A month ago, South African investors were exuberant. Both the currency and the stock market, after years of remarkable strength, seemed bullet proof.
This is, of course, a polar reaction to a time not that long ago when mere utterances from Zimbabwe’s President Robert Mugabe could send both the currency and the JSE into a downward spiral; a time when Aids, crime, corruption etc all contributed to a cloud of gloom, the emotional release of which was traded out in our currency and our stock market, leading to enormous volatility in the rand, stock exchange and interest rates.
But today we live in a different world. A world where Mugabe’s behaviour may have deteriorated to the point where he is now nationalising the mines, but a new world in which our currency and stock market are quite correctly not the slightest bit interested, being traded finally for their value as opposed to emotionally.
Suddenly, however, despite the repeated confirmation by most market commentators that local is still lekker, we found both our currency and our stock market being kicked for no apparent reason a week ago. Well, that is not entirely true: Iceland’s debt was downgraded, Iraq looks close to civil war and the Iranians clearly are not wild about or scared of the West — none of which should theoretically affect us.
However, one of the negatives about having foreigners pouring in when you are hot is that they can as easily “pour out” when you are not. What goes in can just as easily go out! Even when you are still hot, like South Africa currently is, they can still pull out of emerging-market currencies, like the rand. We are what is known as a “liquid market”, so when they need cash suddenly, they often sell us first, just to raise cash fast. This is the heady stuff that constitutes being part of the global investment community.
Similarly, the rand was punished on the back of concerns around the health of Icelandic banks (seriously!), as well as the potential for further rate hikes in the United States, Europe and Japan. This meant that potential returns from developed market currencies should improve further as funds flow toward them chasing the higher yield.
Suddenly, the tide of global liquidity — which regardless of risk chased yield to the far corners of the globe in 2005 and pushed emerging-market returns to astronomical proportions (Egypt’s 155% in dollars made our 31% for 2005 look pedestrian at best!) — washed out, leaving emerging markets and currencies such as ours looking vulnerable.
So, what are we saying?
Firstly, relax. Last week’s weakness should be a temporary withdrawal from emerging markets. Given the fact that most are running surpluses as a result of a deliberate strategy to weaken their currencies in order to protect exports, they are in much better shape than in 1998/99. A collapse and the subsequent contagion that that would result in is unlikely.
Secondly, on a forward PE of between 11 and 13 our market is not stretched, particularly as earnings are expected to come through better than expected.
However, investors have to be very careful of committing the cardinal investment sin — lack of diversification, or in easier language, falling in love. Investors’ love affairs have cost them dearly in the past: small companies, technology (Dimension Data in particular), offshore and the dollar saw investors cast diversification aside. These love affairs generally last longer than they should and tears follow.
So what are the current love affairs? Local equities, property and the rand. Yes, local is indeed lekker — and why shouldn’t it be, given that South African equities, the rand and residential property have delivered world beating returns?
However, be warned. While the rand, property and the JSE have literally hammered their offshore peers for the past seven years, it won’t always be like that. Don’t wait for everything to change before you act. Don’t forget offshore, make sure you are diversified and then you don’t have to stress about whether the tide for global investment is pro emerging markets.
Jeremy Gardiner is a director at Investec Asset Management