The South African bull market in perspective
The South African bull market started in early 2003. The performance of the All Share since then can largely be explained by how well other emerging markets have performed. The All Share and the MSCI Emerging Market Index are both up just on 30% p.a. in US dollars. Should this make you nervous, asks David Crosoer of Glacier Research?
Global growth has been so spectacular (thanks in large part to China and India joining the global economy) that it appears that all emerging markets have been painted with a similar brush (since they all stand to benefit from strong global growth). This has even been true of the three market corrections we’ve experienced in the past 18 months. Each time markets fell on fears that global growth would be weaker than expected, the South African market fell in line with other emerging markets.
South African specific factors (prudent monetary policy, emerging black middle class, 2010 World Cup) have (so far) had almost nothing to do with the performance of our stock market. Instead, expectations of global growth have been driving the performance of all emerging markets over the past five years.
Why should this be of concern to South African investors? There is the mounting prospect of a global economic slowdown. It is probably too early to tell how the US sub-prime crisis will impact on the global economy, but it is noteworthy that the bond market is associating the same risk with bottom-tier investment grade US corporates paying back their debt as with emerging markets governments paying back theirs. In other words, the bond market sees emerging markets as as likely to default on their debt as US corporates. The implication is that the slowdown in the US will have the same impact on US corporates as emerging market governments, i.e. this crisis will affect the global economy. The view that emerging markets will not be adversely affected by the current slowdown in the US is probably too optimistic.
If we have a global slowdown, will South Africa be more resilient than other emerging markets? South Africa’s ranking in terms of GDP per capita growth and consumer inflation have slipped when compared with the other 180 odd countries in the IMF database. South Africa might have grown more strongly than it has since the 1960s, but other countries grew faster. Global inflation is becoming a worldwide problem again, but it looks even worse in South Africa. Should investors become more realistic concerning the individual prospects of emerging markets, they might well take a less favorable view on South Africa. Such an outcome will be especially detrimental to South Africa as it is one of the few emerging markets to have funded much of its growth in the past five years with a substantial current account deficit.
All emerging markets are vulnerable to continued downward revisions in global growth. Until now, the market hasn’t distinguished between emerging markets. When it does, South African investors might be in for an unpleasant surprise. So make sure you investments are sufficiently diversified before taking your annual leave.
