File image: IOL
File image: IOL
JOHANNESBURG - From all walks of life, the message I get is that private investor sentiment in South Africa is extremely negative. Who can blame them? Their hard-earned savings are under tremendous pressure.

While things looked on the up in the first quarter of this year, the past two months eroded much of the first quarter's gains.

No, the weak returns over the past two months had nothing to do with the South African economy and domestic politics.

In fact, the South African bourse as measured by the All Share Index recorded a negative return of 0.8 percent with income distributions reinvested while emerging market equities as measured by the MSCI Emerging Market Index converted to South African rand returned minus 4.7percent with income reinvested.

The JSE also outperformed developed markets as measured by the MSCI World Index as the latter recorded a negative return of 1.7percent in terms of rand with income reinvested. With a total return of 7.1percent, the JSE is also leading the emerging markets index’s 5.9percent for the year to date.

Where it hurts South African investors most is that South African cash deposits on a pre-tax basis outperformed South African equities over the past 12 months and, even worse, over the past five years.


The stellar returns of developed market equities over the short- and long-term necessitates the inclusion of the asset class in all well-balanced equity portfolios.

All commentators and specifically economists are shocked that South Africa's economy contracted by more than 3percent on a quarter-on-quarter annualised rate during the first quarter of this year - the worst economic performance in 10 years.

The equity market players are more informed. The weekly smoothed annualised growth rate of the All Share Index tends to lead the economy by one to three months, but is also prone to wild swings in investor sentiment. The indicator hit a bottom at the end of December and indicated a quarterly smoothed annualised growth rate of between -0.5percent and -1percent, translating into a quarter-on-quarter annualised rate of -3.6percent.

The weekly smoothed annualised growth rate of the All Share Index bounced back in the first quarter, indicating that it bodes well for the economic growth in the current quarter despite all the pessimism around.

Do not be surprised to see the economy making up most of the lost ground since the fourth quarter last year. Yes, quarter-on-quarter annualised growth of 2percent is achievable in the second quarter. Therefore, no technical recession yet.

Since the stock market as reflected by the weekly smoothed annualised growth rate is essentially a fair reflection of the underlying economy, the outlook for equities is critical for South African economic growth.

In my column a fortnight ago, I warned that a major shake-out in global equity markets is looming as the next stage in the global business cycle is probably a recession, which is not priced into the markets yet.

More and more red flags are raised.

The JP Morgan Global Manufacturing PMI indicates that the global manufacturing industry is in recession.

The US Federal Reserve has changed its stance to dovish. Risk-off investment strategies are getting more popular while gold is smiled upon again by investors.

Luckily, or rather hopefully, a major sell-off or the advent of a new bear market is normally not one-way traffic. It is characterised by huge swings and influenced by news flows.

Who else is more dominant in the news flows than the “orange swan”, Donald Trump.

He aptly fits the title of Nassim Taleb’s book, The Black Swan: The Impact of the Highly Improbable, while “orange” refers to the colour of Trump’s quiff. Yesterday, China and Iran. Today, Mexico. Tomorrow who knows?

The only certainties for me now are that investor sentiment in South Africa will remain depressed and the South African economy, despite an improvement in the current quarter and efforts to revive the economy, will be under pressure in coming quarters.


We have missed the bus. Investment return expectations should remain low - the same with economic growth as a full-blown recession may hit sooner than later.

Ryk de Klerk is an independent analyst-at-large. Contact [email protected] His views expressed above are his own. You should consult your broker and/or investment adviser for advice.

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