Weakening rand hides JSE’s decline

The JSE’s strong run over the past few weeks is an illusion created by the weakening rand. While the all share index was up just more than 1 percent in the month to Friday, adding more than R170 billion to its market capitalisation, in dollar terms the benchmark measure was down 4 percent.

Despite five record closes since January 2, South Africa is losing out on renewed global appetite for emerging market stocks. Commentators blame labour unrest, policy confusion and hardline statements by government ministers, particularly Mineral Resources Minister Susan Shabangu, who has threatened mining companies with licence reviews.

Once again South Africa may miss a window of opportunity. Independent analyst Ian Cruickshanks said emerging market equities had outperformed those of advanced economies by two to one this year. And, according to Mike Yates of RMB’s equity sales trading desk, dedicated emerging market equity funds – including hedge and pension funds – have placed $4.18bn (R37.4bn) worth so far this year.

But South Africa has not been among the popular destinations, judging by the rand’s performance. The currency has weakened from R8.45 to the dollar since the start of the year to more than R9 last week, before recovering marginally to be bid at R8.96 at 5pm on Friday

The climate is improving globally for equities, as signs of stronger growth appear in the US and China – the two largest economies – and investors leave bonds for shares.

Cruickshanks noted a close historic correlation between the JSE and the New York Stock Exchange. And he said the Standard & Poor’s (S&P) 500 index was currently challenging the highs of October 2007.

However, corporate profits were 31 percent higher now than they were then, he said, and the S&P 500 price-earnings (p:e) ratio remained 10 percent less than the 60-year mean.

He said 72 percent of US corporate profit announcements were ahead of expectations.

“Rising profits mean share prices can go higher without pushing up the p:e ratio.”

Recent economic data from the US, including an increase in employment, imply that there is more upside to profits.

He said the situation was likely to last as long as US monetary policy remained stimulatory – the foreseeable future. However, he warned that domestic events were putting a cap on the upside for the JSE: labour and social unrest inhibit potential profit growth.

Investec Asset Management joint head of fixed investment Andre Roux said South Africa’s attractions were way out of line with other emerging markets. “The average emerging market currency is appreciating, the average emerging market investment flows are positive.”

In contrast, money has been leaving South Africa.

Citi strategist Leon Myburgh said net sales by non-residents of bonds and equities totalled more than R5.4bn from January 11 to last Thursday.

While international events have largely determined movements in local markets in recent years, domestic issues are now coming to the fore.

Gina Schoeman, an economist at Citi, identified five issues of concern.

One was political uncertainty. “Though the ANC elective conference left a positive spin, questions remain – particularly over the ability to implement the National Development Plan and the proposed ‘strategic state ownership of mining assets’.”

Labour unrest was another key challenge. “The mere prospect of labour unrest in 2013 is likely to deter investment,” she said.

Inflation could become a problem mid year. And consumption could slow. “Retailers and banks already suggest that a slowdown in unsecured credit is taking place and our measures of consumer vulnerability highlight increased indebtedness for low- to middle-income groups,” Schoeman said.

Sovereign rating downgrades are a further threat, according to Schoeman.

Downgrades by three rating agencies have contributed to the rand’s fall from favour. And recent weeks have seen an explosion of violence, both industrial and social – a typical precursor to a further downgrade and a potential flight of capital.