The points I made about the markets in the first part of last year’s February review can be made once again in this review. The local share market, in particular, has had a strong bull run since August 2011 through to end February as you will see in the red line of the graph below [covers the past 5 years of the South African All Share Index]. In this review I would like to draw your attention to the green line which tracks the ZAR to US$ exchange rate over the same 5 year period. Notice how our exchange rate weakens [goes up on the chart] in response to a drop in the South African market – while it strengthens [comes down] when confidence returns and share prices go up. If you look carefully you will also see the lag in time between one and the other. The foreign cash flows out following a selloff of our shares and comes pouring back in to buy shares when they are considered to be cheap. The graph tells us a lot more – it shows just how well foreign buyers can do in our local share market if they time their investment well and partly explains why over 50% of our locally listed shares are owned by foreigners. Foreign investors who saw our market take a plunge at the end of 2008 will also have noticed that they could get a lot more Rands for their Dollars [in December 2008 as many as R12,00 for every dollar]. So, with our shares being so cheap, it was a great time for them to convert their Dollars and buy our shares. Over the next two and a half years our shares virtually doubled in value while at the same time our currency strengthened by almost half to R6,50 per Dollar. In August 2012 Greece caught a really bad cold, the foreigners became risk averse, quickly sold off their SA shares and converted back to Dollars having made a very handsome profit!
It also explains why our market is so volatile and almost unpredictable. There seems to be a real dislocation between what is happening on the ground within our own economy and what happens to our listed share prices. Our local banking system was unaffected by the international banking crisis of 2008 and yet our stock market was hammered all the same. Economic woes in Greece, a tiny component of the European economy, had no real impact on the performance and value of our local companies – yet our share prices got knocked down again while our currency weakened sharply. At the risk of sounding xenophobic … it’s those foreigners again! However, we should welcome their presence in our markets – life would be dull without them and they do provide solid proof that we are indeed part of the Global Village.
But wait, there’s more … [I’m beginning to sound like those adverts from Glomail] … we can do much the same thing and indeed it is precisely what our clever local unit trust fund managers have been doing for the past year or so. When our currency has been strong and it was cheap to buy foreign currency, they have shifted funds offshore knowing that even if world markets decline they will benefit in Rand terms because our currency inevitably weakens at the same time. So, be on the lookout as our currency continues to respond to solid inflows of foreign capital and consider the opportunity to diversify your risk by improving your offshore exposure.
Finally on this topic … keep in mind that more than half of the companies included in the ALSI 40 index [our top 40 companies on our stock exchange who together largely drive the overall index] are dual-listed on foreign stock exchanges. These companies derive the vast majority of their turnover outside of South Africa [Anglo American probably 75%, Richemont 95% etc.] and can be bought by foreigners without any currency risk on their local stock exchanges [notably London, New York, Zurich and Toronto]. These companies, while “born” in South Africa, trade extensively around the Globe and are no longer really South African companies. Their shares are bought by foreigners because they are doing well abroad. The rise in their share prices on foreign exchanges quickly translates into a rise in their prices on our local exchange. This has a considerable effect on our share market index and can mistakenly be taken as a sign of confidence in our market generally – while the fundamentals of our own economy may not support that confidence! The herd instinct sets in and local investors climb into the local market buying all sorts of unrelated shares which have no bearing on the cause of the underlying upward trend in the index. Stick to the Golden Rule, buy shares only if supported by their own fundamentals – or trust your money to fund managers who are ruled by reason and know what they are doing.
House news … we congratulate Rowan who has passed his Financial Services Board Regulatory Exams and Stacey who has passed the half-way mark to qualify as a Certified Financial Planner [CFP]. Stacey plans to complete this tough post graduate diploma, the top qualification in the Financial Services industry, at the end of 2012. We wish her well in her studies and look forward to her ever increasing contribution to the services we offer at Finlaw.
Kind regards
John Wallace – March 2012.