July has been another tough month for most South Africans. With the ongoing threat of Covid and more lockdowns, the violence and looting in KwaZulu Natal and parts of Gauteng added even more pressure to the burdened mindset of all of us.
We have no doubt that you are concerned about the impact of these events on your investments and the outlook for South Africa.
The short answer is what the violence and looting did not have a massive impact on the financial markets.
It is just once again a reminder that the financial markets consider a lot more than our daily living and activities. As investors we are invested in a global market, with even the JSE earning most of their income from offshore sources. To simplify the movement of markets, your investments are impacted a third by what happens in South Africa, another third about what happens in China and the last third about what happens in the United States.
July 2021 as a perfect example of how the performance of your investments were effected by different geographical activities. Please compare the notes to the graph in the picture above.
So how did markets react to the riots and looting?
The market reaction was limited. The Rand peaked at R 14.70 and local bonds did not spike.
Between 9 July and 17 July the markets basically stayed flat during the period of unrest.
The markets are looking forward and at this stage and the riots is priced in as a once off event.
The unrest does not help local economic growth and business confidence and hence can have a long term impact on our already low economic growth.
It is not easy to grow businesses in South Africa if the economy is not growing.
Investments get impacted directly and indirectly about what is happening in the United States:
Directly: United States represents in the region of 63% of the MSCI Worldwide index. Most offshore investments that are in your portfolio is dependent on what happens with United States companies.
Indirectly: Whatever happens in the United States have an impact on investor sentiment internationally.
When international investors are uncertain, they want to take “risk-off” the table and withdraw from risky markets such as South Africa and other emerging equity markets and their bonds. This will lead to lower share prices and the Rand will also weaken.
On the weekend of 16th July there was fears that inflation in the USA have spiked (which will lead to higher interest rates and lower share prices) and that the new Delta Variant Covid will lead to another economic recession.
The local markets sell off 2.59% on the 18th and 19th of July.
Luckily after that the fears subsided and the risk was back on the table with especially resource companies doing extremely well pushing our markets up with 3.7% return for the month.
The Chinese government is tightening regulations in their education and technology sectors.
Over the weekend of 24th of July, the government cited competition concerns with Tencent’s Music streaming service. Tencent erased $ 100 Billion of its market value over two days.
Tencent Share Price fell 42% from February 2021 up to July 2021.
But even with this fall the share delivered growth of 20% annually over the past 6 years.
Why Tencent is important to South African investors is because of the big exposure Naspers/Prosus have to Tencent. Tencent is more than 80% of the value of Naspers. Remember that Naspers is the biggest share on the JSE.
China also plays an important role in most South Africans portfolios with sentiment towards China, driving emerging markets and commodity prices.
The Chinese economy and companies like Tencent however offer long-term growth opportunities not seen in many parts of the world. These companies revise their business structures to comply with Chinese regulations, but there is an underlying risk that needs to be noted by the investors.
As a conclusion it is important for South African investors to take cognisance of the influence of different geographical events on the performance of their investment portfolios and not to only look at what is going on directly around us.
But the Riots is a stark reminder of our number one concern about South Africa: The lack of economic growth which is desperately needed in order to create jobs and attract foreign investment.
PJ Botha CA(SA), CFP ®