Bruce Whitfield  00:00

The joys of telecoms, we'll get hold of the Chief Investment Officer at the Old Mutual Investment Group, Siboniso Nxumalo, in just a bit. It's been a fairly quiet day on markets, actually. The All Share Index on the JSE ended a couple of points up, Paris and Frankfurt were down on the day, London and the US markets were closed because of public holidays. Siboniso Nxumalo, the Chief Investment Officer at the Old Mutual Investment Group, on the line to us from Cape Town this evening. He has been looking at graphs today, you've been looking at graphs of the currency, and as I said to you before you disappeared, the currency is great for exporters and awful for importers, and it's coming through thick and fast in the inflation numbers and lots of other data points too. 

Siboniso Nxumalo  00:41

Yes, Bruce, good evening to your listeners. I mean, I think whenever we look at the Rand, we always referenced the Rand to the dollar. So, if we just start there, we must understand that also, if the dollar becomes stronger, the Rand will naturally become weaker. So, not everything that's in the Rand is caused purely by our own issues in South Africa. But that being said, we do have issues. So, how we look at the Rand, we look at the Rand, the best way to look at the Rand is through what's called a real effective exchange rate, where you take your currency's value, and you say, well, who do I trade with? And you take their currencies to, and then you divide that by your inflation in between those. And that gives you a nice look at the Rand. And when we look at the Rand today was, our Rand is at the same levels it was in 2020, in 2008, and in 2001, and one is in common with all of those, that's when there was a global crisis. And so, our Rand at the moment is pricing in a really, really bad scenario. And so, therefore, all that news that has gone bad in the market, well, that's in the currency. That's why the currency is where it is, Bruce, and all those other times of great buying opportunity. So, the question is, is it the same now?

Bruce Whitfield  01:56

Yeah, and we'll get there in a moment, because another graph you've been looking at is the performance of the JSE All Share Index, relative to the MSCI Emerging Markets Index, and they mirror each other because the JSE is a big market, but certainly under... sort of duplicating the line of the S&P 500, but the S&P 500, of course, outperforming dramatically the emerging markets, and the JSE. 

Siboniso Nxumalo  02:24

Yes, Bruce. I think this is the thing. South Africa is an emerging market. So, it's part of the emerging market basket, but the other emerging markets, the really big one is China. China dominates the emerging markets. But then you will get Brazil, you'll get Mexico, those are all the developing economies that are well on their way to growth. Actually, in that basket, emerging markets have underperformed materially, and they are looking as cheap as South Africa. And so have their currencies also underperformed, so we're not alone in South Africa as an underperforming currency. The trick, though, is that the US market is still looking very expensive, relative to emerging markets, and obviously, relative to South Africa. And so therefore [...] careful about this idea of running away from South Africa and [...] and buy offshore assets, especially if they're in the US, because you're going to pay a very high price for that. And that itself has some dangers. So, it's not that easy.

Bruce Whitfield  03:19

If you look at a graph of relative performance of the All Share Index of the JSE to the S&P 500, roughly from 2010, with a few little anomalies, the All Share Index on the JSE outperforms dramatically the MSCI Emerging Markets Index, and particularly the S&P 500. It's only since the end of 2016, beginning of 2017, where there has been a massive underperformance by the JSE. What - does this tell us that this thing can come back? That this thing with the sorts of interventions that [...] was talking about just a moment ago, with a little bit of sensible policy and some smart economics, actually, the potential of South Africa begins to be restored.

Siboniso Nxumalo  04:05

I think, Bruce, that we need to understand what our market is made of, because whenever people think about the JSE, they all think, oh, it's South African companies. But actually, if you think about what makes up the JSE, the JSE is made up of resources companies, so maybe about a third of the JSE is resource companies. Those resource companies are platinum shares, the gold shares, the Anglos, the bilitants, those companies don't sell those commodities to South Africa, those are exported. So, those are foreign earnings that generally are driven by China. And again, then you get to the Naspers, the Richemont’s, the British American Tobacco, Anhauser-Bush. And again, that's close to 20% of the market. So now, you've almost gone to half the market of shares that are not driven by South African sentiment. So, buying the JSE, the JSE is stronger than the domestic economy, primarily because most of the companies on the JSE, Bruce, are not necessarily making earnings in South Africa. So, we've got to dislocate investing in the All Share Index in the JSE, then investing in South Africa.

Bruce Whitfield  05:08

There we go. Thank you, Siboniso Nxumalo, Chief Investment Officer at the Old Mutual Investment Group. And amidst the doom and gloom and the negativity on markets and currency, Siboniso Nxumalo has been trawling the graphs finding signals.