International Markets vs SA: A One-Way Bet?

Over the last ten years, we have become accustomed to great growth from overseas investments, low growth from local investments and a constantly weakening Rand. However, the last two years have seen a change in this trend. A combination of inflation concerns in the Developed World, COVID, a crackdown on tech shares in China and the Ukraine invasion caused some fundamental shifts in market dynamics and this has been positive for South African investors.

Investment Returns

 Year to Date1 year3 years5 years
MSCI ACWI-7%0.45%12%12%
MSCI South Africa11%-0.52%2%3%
MSCI Emerging Markets-10%-17%1.6%4.6%
Source: Bloomberg

This table above shows the annual growth, measured in Dollars, of the World stock market (All Country World Index) compared to South Africa and all Emerging Markets. The returns for the last five years show a pleasing result for global investors but a very poor outcome for Emerging Markets and South Africa. Global investing (especially in the US tech sector) was an easy bet – almost everything went up. It is also interesting to see the very close relationship between SA and other Emerging Markets performance over three and five-year periods. Over the last decade, most of the returns generated by the JSE came from Naspers/Prosus, and this Group was very closely linked to the performance of Tencent which is a massive Chinese tech company. China is easily the biggest market in the Emerging Markets index, so whatever was good for China was good for Emerging Markets and South Africa.

This close relationship changed dramatically over the last two years as the world went into lockdown because of COVID. Around the same time, the Chinese government started a major regulatory clampdown on Chinese tech shares. These two events caused a big drop in the Chinese stock market, as evidenced by a 50% drop in the value of Naspers/Prosus. On the other side of the World, investors also started to worry about inflation in the USA and Europe as there were major supply chain problems that caused shortages of goods around the world. This was particularly severe in the technology sector with a massive shortage of microchips.

The result of all these events was a jump in the price of commodities after the start of lockdown in March 2020. This caused countries that export commodities, South Africa included, to enjoy a significant inflow of foreign exchange as foreigners bought large quantities of SA commodities at ever increasing prices. The Rand strengthened from R19 to the Dollar in March 2020 to R13,43 in April 2021 as more Dollars came into SA and our trade balances improved.

The SA stock market started to outperform international markets, especially when measured in US Dollars. At the same time, the JSE saw the strong recovery in mining shares compensate for the collapse of the Naspers/Prosus share price. This dramatic change in market dynamics is illustrated clearly by comparing the JSE against Emerging Markets. The JSE was marginally weaker over the last year while Emerging Markets were down 17%. For the first time in years, the JSE is once again ranking in the top 10 stock market performers around the world.

What of the future?

I think the recent strong performance of the JSE and the Rand shows that it is foolish to bet on markets moving in one direction forever. If you had bet everything on the US tech sector over the last year, you would now be a very unhappy investor. Similarly, investing all your money in the JSE has been very painful for the last 10 years. It is always best to own a spread of investments across the world. Keep a significant portion of your money where you plan to live but make sure to keep a good portion of your assets invested out of your home country to benefit from unexpected market events. Finally, avoid making big investment decisions based on predictions. The last few years have proven to be entirely unpredictable both in economic, political and investment markets. Those who had a well-diversified portfolio have been relatively well protected from major losses while many other investors have lost a lot of money.

By Warren Ingram