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Opinionista

Investing in the stock market: Endgame

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Patrice Rassou is head of Equities at Sanlam Investments and co-manages the SIM General Equity and SIM Top Choice Equity Funds.

The JSE has been under pressure for the past few years, but the result does not have to mimic the Avengers movie Infinity War. A happy ending is still possible here. Over to you President Cyril Ramaphosa.

The last time I reluctantly took my boys to watch the Avengers: Infinity War movie I was pretty horrified, after enduring the never-ending saga, that the purple villain Thanos ended up wiping out half of life on our planet because of the ecological wreckage caused by humanity.

As a student of economics, I remember reading the 1798 essay by Reverend Thomas Malthus predicted that population growth would outstrip our ability to produce food, leading to certain starvation.

Flashback to 2008 and global financial markets were in a state of Armageddon following the collapse of Lehman Brothers. Global markets also had a seizure as liquidity dried up and investors ran towards cash and gold for cover. The JSE wasn’t spared the global tsunami, plunging some 40% over a few months as risky assets went into meltdown. Doomsday scenarios are a regular feature of our lives, whether fiction films or markets.

The period post the Global Financial Crisis coincided with a decade of economic mismanagement. Our budget deficit ballooned from 1% to 4.4% of GDP, and corruption and graft crippled state-owned enterprises. As GDP growth weakened from an average rate of 4% p.a. over the previous decade to a meagre 1.5% for the most recent 10 years, South African corporates embarked on an aggressive offshore diversification strategy with some R400-billion being invested offshore over a period of five years, from a start of zero. South Africa felt like a black hole that everyone was trying to avoid and last year real retail sales growth slowed to 4%, which was even worse than during the Global Financial Crisis.

Corporates looked to diversify away from South Africa. For instance, ABSA bought Barclays’ African network and Tiger Brands acquired Dangote Flour Mills in Nigeria for R1.5-billion in 2012. The next wave was to expand in developed markets. Woolies acquired department store David Jones in Australia and Brait took over New Look in the UK. Meanwhile, a number of mining companies tried to reduce their South African exposure with Goldfields unbundling most of its South African assets to form Sibanye, while Anglo Platinum shed its deep Rustenburg mines, also to Sibanye.

Listed property players also pursued an aggressive offshore diversification strategy, which was debt-fuelled with just under half of the assets of the sector now having been externalised. However, for those who expanded into the rest of Africa, the global economic downturn has proved punishing with tenants unwilling to pay high dollar-based lease rates, while those in the UK are facing Brexit-related headwinds. Poor Tiger Brands ended up selling its Nigerian business back to Dangote in 2015 for $1!

It wasn’t only corporates who were venturing offshore. Asset managers took full advantage of the increase in the investible offshore limit with pension funds, from last year, being allowed to invest 30% offshore and another 10% in the rest of Africa. Many advisers barely had to prod savers who were getting increasingly nervous. Run for the hills, they said. And just as in 2001 and 2008, the sudden weakness of the rand in 2015, together with a tenuous political landscape, was the last straw for many investors who rushed offshore headlong.

How do we pit a flyweight against a heavyweight, I hear you murmur. Surely this is not even a fair fight. Some investors seem to echo the IAAF: Ban Caster! Avoid South Africa! But that’s where it gets more interesting. No prizes for guessing that indeed you would have been better off investing in offshore equities than remaining in SA. After all, the rand alone weakened by some 4% p.a. for 10 years against the greenback. So if we compare dollar returns, you may expect a blood bath. But what if I told you that this is not obviously the case?

Lies, damned lies and statistics

So let’s settle this. The US, for sure, has been the big gorilla with the Fed aggressively printing money, the so-called FANGs (Facebook, Amazon, Netflix, Google) vying for world domination alongside Apple and Microsoft, and President Trump vowing to make America great again by slashing corporate taxes and driving unemployment down to half-century lows. But what about the rest of the world? What if you stashed your savings in European or even Japanese equities?

Here is the big reveal: What may come as a shock to most readers is that the JSE in dollar terms (i.e. accounting for the 4% p.a. depreciation of the rand over the decade), in fact, did better than the rest of the world equity markets if we exclude the US.

The JSE kept up with most faster-growing emerging markets! What kind of Voodoo mathematics is this? You see, the JSE is not a reflection of SA Inc – over 60% of its earnings benefit from rand weakening. If you think of our largest listed company, Naspers, and the resources sector, this represents close to 40% of the market cap of the JSE and their fortunes will be dictated more by the Chinese than the South African economy.

Unfortunately, in many cases, as per the corporate examples above, investors end up di-wors-ifying returns by going into offshore markets they do not understand or timing it just after the rand and JSE have suffered a sudden slump. Surprised? Shocked? You probably feel the same as I did after I watched Avengers: Infinity War.

Let me remind you that Trevor Manuel turned a gaping budget deficit into a surplus and that economic growth peaked at 6% in 2007! So, just as we are about to elect a new administration this is not the time to give up on the JSE. In the final instalment, Avengers: Endgame, the saga does have a happy ending. DM

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