WHY does it matter what foreign investors think about South Africa? It might come as a surprise, but the fate of our market is increasingly in the hands of overseas investment managers.
Foreign pension funds own about 40% of the average share listed on the JSE. The figure is even higher when it comes to dual-listed shares, such as British American Tobacco, Anglo American and SABMiller.
Foreign investors have been active in South Africa for decades, but this has escalated in recent years as global asset managers increased the amount of money they allocate to emerging-market or global equity portfolios.
And our fortunes are increasingly tied to what happens in overseas markets.
In 1995, the correlation of performance of the JSE’s All Share index to that of global equity portfolios was about 20%. Now, thanks to the liberalisation of South Africa’s market, it is about 80%. This means that about 80% of the month-on-month movement of shares on the JSE is driven by global markets.
It’s the same with South Africa’s bonds, though the correlation between local bonds and the global bond markets is not as tight as that for equities. In 2007 foreign investors held about 11% of South Africa’s government bonds. They now hold 36%.
Little wonder that Finance Minister Nhlanhla Nene is concerned about global ratings and the need to keep our monetary policy in line with global trends.
As these figures illustrate, foreign investors are crucial to funding our budget deficit, which Nene is using to pay for all sorts of things, from building Medupi to paying out 16million social grants every month.
This is why, when the government makes rules restricting new mines, or implements new taxes that spook foreign investors, it causes wider ructions in our markets.
Only 20 years ago, South Africa was considered a closed economy. Now we’re a small open economy, measured by the total of exports and imports as a percentage of gross domestic product (GDP). This is about 55% -well above the average of developed and emerging markets. The figure for the US is 23% and 44% in China.
It is evident in our economic growth, which correlates to growth in the Group of Seven nations (the US, Canada, the UK, Japan, France, Germany and Italy). From 1970 to 1990 this correlation averaged 10%, but it has since increased to 60%, showing that our growth is increasingly globally linked.
The rand’s fate is also largely determined by external events. The rand is the 18th most liquid currency, resulting in investors trading our currency as a means of adjusting their global risk exposure. The rand is also influenced by commodity-producing countries, and these two factors combined explain the bulk of what happens to our currency.
The independence of our central bank is widely acknowledged, but our monetary policy is not immune to global events.
An example is the 1997 Asian crisis, which rolled on to the Russian crisis in which Moscow hiked rates. Shortly after, there was a run on the rand and the Reserve Bank followed suit.
The country’s surprise January rate hike was driven by Turkey hiking its rates 4%. Recently, there has been plenty of discussion about the apparent contradiction between souring business confidence and the soaring fortunes of the JSE.
In the real economy, business confidence has fallen on strikes, the ratings downgrade and the interest-rate hike. But JSE stocks have bucked this trend.
This is understandable, considering the extent to which our markets are correlated to steadily rising global markets.
The market and the economy also have different drivers. Mining generates 9% of South Africa’s GDP but accounts for 20% of the JSE. Manufacturing is12% of GDP and only 6% of the JSE.
The JSE has a chunk of dual-listed shares, which have little to do with South Africa, including Richemont and Naspers. Break down the sales of JSE-listed companies, and less than 40% is in rands. This portion is shrinking, as local companies seek diversification and growth outside our borders.
The game has changed for South African pension funds. Now, a typical balanced fund will have about 40% of its assets in “South African equity”, with a 30% cap on “foreign exposure”.
But this is misleading: South African pension funds are far more exposed to the global market than that. In practice, about a quarter of “South African equity” allocation is effectively in global equity, due to the effect of the dual-listed shares, while another quarter will be in resources shares (and so is exposed to the dollar), and another eighth is exposed to African investments.
The bottom line is that only about 15% of a balanced fund can truly be considered pure “South African equity”.
Our fate is inextricably entwined with overseas markets.
• Brooke is the head of MacroSolutions, a member of the Old Mutual Investment Group
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