Surprising silver lining

t’s common knowledge that the companies on the JSE are exposed to international earnings to a large degree. But I hadn’t appreciated how little a conventional balanced fund relies on a growing SA economy.

Dave Mohr, the chief economist at Old Mutual Multi-managers (the old Symmetry) says its balanced fund is only 20% exposed to SA growth. And this is a fund that keeps to regulation 28 of the Pension Funds Act, with a maximum of 25% in internationally domiciled assets. But at least 55% of earnings on the JSE come from international sources, and much of this is not from exports but from products that never go through our harbours. The vast majority of British American Tobacco products are not made in SA factories, and the entire market value of Naspers is made up of its holding in Tencent, which dominates China’s messaging and transactional Internet services through Wechat.

And an increasing proportion of the Jse-listed property board is outside SA — at least 40%, and more if you include the dual-listed former Liberty businesses Intu and Capital & Counties.

So most pension fund members should be celebrating rather than feeling depressed when the rand falls.

In the long run, the “tides” in the rand are determined by commodity prices, sentiment on emerging markets (EMS) and the strength of the US dollar itself, while news flow determines the “waves”.

A subtle argument is that bonds will do best in a slow-growing SA economy, provided inflation is coming down, as it has, to 5% or less. They are a good investment in these economic conditions, with a 9% yield when inflation hovers at about 5%. As more than 90% of SA sovereign bonds are denominated in rand, there has been little direct effect

Ifrom the recent downgrade. Overall we have benefited from a revival in EMS: there has been relentless foreign buying of SA bonds despite the politics and downgrades — global demand for EM assets overwhelms SA political risk.

It is hard to believe sometimes that the world economy is growing fast: the G20 group of developed and emerging economies is growing at a healthy 3.7% in real terms, back to its late 2013 peak. This means, at least, that commodity prices should bounce back, though mining is now less than 10% of the economy.

Corruption and confidence

You don’t have to be an economist to realise that companies are reluctant to invest in SA because of low confidence levels, and Mohr’s figures confirm the close relationship between business confidence and private fixed investment. The short-term fluctuations of the rand, which are heavily influenced by politics both at home and abroad, also make it harder for businesses to plan long-term investments.

It is just as well that the World Bank report on corruption comes out a year after year-end. SA was surprisingly ahead of its peers back in 2015, getting a score of 58 — more than a passing grade. Turkey was not too far behind at 54, but Brazil had just a borderline pass with 41, while Russia would have been forced to start again with a score of 19. I would not be surprised to see SA fall to 45 or less in the next corruption index.

Apart from low confidence in the economy and in government, fiscal policy is the biggest negative in SA, Mohr says. Government debt as a percentage of GDP has ballooned, revenue shortfalls just seem to keep growing and both of these point to more tax hikes, though SA’S small 5m-odd taxpayer base is already feeling stretched.

Most pension fund members should be celebrating rather than feeling depressed when the rand falls