Kevin Lings. Supplied
South Africa's equity market capitalisation equates to more than 200 percent of the country's gross domestic product (GDP), the highest proportion in the world and a level that is simply not sustainable.

South African investors are in love with equities - we kind of think it’s the only place to be. This fixation cannot last. South African investors need to embrace different asset classes.

While South African equities have underperformed in recent years, especially 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 crisis.

Emerging market malaise

For instance, economic growth in South Africa has declined from an average rate of 4.2 percent between 2000 and 2008 to a mere 1.9 percent from 2010 to 2018. Similarly, growth in Brazil has slipped from an average of 3.8 to 1.4 percent over the same time frames while in Nigeria it has more than halved from an average of 8.3 percent between 2000 and 2008 to 4 percent from 2010 to 2018.

Emerging market equities have not been the place to be and South Africa is simply a part of that. We’re beating ourselves up too much. If the growth rates in emerging markets pick up, so will equities.

Nevertheless, South African investors should include new asset classes in their portfolio construction, particularly those that are appropriate for the country's low growth environment. This is especially important given it is expected South Africa's economy will expand by no more than 0.7 percent this year. The circumstances we find ourselves in are screaming out for us to embrace other asset classes, such as government and corporate bonds. If you can get a 9 percent nominal return from a bond fund, relative to an inflation of say 5 percent, that’s a decent real return with significantly less risk.

A reality check

Be realistic and not expect an instant turnaround in South Africa's fortunes. After all, the country's youth employment rate of 55.2 percent (which jumps to 69.1 percent when you include discouraged workers) is worse than the levels experienced in industrialised nations during the Great Depression.

Whenever you have a crisis, as you uncover the extent of the crisis it always gets worse before it gets better. South Africa is still in the discovery phase - we're still trying to understand how much damage has been done in the last nine years.

The total debt of South Africa's government, companies and households has surged 106 percent since 2010, which is an increase of a massive R3.8 trillion. While government debt currently equates to 58 percent of GDP, the figure jumps to 75percent when you include the debt owed by state-owned entities.

If a South African company was almost bankrupt and it elected a new chief executive could you really expect him to turn it around in a year? We are creating 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.

Kevin Lings is the chief economist at Stanlib.

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