger and the price of one litre of petrol between 2002 and 2012 – so comparing that cost across the decade. You published that on your blog and we republished it on Moneyweb.co.za.
A very interesting post this morning – Steers opened in Clapham in London last weekend, and the prices of Steers burgers in the UK versus the prices here yield some very interesting comparisons.
CHRIS BECKER: Ja. It was very interesting. Steers opened their London-based shop on Sunday and the price for a King Steer Burger Meal was £7.30, £7.29. At the current exchange rate that converts to a rand-based price of R111.
In South Africa for exactly the same meal you are looking at a price of R64.90, about R65. So it’s actually 40% cheaper to buy the King Steer Burger Meal in South Africa than it is to buy it in London.
What I wanted to draw out and the point I wanted to make on the posts that I put up was to say that we’ve been communicating to ETM clients for a while now that we think the rand is starting to look really undervalued, and we are looking at a rough estimate of around 15 to 20% undervalued against the pound sterling, the euro and the dollar.
I wanted to say that this price difference between London and South Africa of a Steer Burger would start to compress, and that price difference should start to come back as the rand strengthens over time.
Of course, the other thing to say is that South Africa could be very cheap at this stage because we are going into a high inflation environment. So the recent rand weakness that we’ve seen should start to feed through to much higher prices at the retail level, and a combination of high inflation in South Africa and a rand that starts to strengthen again from here should start to see the price discrepancy squeeze narrower again.
HILTON TARRANT: Chris, you do say in your post that this just remains interesting, and that we shouldn’t read too much into this. But it does give us an updated comparison, I guess, to something like the Big Mac Index which The Economist magazine publishes annually or biannually. The most recent update to that index was in January this year. So we are a good couple of months down the way. The exchange rate they used in January was R9.05/US dollar, so [we’re] already substantially weaker against the dollar and I’m guessing prices haven’t moved that much.
CHRIS BECKER: Ja, prices haven’t had a chance to really respond. The currency markets tend to lead and they move a lot faster. They are a lot more liquid and prices adjust quicker. So in that sense a rand that moves also incentivises and entices capital flows all across the world.
So already some feedback we’ve started to see from the market, especially from foreign investors, is that they are saying that South Africa is looking really cheap in terms of investment markets.
The stock market hasn’t fallen that much although it’s come under some pressure in the last few weeks. The rand has fallen a lot and this is basically signalling to foreigners that South Africa is looking really cheap now as an investment destination, and so money is starting to flow back into the country.
HILTON TARRANT: Chris, just to get back to the burger very quickly, an interesting side note that you do make in that post is that the burger itself here in South Africa is 7.5% more expensive than it was last year, and that is versus an inflation rate of somewhere around 5.5%.
CHRIS BECKER: Ja, I did make the point. My sense is that the real cost-of-living increases are a lot higher than StatsSA, for instance, is reporting. This little anecdote just sort of tends to confirm that. petrol prices are also going up at a much faster rate than StatsSA reports the overall inflation rate [being].
But what we are really doing here is anecdotal stuff. It’s not a rigorous analysis like StatsSA would be doing. They crunch something like 70 000 different prices to come up with this inflation rate, and no consumer really buys that much stuff on a monthly basis.
So, when we are looking at things like King Steer Burgers and fuel prices and other simple commodities and goods that people buy on a week-to-week or day-to-day basis, it sort of drives home the things that are really important and that are hurting the pocket quite instantly.
And I also just wanted to make another point. Earlier you spoke about the comparison I made between a litre of petrol and the price of a King Steer Burger. Those prices are both going up over time at roughly the same rate, and so the underlying denominator to inflation is the weakening rand.
So it’s the rand that is weakening that is pushing up overall prices in the economy, and that’s what’s really starting to hurt your low-income earners, for instance, who are experiencing this high inflation rate, and who are restricted or locked out of the credit markets. They are not able to borrow and spend borrowed money to get geared and buy assets where they can actually profit from rising inflation. They are locked out of that market and so they then, on fixed salaries, or if they are unemployed, see prices running up at a much faster rate.
That then also starts to trigger off all sorts social unrest in society. So another consequence of this weak rand is that general prices of basic goods that people need to buy to survive are rising faster than the overall inflation rate, and I expect to see a lot more social unrest in South Africa going forward.
HILTON TARRANT: Our thanks to Chris Becker. Gugu, Chris does point out that the price of a King Steer Burger is up 7.5% from last year when he did that other comparison between a decade before that, 2002, and last year, 2012.
A King Steer Burger cost R39.90 last year – what do you think it cost in 2002?
GUGULETHU MFUPHI: Oh, gosh. If my maths still serves me well and is accurate – what, it’s probably around R40-odd rand now?
HILTON TARRANT: R42.90 now – what did it cost in 2002?
GUGULETHU MFUPHI: Oh boy, thanks Hilton!
HILTON TARRANT: R11.50.
GUGULETHU MFUPHI: No ways. That’s like the equivalent of their Get Real – which is like the Value Meal.
HILTON TARRANT: R11.50 back in 2002. Crazy, crazy, crazy.
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