Picture: 123RF/UFUK ZIVANA
Picture: 123RF/UFUK ZIVANA

SA is yet to administer a single Covid-19 jab, but the country is riding the wave of market exuberance, driven by optimism about the pace of inoculations globally, and the potential that the cycle of new infections, hospitalisations and economically damaging lockdowns will be broken.

In about five weeks, it will be a year since SA entered one of the most severe lockdowns anywhere in the world in response to Covid-19. That resulted in its biggest economic shock since the Great Depression with GDP having shrunk at least 7% in 2020, according to most predictions.

Even before then, SA’s finances were in a perilous state with a budget deficit approaching 7% and a credit downgrade, which would take the country into sub-investment grade, or junk, with all the major ratings agencies already priced in. With the shock of the lockdown and extra spending on health and welfare crises, the government’s last official forecast was for a shortfall of about 15%. Very few in the market believe it will succeed in its efforts to keep the debt-to-GDP ratio below 100% in the near future.

Thanks to a boom in commodity prices and miners’ profits, recent headlines have been more positive. That doesn’t change the bigger picture of a fiscal crisis, an underperforming economy and one of the highest unemployment rates in the world.

Despite this, SA boasts one of the best-performing currencies of 2021, with the rand up 0.7% against the dollar. Even against the pound, which has been boosted by the UK’s impressive vaccination programme, it is holding its own and nearly broke R20 for the first time in six weeks on Monday. 

The picture in the bond market also looks rosy. Ten-year yields, which move inversely to the price, are lower than they were at this time in 2020. Compared to the aftermath of the lockdown and downgrade by Moody’s Investors Service in March, they are down about six percentage points. It’s not hard to see why.

US treasury yields might be rising but they are still at just more than 1%, making the 8.66% on offer in SA compelling at a time when the global economy is awash with money searching for a temporary home. It has also been a good time to be in SA equities, with the JSE all share up about 13% in 2021 so far, adding to a 4.07% increase in 2020.

We have been here before in the past year, when investors worried that the gains were too good to be true. Since its 2020 lows, the JSE has gained about 80%. Some investors will be rightly questioning whether this is justified by fundamentals.

Markets across the world have hardly behaved in ways that traditional watchers would describe as rational, pointing to the volatility in videogame company GameStop and cryptocurrency bitcoin.

Some have blamed the “sugar high” from government stimulus, which has added another sea of liquidity in markets that have long been addicted to an injection of central bank money at the first sign of trouble.

Others have blamed the predominance of passive funds, where, due to their nature, managers buy stocks potentially at the top of the cycle. As these funds track the index and managers therefore need to up their holdings as share prices rise whether valuations are reasonable or not, they end up creating distortions that will end in tears for investors. 

Passive funds may be the flavour of the month when stocks rise but could leave many an investor with a bad taste in the mouth.

Of course, proponents of the funds and market bulls in general seem only to have known good times. It might as well be 2007, when Charles “Chuck” Prince, then head of Citibank, famously advised that “as long as the music is playing, you’ve got to get up and dance”. It didn’t end well, even if the bankers were ultimately not the ones to suffer when markets crashed and they got huge government bailouts.​

The global party in full swing is giving SA some needed breathing space. It better take advantage of it before it turns. And individual investors better hope their fund managers and advisers are up to the task of ensuring they are not the ones nursing hangovers when the music stops.


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