PATRICE ROSSOU: SA assets pull off a podium finish

When Bradley Nkoana handed the baton to Akani Simbine for the final leg of the 4x100m relay trailing in fifth position, few would have expected a record-breaking final dash would yield our national team a silver medal in Paris, and a new national record. 

It reminded me of the performance of the JSE, which, after underperforming global equity indices by about 12% at the beginning of the year, clawed back all of this underperformance. The strength of the rand, one of the world’s best-performing currencies this year, was a big contributor. 

The start of the year was plagued by concerns over an uncertain outcome from our general elections, with the governing party set to lose its clear majority for the first time. Even the formation of a government of national unity left many in doubt, with voters still bearing the scars of the vicissitudes faced in forming a provincial government in Gauteng.

Yet there has been a palpable change in mood after the elections. Standard Bank recently mentioned that 95% of foreign investors were looking to increase their exposure to SA, after years of our country experiencing net outflows. The SA benchmark 10-year bonds, which were trading above 12%, rallied to touch 10.5%.

A briefing by energy minister Kgosientsho Ramokgopa earlier this month trumpeted that the end of load-shedding was near, with the energy availability factor at its highest in more than three years. Despite being able to produce more electricity than current demand, load-shedding is now being superseded by load reduction, with some households still experiencing outages due to crumbling municipal infrastructure.   

As investors in a developing economy at the tip of the African continent, we are perhaps battle-hardened compared with our developed world counterparts. Few would associate political risk with so-called developed countries. Yet the assassination attempt on former US president Donald Trump and a subsequent political revival for the Democrats leave the forthcoming US elections in the balance.

Bear market

In Europe, incumbent governments have been removed at the polls as electorates voted with their feet due to economic woes. Even in Japan Prime Minister Fumio Kishida decided not to stand for his party’s leadership vote, in effect stepping down from his post.

Japan grabbed the third-largest gold medal haul in Paris to finish behind the US and China. The Bank of Japan has been anathema in the world of central banking, finally ending negative interest rates earlier this year by hiking rates for the first time in 17 years. But it was its second hike to 0.25% at the end of July that unexpectedly sliced through global markets like a sharpened katana sword.

Investors had been able to borrow in yen at an almost zero interest rate and invest in higher-yielding assets — US treasuries have been offering yields of 5% or more. This yen carry trade phenomenon depressed the value of the yen against major currencies and helped export-orientated corporates to increase profits. The Nikkei 225 index reached its highest level in 35 years before experiencing a 25% peak-to-trough sell-off from mid-July to the beginning of August — plunging Japan into a temporary bear market. 

The unwinding of the yen carry trade led to a huge spike in volatility as fear gripped global markets. The volatility index (VIX) doubled from levels seen in the past year, a spike that subsequently moved back to the previous year’s level, mirroring the gold medal jump of Swedish pole-vaulter Armand Duplantis. 

The sell-off was also triggered by a poor US payroll report, which also meant US unemployment has started ticking up, though still at a low 4.3%. This led some investors to speculate that the Federal Reserve would have to slash interest rates at least three times by 50 basis points to stave off a recession.

Question marks

The US market, which had been powered by the Magnificent Seven tech stocks at the beginning of the year, was also dragged down — shedding more than $1-trillion in market capitalisation in two weeks — about the whole market cap of the JSE. 

With question marks arising about the true potential of artificial intelligence to generate future profits and Warren Buffett slashing his Apple investment by half, investors have started to trim their exposure to the tech mega cap, whose contribution to the index is at the highest level yet — indicating extreme concentration risk in headline indices.

Financial markets never go up in a straight line, and with the global economy heading to a turning point investors should expect such sharp corrections to become the norm. Akin to Simone Biles at the vault, local investors should brace for some somersaults as the global economy slows down. 

Already we have witnessed the fear gauge (the VIX index) return to normal levels and global markets have regained their footing, with the JSE reaching new record highs. In investing, as with a 4x100m relay, it is important not to drop the baton on your way to the finish line. 

• Rassou is chief investment officer at Ashburton Investments.