posted on January 25, 2021 11:44
Welcome to the first letter of 2021. I hope it is a good year for everyone. The JSE has made a brisk start to the year, up over 7% to date. This is a pleasing continuation of the late-2020 performance and comes together with a stronger rand and slightly lower bond yields. We have all made some money in our local portfolios for a change. Risks are certainly still around, but the tailwinds I spoke about late last year are also definitely around.
One of them, being foreign flows into, particularly, equities and to a lesser degree bonds have assisted the rand’s relative strength. I say relative because, at over R15/$, the rand is still weak in world terms and especially in the universe of Emerging Markets (EMs) who are our major competitors. I saw a report last week which sought to state that, on a purchasing power parity basis, the rand should currently be at 5.50 to the US$. I don’t know what criteria their report used and these types of tests are notoriously flawed, but imagine how much easier life would be here if the rand was at that kind of level.
Lest this appears to be a slight digression, I believe there is a point to be made here. One of the reasons foreigners have been invited back into our markets is our current terms of trade. Because of the rand’s weakness, imports are very expensive at this time. Together with the financially damaging effects of the Covid recession and related shipping bans, this has decimated importing. Luckily, at the same time, demand for our resources has increased along with the prices of those resources, meaning our exports have soared. So the RSA “current account” is recording monthly surpluses and has been for some months already.
If we were an individual, our bank manager would be very pleased with us right now. It’s pretty much the same thing. The longer this situation perpetuates, the better for the currency from that point of view. With interest rates likely to remain low around the world, foreigners will be happy to access the high interest rates on our bonds and the deep value on our stockmarket while we are behaving ourselves from a current account perspective.
The opportunity I see is very exciting, but unfortunately also a bit of a long shot. We are all aware of the parlous state of the local economy which is crying out for development onto a growth path. This will require vast amounts of capital and ingenuity from business to make it happen. Real, sustainable growth has never and will never come from government anywhere in the world. Government is an enabler and is sometimes confused with being a partner of business in successful economies.
The single biggest impediment in RSA getting to any semblance of where we need to be is the standoff between government and business. Neither one trusts the other and, with militant labour thrown into the mix, has resulted in business refusing to invest properly for nearly two decades. Big business is sitting on over a trillion rand in cash and, despite being accused of things like “white monopoly capital”, is quite happy to do so rather than risk investing in an environment of possible expropriation and being pushed around by regulation like BEE.
But what is emerging is that the stagnation of those decades is manifesting in a lack of ability for business to grow in a shrinking pie environment. This is also not new and has seen the emigration of the country’s blue chips over the years, the latest being Investec Asset Management (91). The post Covid offshore environment is now even more demanding than before and this, together with the harsh lessons learned over the years by local companies venturing offshore and taking a hiding, has chastened any future pretenders toward first considering how they can rather grow where they are planted.
I know they may appear to be insignificant, but examples like the one on Carte Blanche last evening of the doctor/engineer who developed a respirator which is a more-than-reasonable replacement for high-cost imports has to be impressive. We grew up with sayings like “boer maak ‘n plan”. I bet the younger generation has never even heard of that, so forgotten had it become. It’s the ingenuity I spoke of earlier and which helped build this country in the first place. The excellent local manufacturers he found must be smacking their lips at the potential of this product gaining worldwide regulatory approval so they can start exporting.
I saw a program on business TV recently about a company in Durban who decided that sustainable energy was their growth opportunity. They found that importing glass paneling for solar installations was not only expensive but that the carbon footprint in their manufacture was undesirable, so they engineered and manufacture their own lower cost, lower carbon alternative at their local plant. They are gaining international exposure and are potentially facing a bright exporting future as a result.
Even government has realized that this may be our only way out of the mess we are in and, according to commentators with reliable inside knowledge, relations between government and business (even labour as in Cosatu can be mentioned) have never been better. This doesn’t mean they are friends, much less partners, but at least they are willing to try and accommodate each other in moving forward. The long shot is that we can transition to a manufacturing, export economy which creates jobs and maintains the positive current account we need.
May it happen.
More next time