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Many readers are probably familiar with the joke about the two war veterans reminiscing at a reunion. Koos turns to Mike and asks him whether he remembers the Spierbult massacre. “Of course,” Mike replies, “That was a big day; how can anyone forget? It was 10 men against 10 000.”
“That’s right,” Koos said, “And do you remember how quickly we beat those 10 men into the ground?” Why this joke, you ask? It’s about perspective.
Though it may not always be clear to us as South Africans, we also feel that we are being beaten into the ground these days by the rest of the world on an economic and investment front. You don’t have to take an overseas trip to realise that your rands simply cannot buy as much as they could five years ago.
When we take a look at our local stock market, things look pretty much the same. Over the past five years (up to end September 2015) capital growth, excluding dividends, in the FTSE All World Index in dollar terms, amounted to 5% per year. During the same period, the FTSE/JSE All Share Index grew by 11% in rand terms (also excluding dividends).
But to compare these two percentages to each other is the same as viewing the Spierbult massacre as a great achievement. It’s only when we view our growth in dollar terms that we get a proper perspective. The hard reality is that the JSE didn’t only perform 8% poorer when compared to world markets, but it also declined by 3% per year over the past five years in dollar terms.
Where did things start to go wrong? Less than a decade ago, well-known investment experts such as Mark Mobius claimed that emerging markets (including the South African market) offered the best investment potential. Were these experts wrong, or was the playing field altered in such a way that this claim should be reconsidered?
The short answer is that they weren’t wrong, but in supporting my answer, we should have a look at why investors like Mobius prefer to invest in emerging markets.
In my opinion, the answer lies in the very definition of an emerging market. According to investopedia.com, emerging markets are popular among investors because they offer prospects of higher returns, simply due to the fact that they often experience faster economic growth as measured by their GDP.
These higher yields, however, come with much greater risk due to emerging markets’ political instability, infrastructural problems, volatile currencies and limited stock opportunities.
Nearly a decade ago during a time when everyone was still in love with emerging countries, South Africa had a healthy economy. Between 2005 and 2009, the country's GDP grew about 3% faster compared to the annual GDP growth of the G7 nations (Canada, France, Germany, Italy, Japan, the UK and US). That made it worthwhile for large investors to take these risks with the prospects of higher returns.
Since then, however, this difference has decreased considerably, up to where SA’s economic growth is now even slower than the economic growth of the older established developed countries.
This is an excerpt from an article that originally appeared in the 29 October 2015 edition of finweek. Buy and download the magazine here.
