Markets & Equities

A look at the South African market in the context of emerging markets.

Bertrand Russel said “Collective fear stimulates herd instinct, and tends to produce ferocity toward those who are not regarded as members of the herd.” This is particularly fitting when we consider investments, as fear and greed are seen as the two main emotions in driving our markets. For this purpose, however, I would like to add to Russel’s quote by saying that both collective fear and collective greed can stimulate herd instinct.

A great example of this has to be the very recent Bitcoin “fashion” trend. I don’t want to start a debate on whether this cryptomania was a good or a bad thing, but I would like to focus on the two main views that emerged whenever the word ‘Bitcoin’ was uttered: there were those who believed that Bitcoin would reach $100 000/Bitcoin, and those who believed that it would eventually reach zero. Of course the price reached amazing heights, and along with it came investor greed, which caused the herd instinct to become so overpowering that no-one dared to mention that it was actually extremely difficult to justify those price levels.

Let’s move along swiftly, though, as this isn’t an article about Bitcoin or investment emotions, but rather about what is eliciting more and more emotions: South Africa as investment focus.  In the same way that Bitcoin triggered collective greed, the volatile South African market has definitely triggered collective fear over the last few years, to such an extent that it has resulted in a highly stimulated herd instinct.

I don’t want to spark aggression amongst investors. As a South African, I am well aware of what went wrong over the last few years. I just don’t hope that on the back of what happened during these difficult years, investors will end up feeling that they have to get their investable capital out of the country as soon as possible. In that respect, I will have to agree with what my kids often say: “Dad, that is so last year”.

Those who know me, know me as an if-you-can-measure-it-you-can-manage-it kind of guy, and I simply cannot support such short-sighted opinions, especially since I believe that true value is starting to emerge in our local market. As I mentioned earlier, I am not turning a blind eye to the mistakes that have been made in our country over the past few years, but these mistakes were not the only reasons why we had a tough time in terms of investment returns. Here are a few interesting figures, facts and reasons why I won’t be looking exclusively for salvation in offshore developed market investments:

  • The average annual South African inflation rate over the last 15 years was 5.7%. Over the same 15-year period, the MSCI All Country World Index (ACWI) delivered returns of inflation plus 6.5% per year in Rand-terms. If you were invested in the MSCI Emerging Markets, you would have earned an additional 1.5% per year in returns (compared to the ACWI).
Graph 1: MSCI Emerging Markets relative price movement vs. MSCI All Country World Index (ACWI)(source: @SchalkLouw & Thomson Reuters)
  • Many of you will wonder what that has to do with anything. Well, given the fact that we are the sixth largest market on the MSCI Emerging Market Index, and with a 76% correlation with the FTSE/JSE All Share Index (JSE) over this period, mathematicians would say quite a lot. If you were invested in the JSE for the same 15-year period, you would have earned an extra 0.5% returns per year compared to the MSCI Emerging Markets.

  • Were investors safe in developed markets when the great correction of 2008 hit? Definitely not. The ACWI lost 43% of its value between May 2008 and February 2009, while the MSCI Emerging Markets only lost 33%. The JSE declined by 40% over the same period.


  • Compared to the ACWI, did the MSCI Emerging Market Index (not unlike the JSE) underperform over the last five years? Absolutely, by 2.5% per year. Investors are correct in saying that the past five years’ mistakes have definitely cost South Africa dearly. The JSE didn’t only underperform compared to the ACWI, but also to the MSCI Emerging Market Index by nearly 4% per annum.

The conclusion is that although we have definitely experienced some of the worst times in our local market over the last five years, the JSE’s underperformance compared to something such as the ACWI isn’t exclusively because of what happened in South Africa. I do believe that the mistakes made are being addressed. It may not happen as fast as we would like, but it is being addressed nonetheless. What I would like to know, is what will happen when the trend shifts the other way and things start to look up for emerging markets? I would advise investors to be extremely careful of succumbing to herd instinct based on extreme fear. Investments should never be based on emotions.

The opinions expressed in this document are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this document, no responsibility can be taken for actions taken based on the information contained in this newsletter. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.


Schalk Louw
As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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