The South African market in perspective

That, mixed with a number of coaches who tried and failed, didn’t leave South African supporters with much to believe in. But man, did they surprise us! After nearly two years, the British Lions found themselves facing the Springboks head-on again for the first time since 2009. Again, the chances didn’t look too favourable for the Springboks. These teams didn’t play against each other for nearly two years, and on top of that, SA rugby was going through a difficult time. And once again, the Springboks showed us just how resilient we are as a country.

When we take a look at our local stock market, the picture doesn’t look that different. Over the past 10 years (until the end of July 2021), the FTSE All World Index (ACWI) delivered growth of 10.7% per year in US$ terms. Over the same period, the FTSE/JSE All Share Index grew by 11.6% per year in rand-terms, but to compare these two indices in this way is a lot like asking Faf de Klerk to scrum against Ox Nché. It’s only when we convert the ACWI’s growth into rand-terms, that we get a proper perspective. The reality is that when you factor in the rand’s weakening over the past 10 years, you will firstly see that the ACWI grew by 19.7% per year, and secondly, that SA shares contracted by 8%.

Graph 1: FTSE All World Index vs. FTSE/JSE All Share Index in rand-terms

Source: Refinitiv Eikon

Where did things go wrong? Just over a decade ago, well-known investment experts like Mark Mobius claimed that emerging markets (including South Africa) offered the best investment potential. Were these experts wrong, or was the playing field altered in such a way that this claim should now be reconsidered?

The short answer is that they weren’t wrong, but in order to support my answer, we first have to look at why investors like Mobius prefer to invest in emerging markets. In my opinion, the answer lies in the very definition of an emerging market. According to Investopedia.com, emerging markets are popular among investors because they offer the prospect of higher returns, simply due to the fact that they often experience faster economic growth as measured by their Gross Domestic Product (GDP). But as we know, with higher-than-expected returns comes higher risk, mainly as a result of political instability, infrastructural issues, volatile currencies and limited stock opportunities in these countries.

During 2000 and 2010 when everyone still loved emerging countries, the South African economy was still healthy. Between 2005 and 2009 South African GDP grew approximately 3% faster per year compared to the annual GDP growth of the G7 largest countries in the world. This made facing the risk worthwhile for big investors, because of the prospects of possibly higher returns. Since then, however, this difference in growth has become smaller and smaller and South Africa is now growing at a glacial pace, even when compared to the economic growth of some of the oldest and most developed countries in the world.

Graph 2: SA annual GDP growth, FTSE/JSE All Share Index earnings growth and IMF expected GDP growth

Source: IMP & Iress

This means that despite a strong underperformance of South African shares against developed markets, it still didn’t entice large investors worldwide to come looking for bargains in the South African market.

But don’t lose perspective. I strongly believe that things will get better. We can see that thanks to better commodity prices in general, South Africa has already started to surprise us, with an increase in tax revenue and a now much stronger current account as contributing factors. And these surprises are what made institutions like the International Monetary Fund (IMF) review their estimates for South Africa’s expected GDP growth for 2021 three times since October 2020, and increased their expectations from 3% to 4%.

Like Morgan Housel said in his article called, Getting Rich vs. Staying Rich: “Nothing great or terrible is likely to stay that way for long, because the same forces that cause things to be great or terrible also plant the seeds to push them the other way.”