Johannesburg - Despite disappointing economic growth, ongoing industrial unrest and policy uncertainty, the local stock market has outperformed its peers this year. In own currency terms, the JSE all share index has risen 6 percent since January 2, while benchmark indices in other major emerging markets have fallen – Brazil’s Bovespa by more than 20 percent.
Currency losses in all these markets have reduced the dollar value of stock market capitalisation. Measured in dollars, the all share index has fallen by 12 percent since the start of the year, while the benchmark indices in comparable markets fell further – Brazil by 31 percent, the Turkish bourse by 27 percent and India’s Nifty by 25 percent.
The local market has been buoyed by some stellar names, which make up about 36 percent of the all share index, according to Claude van Cuyck, a portfolio manager at Sim Unconstrained Capital Partners. They are successful dual listed companies with large offshore exposures: SABMiller, Richemont, Naspers, MTN, Sasol and British American Tobacco (BAT).
The profits that are generated abroad have translated into higher rand earnings as the currency weakened from R8.50 to the dollar on January 2 to R10.30 on Friday.
In line with the strong earnings, the price of each of these counters on the JSE has risen sharply over the course of the year.
Resource stocks have performed poorly due to lower commodity prices and fears of output disruptions related to strikes, as well as policy issues.
The relative buoyancy of the JSE, without the contribution of the companies that traditionally dominate the market is striking. But threats lie ahead, including a potential US-led strike on Syria, which will destabilise financial markets.
And the backdrop for emerging markets is not reassuring. These economies have been collective casualties of the decision by the US Federal Reserve to start tapering its monetary easing operations.
The wall of money washing through the US markets for the past five years reduced investor returns from that country, diverting funds to more profitable opportunities in emerging markets.
As monetary policy goes into reverse, levels of liquidity will soon start to fall in the US and, in anticipation, investors are shifting money out of emerging markets back to traditional financial centres.
The rebalancing of global investment portfolios is reflected in falling flows to the South African market. Figures from Citi show that, in the month to Thursday, net off shore purchases of domestic bonds and equities worth only R100 million, from R6.5 billion last month and R18bn in April before fears about Fed tapering emerged in May.
In terms of economic growth prospects, South Africa could be the poorest performer among emerging markets. The International Monetary Fund (IMF) estimates growth of 2 percent for the local economy this year. The forecast for Brazil is 3 percent and for both Turkey and Russia 3.4 percent, India 5.7 percent and Thailand 5.9 percent. But these forecasts have been overtaken by recent events and many of the estimates may now be unrealistic.
But whatever the rate of growth, South Africa is an economic minnow with total gross domestic product (GDP) worth $376bn according to IMF data. This compares to Brazil with GDP worth $2.5 trillion, Russia $2.2 trillion, India $2 trillion, Turkey $851.8bn; Thailand $425bn.
These numbers highlight the vital role on the JSE of companies that don’t depend solely on the local economy because they have customers in other countries.