There was much hype surrounding the JSE All Share Index last
month as the index soared passed 50 000 for the first time ever marking a
new high in a bull market, which doesn’t seem to lose momentum. If there’s one
was thing I had learned about numbers it is that they can exhibit distortion
and in this case there is no exception.
The JSE All Share Index - is a representation of all the
shares listed on the Johannesburg Securities Exchange weight-based on their
market capitalisation. The larger the company the more the daily movements
count towards the points gained or lost in a given day.
This is a monthly chart taken over 18 years and a quick glance
one could say that the index has done incredibly well in those years. From 1999
the South African share market has seen a massive uptrend in place with the
index now 8.3 times higher.
The first point I’d like to highlight on the chart is the
massive rally up until the red arrow. Why the red arrow? Rallies such as these are usually characterised
by a catalyst which aid the market to surge to new heights. South Africa’s
catalyst was radical policy changes which central focus became the poor.
To break it down, the new government was tasked with
reforming policy and for the first five years we can see a slow and
directionless market as the economy began its transformation. Once the
foundational pillars were in place the construction phase would take precedent
and we see, as a government was taken under the curatorship of Mr Thabo Mbeki,
the economy was rapidly growing. This phenomenal growth lasted for almost 10
years under his tenure but was abruptly stopped in its tracks with the
Financial Crisis which was a worldwide issue.
On the chart below is the South African GDP Growth Rate;
which may help us explain why JSE All Share Index saw the massive Bull Run. The
co-relation between the two graphs is quite close. There was a large pool of
poor people in South Africa and with the central focus now shifted towards them
what we saw was an emergence of a new middle class which now had money to spend
on purchasing: houses, cars, furniture and more for the first time. This in
turn spurred business to grow at exponential rates. Some of these businesses
are listed on the JSE and benefitted substantially from this.
The period between 2008-2012 is an interesting one; both
charts once again track along the same path as governments around the world
pursue a goal of bringing the world economy back to normality. Again we see a close relation between the two
charts up until the beginning of 2012.
The analysis thus far would suggest that the ANC government
had been very successful in diminishing the plight of poverty and bringing
wealth to those who previously had no access to it. It can also be said that
due to the financial crisis which had created turmoil worldwide, their plans
had to be placed on hold. We can also conclude that if South Africa sees
economic growth it can be implied the mechanism of transformation is working
well.
However herein lays the distortion, from the beginning of
2012 till present we see a divergence between the two charts. The All Share Index
has once again surged ahead but the growth rate has been decreasing. This would
suggest that in the last 2 years the economy and stock exchange have not moved
in tandem as they have previously. But how can this be?
In today’s world we have seen a transformative move towards
globalisation. This has led many of the
top JSE companies begin to diverse their assets to other countries besides
South Africa. The Top 5 companies currently earn more in foreign currency than
they do in Rands. These same shares make up a large portion of the index. The distortion comes in here, if the Rand
begins to weaken these shares will increase as their earnings will be much
larger in Rand terms.
However this is not the point I wish to make. This
divergence would suggest that a trend is beginning to emerge where local
companies are increasingly investing outside South African borders and no
longer investing in the domestic story. Thus it can be said that the All Share
Index is not a true reflection of the condition of the South African economy.
From a technical perspective on the GDP Growth Rate we see a
descending triangle forming and should a downward movement occur we could
possibly see a recession begin. Probabilities are likely that we will see that
in the next 3-6 months.
This paints a very disturbing picture for South Africa going
forward. Some would say there have been a serious mismanagement of the economy
and a lack of urgency to solve the problem. Others argue that government haven’t
backed business enough for it to feel comfortable investing in the South Africa
story, opting instead to go in the direction of China and Africa.
The disappointing part is that South Africa still has large
pools of poor people, people which hold potential value creating benefits for
the economy yet without a proper co-operation between labour, business and
government, the biggest losers turn out to be the poor. This would contradict
the stance in which the ANC stand for.
If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to
follow me on twitter and get the latest updates of news, interesting commentary
and general trends in the market, my twitter handle is @CadeTradeR if you
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