Market performance is more dependent on global events than local ones, writes Paul Hansen, Director: Retail Investing Stanlib
While many of us are concerned about the economic impact of local political events in South Africa, there is a far greater current at work that is continuously pushing and pulling the valuations of our currency, bond and equities markets.
During 2017, South Africa experienced many internal shocks – mostly political in nature – which resulted in our foreign debt being downgraded to junk status. If any investors had predicted the political events that unfolded during the course of last year, including the firing of a well-respected Finance Minister and the downgrading of our sovereign debt, they would have cashed out of their portfolios and hidden their money under their mattress, perhaps in the form of Kruger rands or US travellers cheques.
Theoretically, 2017 should have been very bad news for our markets, yet between January and mid-November 2017, the JSE All Share index rose by 21% in rand terms. Even in dollar terms, the JSE All Share Index was up by around 19% by mid-November. The currency certainly experienced moments of volatility, but these were all short-lived. Before the outcome of the ANC conference in December, the rand looked to end the year at a similar level to where it started.
So, what stopped the South African markets from completely blowing out?
The answer is simply that we were on the right side of emerging market flows. After a period of being out of favour, global investors showed renewed interest in emerging markets, which saw an inflow of US$205 billion in the first eight months of 2017.
This was driven in part by a search for revenue as interest rates remain depressed in the developed world. High growth has driven oil and commodity prices higher, benefiting the commodity-exporting emerging markets. At the same time, higher economic growth increases the risk appetite for riskier asset classes such as emerging markets.
The MSCI Emerging Market Index rose by 38% during 2017. Because South Africa makes up around 6,7% of the Index, irrespective of our politics (which are not that bad compared with some of our emerging market counterparts), we benefited from those higher valuations.
The market’s reaction to the “Ramaphosa Effect”
What the “Ramaphosa Effect” showed us was that while politics may not dedicate the direction of the trend, it can certainly enhance it. The rand strengthened by 13% in the six weeks after the ANC conference and the JSE All Share Index rose by 7% in rand terms. However, when you consider the combination of a stronger rand and rising stock market, the dollar returns from the JSE netted foreign investors a massive 22% in just six weeks.
Ironically, the stronger rand is not always good news for the JSE All Share Index. The bulk of our top 40 shares derive their earnings offshore and a stronger rand results in a lower share price.
The best long-term investment strategy
The complexity of the currents that move the markets illustrates that the best long-term strategy remains diversification, rather than market timing. The stronger rand reminds us never to assume the ZAR is a one-way bet. Today the rand is stronger to both the US dollar and British pound than it was in 2001.
A well-diversified portfolio, with exposure to a range of sectors and currencies, will provide a better long-term outcome than moving in and out of the market and trying to predict the next trend.