South African investments in context

Those who predict that the rand will never recover should reconsider their views.

I received a surprising number of emails and Twitter comments after some rather hysterical (but sadly not funny) articles in the media about South Africa’s prospects. People were asking what I thought of these articles and why I haven’t responded. The intent behind some of these articles is so transparent that I was surprised that people took them seriously. My approach to this discussion is to try to understand the investment implications of our current problems and how this might unfold in future.

Many rational investors are understandably concerned about the political, economic and social problems that face our country. It is obvious to all of us that we have some real issues that need to be addressed as a matter of urgency. The fact that our problems are so obvious is a real source of frustration to many – myself included. However, our problems need to be given a context, especially when hysterical commentators start predicting the end of the world as we know it. South Africa is essentially a teenage democracy (Mandela’s years as president should be viewed as a honeymoon period) and like any teenager, we are prone to bouts of irrational behaviour. At this stage, we can only catch glimpses of the potential our country has while the problems are on display most of the time.

As for our politicians (from all the parties) why would you expect them to be pillars of virtue or examples of excellence? I can’t think of one current leader of any major country that is worth admiration. Why should our politicians be any different?

The rand

The graph below shows the performance of the rand against the US dollar from January 2012 to date, and compares it against other emerging market currencies including: Brazil, Russia, India and China. These are the other BRICS countries and I believe they are most comparable to our country. As you can see, all of these currencies except for China have lost value against the US dollar and China’s currency is being managed, so it does not move with market forces. It is clear that the rand is not exceptional in this context – we are just another emerging market currency that is out of favour with investors. Commentators who predict that the rand will never recover should reconsider their views. When emerging markets regain favour with international investors, there is no reason to expect the rand to behave any differently to the other BRICS currencies. So if you advisor is telling you to send all your money out of SA at these levels, you are probably being told to close the stable door long after the horse has bolted.

Source: Compiled by Nedgroup Investments

Our stock market

Many investors are really worried about the local economy and how this might impact their investments on the stock exchange (JSE). The majority of the largest companies on the JSE are not heavily dependent on the performance of the South African economy. I believe the JSE is very similar to the Hong Kong stock market, which is seen as an entry into China and Asia. The JSE is similarly an entry into Africa and other emerging markets. The graph below shows how the JSE has performed since the start of 2007 (before the financial crisis) until now.

Most importantly, the performance is measured in US dollars, in other words it is the growth that an offshore investor would have received in the last eight years. I compared the JSE to the Australian stock exchange because many South Africans view this as a viable alternative to SA and because it is also an economy that is dependent on mining. You will note the startling similarities between our market and the Aussie market. The US stock market has not done much better than the JSE over the last eight years even though the S&P 500 has broken new records in recent months.

Source: Compiled by Nedgroup Investments

I am certainly not oblivious to SA’s problems (I am also furious about Eskom, corruption and our education system) but many other markets are beset by their own problems. If you are a rational investor, you should not be selling all your local investments and buying foreign currencies at any price. Sensible diversification is a good principle that should be implemented across all your investments but maintaining a significant exposure to the JSE is also a rational decision.

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