In a presentation at the recent Allan Gray Investment Summit in Cape Town, Stanlib chief economist Kevin Lings asked whether South Africans were “too in love” with equities. He said we tend to compare our stock market with the US stock market and those of other developed countries, whereas we should rather be comparing it with those of our peer emerging economies, such as Brazil, Turkey and India.
Lings made the point that the market capitalisation of the JSE equates to more than 200% of South Africa’s gross domestic product, the highest ratio of any stock market in the world, and this is not sustainable.
He said although South African equities have underperformed in recent years, particularly when compared to US stocks, their performance is actually in line with that of other emerging markets. Much of this has to do with the fact that economic growth in developing countries has struggled to recover since the 2008 financial crisis.
“Emerging-market equities have not been the place to be, and South Africa is simply a part of that,” said Lings. “We’re beating ourselves up too much. If the growth rates in emerging markets pick up, so will equities.”
Lings said South African investors will have to include new asset classes in their portfolios, particularly those appropriate for the country’s low-growth environment. “The circumstances we find ourselves in are screaming out for us to embrace other asset classes, such as government and corporate bonds,” said Lings. “If you can get a 9% return from a bond fund, relative to inflation of, say, 5%, that’s a decent real return with significantly less risk.”
Lings also said that we need to be realistic about the economy and not expect an instant turnaround in South Africa’s fortunes.
“If a company was almost bankrupt and it elected a new CEO, could you really expect him to turn it around in a year?” asked Lings. “We have unrealistic expectations on how quickly this can turn around. It’s much easier to damage an economy than fix it, and we’ve been damaging this economy for the last nine years.”
Given the scale of the turnaround required, he said South African investors will have to work harder to find good opportunities. For example, despite the fact that South Africa’s manufacturing industry has slumped, there are still bright spots, such as the automotive sector, as well as food and beverages. “We’re actually quite good at producing food in this country,” said Lings. “We have a pretty good agricultural sector and an advanced food processing industry.”
He also advised investors to focus more strongly on the geographic diversification of their portfolios. “We’re a small portion of the world, so why would you put everything in South Africa?” he asked.