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Many people would probably suggest the exchange rate of the rand (in particular against the dollar) as the best proxy for the “share price” of South Africa Inc. Bearing in mind that modern exchange rates are determined to a much greater degree by capital flows rather than trade flows and that portfolio investment accounts for a large part of capital flows, the suggestion does not sound unreasonable.

Another suggestion would be bond prices, or inversely the yield on long-term government bonds, although one could argue that this represents the market’s assessment of the government’s finances rather than the economy as a whole. However, the level of bond yields is not determined by government’s actions alone but also by broad structural features of the economy (the savings rate, the depth of financial markets, the strength of the institutional investor base, etc.) as well as the secular and cyclical performance of the economy (economic growth, tax buoyancy, etc.).

To this can be added political characteristics such as the functioning of democracy, the degree of acceptance of the rule of law, the general standard of governance, the expectations of the electorate and the implications thereof for the size of government, and the awareness of and sensitivity to trade-offs and intergenerational transfers.

Before we assess South Africa Inc.’s recent “share price” history, we should remind ourselves that share prices depend on a range of factors, some of which are specific to the company evaluated (its earnings, growth prospects, quality of management, etc.) and some of which are of a general nature (general economic and industry conditions, interest rates, risk appetite, market ratings, etc.). For this reason it is necessary to evaluate the performance of a share price not only on its own but also relative to the market and its peer group.

We should also bear in mind that share price movements are determined not only by changes in earnings (especially earnings expectations given that markets are forward looking in discounting the future) but also changes in the rating applied by the market (e.g. the price-earnings ratio), which depends inter alia on investor confidence.

So how has South Africa Inc.’s “share price” performed recently? We will first look at the rand/dollar exchange rate, and then government bond yields.

The rand/dollar exchange rate averaged R13,20/$ in February 2017 ̶ an appreciation of nearly 20% from its average value of R16,38/$ in January 2016 and 7% from its pre-Nenegate value (November 2015). A depreciating trend of approximately 20% p.a. in the previous 4 years has thus come to an end. (At the time of writing the rand was trading at R12,33/$).

What is particularly intriguing is that there was no fundamental improvement in domestic South African conditions to justify this appreciation; on the contrary, economic growth in particular weakened further to only 0,3% and the quality of South Africa’s political management deteriorated further. On the other hand, weaker growth contributed to an improvement in the current account of the balance of payment of approximately 1% of GDP and the SARB raised the repo rate by 50 basis points.

The 10-year generic yield for South African government bonds shows a similar trend. It strengthened from 9,20% in mid-January 2016 to 8,79% in February 2017 ̶ at the time of writing it was trading at 8,28%, i.e. about 30 basis points lower than its pre-Nenegate level of 8,57%. The same comments as above apply here. I In addition, South Africa’s fiscal position deteriorated further, with the gross debt-to-GDP ratio continuing to rise while the risk of a downgrade to below investment grade by international credit rating agencies increased.

To many people the recent performance of South Africa Inc.’s “share price” will therefore probably not make sense. But this just shows the power of market forces at an aggregate level and the importance of evaluating performance relative to suitable benchmarks.

First of all, during the period when the rand appreciated by almost 20% the MSCI Emerging Markets Currency Index appreciated by a mere 9%, while JP Morgan’s similar index appreciated by 5%. The rand therefore outperformed its peers decisively1.

If we assume that the rand was grossly undervalued in February 2016 because of Nenegate (an event that was unique to South Africa) it may be better to go back to November 2015 as the starting point for our comparison. Surprisingly the rand even outperformed over this period although to a lesser extent, appreciating by 7% compared with 6% for the MSCI index and 1% for the JP Morgan index.

The movement in the10-year government bond yield is more complicated. As mentioned above, the SA 10-year yield declined by 40 basis points in round numbers between January 2016 and February 2017. During the same period the US 10-year yield increased by 50 basis points while the JP Morgan EMBI+ spread (a measure of perceived risk in emerging bond markets) declined by 100 basis points. Netting out the changes in the two factors (the global risk-free rate and the emerging-markets risk premium) leaves one with a decline of 50 basis points, which is close to the 40 basis point decline in the SA 10-year yield ̶ for all practical purposes therefore a neutral performance.

A similar analysis for the period since November 2015 produces a decline of about 10 basis points in the SA 10-year yield compared with a benchmark decline of 25 basis points. The difference of 15 basis points is also not a meaningful number.

In conclusion, therefore, despite all the doom and gloom about events in South Africa in the past 15 months, South Africa Inc. has performed roughly in line with its peers. By implication it appears that the market’s expectation regarding the future performance of South Africa Inc. compared with that of its peer group has not changed meaningfully.

What we have rather witnessed is a general rerating by investors of the outlook for emerging markets relative to developed markets from which South Africa has also benefited. The expected greater differentiation between individual emerging markets as global economic integration subsides will bring South Africa’s specifics into sharper focus but this is clearly a matter for the future.

1 Excluding South Africa from these indices (it has a weight of nearly 10% in the JP Morgan index, for example) would boost its relative outperformance even further.
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