ZA Economist – A blog on the South African economy and global financial markets

Higher interest rates – good or bad news?

Interest rates globally have been on a sharply upward tack in recent weeks. Whether this is good or bad news depends on the reasons for the higher interest rates. If the higher rates are largely a response by markets and central banks to expectations of permanently higher inflation, it will be bad news for all but short-term lenders. The increases however could be caused by something else, by an increase in the real productivity of capital and in the willingness of borrowers to pay up for now more valuable capital.

Higher rates driven by increased demands for capital portends faster growth in incomes. More supply to come, perhaps even with less inflation, as increased debt funds income and output enhancing plant and equipment and value adding R&D. And the response to market determined interest rates in the marketplace for assets, including the value of the companies that invest in plant and equipment and R&D, will depend on the causes of higher interest rates, and their effects.

The market determined present value (PV) of any company will depend in part on estimates of the flow of operating profits over time and after taxes. The stronger these expected flows of revenues less costs, and the longer the period over which the estimated operating profits will flow, the more valuable any company will be. But since operating profits earned in the future are less valuable than profits now, the value of future profits will be discounted by an appropriate rate of interest, by the opportunity cost of capital. The higher these costs, the higher this discount rate, the less valuable the company- for any expected flow of operating profits and taxes. A 100 worth of operating profits after taxes to be received in ten years’ will be worth 39 today given with a discount rate of10% p.a. and worth only 25 should the discount rate be 15% – close to the cost of capital in SA.

But the discount rate for such a PV calculation will not be established independently of the top line for the average company. The more growth in revenues and costs expected across the wider global economy, perhaps aided by inflation and real growth, the stronger the top line of the PV calculation, the more demand for capital to invest, and so the higher the discount rate is likely to be. It is very possible, as is the case this year In the US, for returns on equities to be positive while returns on bonds are negative. The numerator of the PV calculation, the growth expected operating profits, has been more powerful recently than the denominator, the higher discount rate. This outcome, a positive correlation between equity and bond market returns is by no means unusual. [1]

When real inflation protected yields rise it should be regarded as the response to a real increase in the demand for capital. When the nominal yields on a vanilla bond increase, it could be because more inflation is expected. And or because real yields have risen. The recent increase in the yield provided by the key US 10-year Treasury Bond from 4.45% p.a. in early June to well over 5.2 % p.a. by October 12^th, some 79 basis points, has been accompanied by an even larger increase in the equivalent inflation protected bond (TIPS) of 84 basis points. That is the increase nominal interest rates in the US have been driven by an even larger increase in real yields in the US.

Fig. 1; Real Interest Rates in different Currencies. 10-year Inflation Protected Bond Yields

Source; Bloomberg and Investec Wealth & Investment

The difference between the respective yields, the lower initial real yield on a fully inflation protected bond, and the higher yield on a vanilla bond, exposed to the risk of inflation, can be assumed to reflect inflation expectations. These differences in yields are described as breakeven yields that compensate the lender for expected inflation. inflation expected is little changed this year and close to but still above the inflation target of 2% in the US. Real 10-year yields in the US are now close to 3% p.a. It is a real rather than an inflation story driving higher long term interest rates in the US.

Fig. 2; US Nominal and Real Inflation Protected Bond Yields and their Differences. Daily Data June-October 2026

Source; Bloomberg and Investec Wealth & Investment

Which given the importance of the US in the market for capital has driven interest rates higher across the globe. Higher real yields in the US are highly consistent with the underlying strength of the US economy. Revealed by highly buoyant indexes that measure economic activity, especially activity in the service sectors (PMI’s) and by the very strong growth in bottom line earnings. The huge growth in capex spending by the IT superscalars now more than exhausting still very large internally generated cash flows, has become a source of much newly issued debt. Borrowing to fund growing fiscal deficits is another important source of demand for capital. And a now stronger USD is consistent with an increased flow of foreign capital to the US.

When real inflation protected yields rise it should be regarded as the response to a real increase in the demand for capital. When the nominal yields on a vanilla bond increase it could be because more inflation is expected. And or because real yields have risen. The recent increase in the yield provided by the key US 10-year Treasury Bond from 4.45% p.a. in early June to well over 5.2 % p.a. by October 12^th, some 79 basis points, has been accompanied by an even larger increase in the equivalent inflation protected bond (TIPS) of 84 basis points. That is the increase nominal interest rates have been driven by an even larger increase in real yields in the US. It is the real demand for capital that is driving interest rates higher in the US. Indeed, good news about the US economy.

Fig.3; US Production Managers Composite Index. Monthly Data and Long-term Interest Rates

Source; Bloomberg and Investec Wealth & Investment

A postscript – Some reflections on interest rate spreads. Real and Nominal rates

The sustained differences in real yields between the different currencies, including the much higher real yields on offer in SA, is explained by expected exchange rate movements. The real yields on offer are realised in different currencies. The return from the inflation linker in a foreign currency will be reduced or increased for a foreign currency investor by movements in exchange rates. The expected real fully inflation protected returns therefore depend in part on the expected movement in exchange rates. Higher real yields offered in a domestic currency may be offset by exchange rate weakness. Furthermore, judged by past performance, there can be no presumption of exchange rates following purchasing power parity. (PPP) The movements in exchange rates are very unlikely to closely match differences in inflation. Independent currencies therefore carry real exchange rate risk. The risk that is of deviations from PPP.

The same expectations of exchange rate movements made explicit in the market for vanilla bonds may be applied to the market in independent currency inflation linked bonds. For example, the higher real rand yield on an RSA inflation linker (4.2% + SA inflation) when compared to the lower 3% p.a. USA TIPS yield of the same term, 93% plus US inflation) will be reduced for a USD investor, by a weaker USD/ZAR exchange rate. The difference in 10- year interest rates available on vanilla RSA Bonds when compared to the lower yields offered by 10-year US Treasury Bonds, indicates that the rand is currently priced to weaken Vs the USD by an average 3.8% p.a. rate over the next ten years. If such exchange rate expectations prove accurate, the expected dollar returns from the 4% plus inflation real rand return are not relatively attractive. The risks of exchange rates not complying with PPP are not easily hedged. Inflation linkers eliminate the risk of inflation – but only in the domestic currency.

Fig.4; RSA-USA Real interest rate spread – before and after expected ZAR weakness.

Source; Bloomberg and Investec Wealth & Investment

A consolation for investors in RSA Bonds -the carry has narrowed recently.

One important recent consolation for investors in RSA bonds is that while RSA yields have risen, they have risen by less than US bond yields. The carry- the extra reward for holding RSA bonds – has declined rather than widened. And as discussed, by implication of interest parity, the ZAR is expected to depreciate at a lower rate which implies less pressure from the rand prices of imports and exports on the SA CPI than before.

Fig.5; RSA and USA 10 year Bond Yields and their Spread (Daily Data June – October 2026)

Source; Bloomberg and Investec Wealth & Investment

Measuring sovereign risks of default.

The difference between the yield on a same currency USD denominated RSA bond and a US Treasury Bond provides a less complicated view of sovereign risk. It carries default risk- but not currency risk. Thus this spread may be regarded as compensation for the risk that a government issuing the foreign currency denominated bond might not be able to pay the interest or capital repayment in the foreign currency. The difference in the yield offered by a RSA Yankee – dollar denominate RSA bond – and an equivalent US Treasury Bond therefore represents the risk of default. This interest rate spread may be regarded as a Sovereign Risk premium. The yield on the five-year RSA Yankee bond has widened recently in line with bond yields generally including dollar denominated debt issued by other emerging market issuers. As has the RSA spread over US Treasury Bond yields widened marginally, indicating more sovereign risk. But of some further consolation to investors in RSA Yankee bonds is that this sovereign risk spread is significantly lower than it was in early 2025.

Fig.6; RSA sovereign risk identified. Daily Data 2026.

Yield

Source; Bloomberg and Investec Wealth & Investment

[1] The correlation between daily per cent moves in the S&P 500 Index and a US Treasury Bond Index in 2026 is a positive (R=0.41) it was negative for much of 2025.

A tale of two economies- USA and RSA

In my previous column I pointed to their extraordinary gains in bottom line profits of the US corporation. Profits as a share of the Gross Value Added (GVA) of all non-financial corporations in the US have risen from about ten per cent in 2019 to about 16% now. This profit ratio was below 4% in the early 2000’s. The growth in profits is much more conspicuous in the bottom earnings line than in top line revenue growth. The average US company has become significantly more efficient. They have also been investing heavily to grow their capacity.

Fig.1: US Nonfinancial Corporations; Gross Value Added (GVA) and Net Profits. (2000=100) Quarterly

Source; St.Louis Reserve Bank. Investec Wealth & Investment

Fig. 2; US Nonfinancial Corporations. Profit Ratio %. Profits after Taxes/Gross value Added. Quarterly 2000- 2026

Source; St.Louis Reserve Bank. Investec Wealth & Investment

I have examined the performance of the South African Nonfinancial Corporations that accounted for about 60% of all GVA or GDP in 2025. The differences in outcomes are striking. Top line growth in the GVA of SA non-financial corporations has been tepid. Real growth in GVA was less than 5% between 2019 and 2025. Bottom-line growth reveals no surge in efficiency and the reluctance of these corporation to commit to capex or to raise capital is striking.

Unlike the US, the SA Nonfinancial Corporations reveal a very stable relationship between bottom line earnings and their GVA. The profit ratios – both at the gross and net levels have remained largely unchanged – no trend higher or lower in the profit ratios since 1995 can be observed. The share of the operating surplus in GVA has been about 50% and the ratio of income after taxes- Disposable Incomes – have hovered around 20% p.a. without revealing any obvious trends in either direction.

Fig.3 RSA Nonfinancial Corporations Gross Value Added and Net After Tax Profits (1995=100) Annual Data

Source; SA Reserve Bank and Investec Wealth and Investment

Fig.4; SA Non-Financial Corporations Real Gross Value Added (2015=100)

Source; SA Reserve Bank and Investec Wealth and Investment

Fig.5; RSA Nonfinancial Corporations; Key Ratios to Gross Value Added

Source; SA Reserve Bank and Investec Wealth and Investment

Most distressing and depressing of GDP growth, to date and in the future, is that the capex of SA private business enterprises has stagnated. Adjusted for inflation it is running at about the same level reached back in 2005. The ratio of the capex of non-financial corporations to their contribution to the economy (GVA) was 24% in 2012- it is now less than 18%. The ratio of capex to household consumption spending follows a very similar pattern.

Fig. 6: Non-Financial Corporations; Ratio of Capex to Gross Value Added and to Household Consumption Spending

Source; SA Reserve Bank and Investec Wealth and Investment

Fig. 7; SA Non-Financial Corporations; Real Capex (2015=100)

Source; SA Reserve Bank and Investec Wealth and Investment

How is this failure to grow to be explained? The usual explanation would be to refer to the supply side constraints that have hampered the economy- lock downs and logistic failures are obviously front of mind. Clearly you cannot meet a potential demand for exports unless you can get the metals and minerals and other stuff competitively to markets offshore. Supply side reforms that introduce private style incentives are under way and promise to relieve some of the constraints on meeting foreign demands. And will encourage more capex building mines, harbours roads and railroads.

A willingness to invest in additional capacity to meet the growing demands of households for goods and services is also essential to the purpose. The US corporation has had the stimulus of a growing domestic market. The average SA business has had no such encouragement. Household consumption spending adjusted for inflation has grown by about only 7.5% since pre-Covid 2019. The spending of the SA household has grown not nearly rapidly enough to stimulate capex.

The flat ratio of capex to household consumption spending reveals this dependence of capex on final demands. Capex spending is derived from the growth in household spending. It is quite unrealistic to expect otherwise. SA business has been in a holding pattern. It has learned to survive without much growth in its domestic market.

But they could do much better for the economy than paying dividends and buying back shares from still satisfactory cash flows. They could do more capex and raise capital from abroad to fund faster growth if there was a growth case to do so. Without extra supplies there cannot be much growth. But without extra demands for potential suppliers of goods services and employment extra output and capacity will not be solicited. Supply creates demand and demand determines supply. They are two blades of the same scissors. They work together to cut the cloth.

Real household spending growth of the order of the less than one per cent p.a. is growth defying. The aim of monetary policy should be to target household spending growth of the order of 3% p.a. with more accommodating interest rate settings to make such growth and growth in bank lending possible. And to see where such faster growth would take supply- including supplies of foreign capital to help fund growth and support the ZAR.

Alas with the oil price shocks the SARB in lock step with other central banks has raised rates. SA households will therefore be growing their spending at a still slower rate in the months to come – under a supply side shock- fuel price plus higher interest rate pressure. Faster growth will again have to wait for lower inflation and interest rates. The SARB is not about to change its approach out of sensitivity to the state of the SA economy. It will be inflation led- whatever the cause of higher prices.

Fig.8; SA Real Household Consumption Spending (2015=100)

Explosive profits and profit margins in the US; How long will they be sustained? Stagnation of profits in SA – how long will this be the case for the non-mining sector?

US Corporations are delivering explosive growth in their profits. Bottom line earnings are not only growing very rapidly they are growing significantly faster than the economy at large, as they have done consistently since 2000. This growing share of profits in GDP has accelerated since 2020. Since Q1 2020 Corporate Profits after tax (CP) as measured by the National Income accountants are up 2.15 times, S&P 500 earnings, largely included in CP have grown 1.8 times while the GDP is up by 1.5 times since 2000. The outlook is for further growth in profits in the year to come- is of the order of 30% plus higher on current estimates of S&P 500 earnings after tax . The prices of the average S&P listed company – weighted by size has been running ahead of current reported earnings- presumably anticipating further growth in reported earnings.

Fig. 1; US Nonfinancial Corporations; Profits after Taxes, S&P 500 Earnings, and GDP (2000=100) Quarterly

Source; Federal Reserve bank of St.Louis, Bloomberg, Investec Wealth & Investment

Fig. 2; US Nonfinancial Corporations; Profits after Taxes, S&P 500 Earnings, and GDP (2020=100) Quarterly

Source; Federal Reserve bank of St.Louis, Bloomberg, Investec Wealth & Investment

Clearly the share of all national income attributable to the owners of incorporated US businesses has risen sharply, while the share of employment benefits that make up a much larger portion of all incomes will have declined in roughly the same proportion. It is as well for social stability that many of the workers struggling against minimal real wage growth are also shareholders that have benefitted significantly from more valuable pension and retirement plans.

What deserves special attention is that the growth in profits has not come from exceptional growth in the growth in the output of the average US corporation. The top line of the corporate books has grown strictly in line with the growth in the wider economy. The Gross Value Added (GVA) by nonfinancial corporations has grown very similarly to GDP- that is all the Value added in the US. The share of GDP added by now much more profitable non-financial corporations has not changed significantly. It is now approximately 50% of GDP and was higher at 54% of all GDP in 2000.

Fig. 3; US Nonfinancial Corporations; Groos Value Added and Net Profits. (2000=100) Quarterly

Source; Federal Reserve bank of St. Louis, Investec Wealth & Investment

Fig.4; US Nonfinancial Corporations Gross Value Added and GDP Current Prices (2000=100) Quarterly

Source; Federal Reserve bank of St. Louis, Investec Wealth & Investment

Fig.5; US Nonfinancial Corporations; Gross Value Added/GDP % p.a. 2000-2026; Quarterly

Source; Federal Reserve Bank of St. Louis, Investec Wealth & Investment

The big story about the US economy is that it is not about top line growth – not about exercising the economies of scale – growth in sales and a growing share of all spending and economic activity – that have made US businesses more profitable. It is the improvements, the gains in the efficiency of their operations that are reflected in the bottom lines of the average US corporation- listed and unlisted -that are responsible for the additional profit margins and earnings. Better use of capital, relatively less capital employed, utilising a more productive work force while responding to a strong focus on required returns on capital should be recognised as the sources of much improved profitability. And AI and its application promise more efficiency gains and strong support of good returns on additional shareholders capital put to work Capital light rather than capital heavy operations is likely to characterise the new service dominated economy.

It is the dramatic improvement in the profitability of each unit of gross output added (GVA) that is the remarkable feature of US business. The Federal Reserve Bank of St Louis has calculated the profit per unit of real value added by US nonfinancial business. This unit profit has grown from approximately 4% in 2000 to 20% in 2026. This represents what you might describe as a five times improvement in efficiency over 25 years. In 2020 this measure (profits per unit of output) was 12% from which it has grown to 20%. My own calculation of the ratio of the profits of US nonfinancial corporations to their gross value added ( GVA) indicates the same trend. This net profit ratio was below 4% in the early 2000’s – it grew to 10% by 2020 and is currently a lofty 16%.

Fig.6; US Nonfinancial Corporations; Profit per unit of Real Gross Value Added

Fig. 7; US Nonfinancial Corporations. Profit Ratio %. Profits after Taxes/Gross value Added. Quarterly 2000- 2026

Source; Federal Reserve Bank of St. Louis, Investec Wealth & Investment

While US corporations have become more profitable it is hard to discern any significant changes in how they allocate their surpluses. Their savings and capex continue to be closely matched – free cash flow after capex is still positive and almost all of capex is funded by cash generated from operations. Though a recent increase in savings and retained earnings can be noticed. They remain willing to invest in growing their enterprises. But no runaway investment boom is apparent for the average company. Real capex by all nonfinancial corporations is up by a healthy 23% since 2020 a confident but not dangerously exuberant response to the increase in profits and profit margins it would seem. Current Capex of Nonfinancial corporations is of the order of 3 trillion USD

Fig. 8; US Nonfinancial Corporations – Capex, Savings and Retained earnings

Source; Federal Reserve Bank of St. Louis, Investec Wealth & Investment

Fig. 9; US Nonfinancial Corporations; Real Capex (2020=100)

$ Billions

Source; Federal Reserve Bank of St. Louis, Investec Wealth & Investment

Though true enthusiasm to invest in growth may well describe the so-called hyper scalers that are competing so actively and expensively for the AI spend. These super scalers – Google, Amazon, Microsoft Meta and SpaceX are scaling up their operations ompeting for the expected AI spend and the profits that are expected to come with such spending. They are forecast to be spending over 1.2 tr dollars of Capex by 2028. Except for SpaceX, they are also very profitable companies, currently returning over 20% p.a. on invested capital.

The cure for high profits is high profits -the search for additional profits that requires more capex and growth in capacity to supply customers. Actions that in time will compete away returns on capital. This is the way competition works. And this next time will be no different if business is left to pursue its own profit seeking objectives. The key question for investors is just how long it will take for profit margins to come under serious pressure, how long it will be for the moats that protect established companies to be breached and returns on shareholders capital revert to something like normal-about 10% p.a? Though as has been shown the recent profit share trends- some 20 years or more of them – have been in the opposite direction- and have come to be well recognised by the market in US stocks.

A Postscript for the SA Economy.

I have applied a similar approach to the performance of the South African Nonfinancial Corporations. Their results are reported in the Reserve Bank Quarterly Bulletin in the Production and Distribution Accounts of National Income. The annual data is available only from 1995. And the non-financial corporations in the estimates of Value Added and profits include the very large State-Owned Corporates, Eskom and Transnet that have been an important part of GVA but generally unprofitable.

Unlike the US, the SA Nonfinancial Corporations have had a very stable relationship between bottom line earnings and their GVA. The profit ratios – both at the gross and net levels have remained largely unchanged – indicating no trend higher or lower in the profit ratios since 1995. The share of operating surplus in GVA has been about 50% and the ratio of income after taxes- Disposable Incomes – have hovered around 20% p.a. without revealing any obvious trend in either direction.

Fig. 10; RSA Nonfinancial Corporations Gross Value Added and Net After Tax Profits (1995=100) Annual Data

Source; SA Reserve Bank, Investec Wealth & Investment

Fig. 11; RSA Nonfinancial Corporations Key Ratios to Gross Value Added

Source; SA Reserve Bank, Investec Wealth & Investment

However, unlike their US counterparts the SA Nonfinancial Corporations have significantly reduced their capex when adjusted for inflation – measured as the annual changes in the GDP deflator.

Fig. 12;

Source; SA Reserve Bank, Investec Wealth & Investment

This reluctance to undertake more Capex has made SA non-financial corporations net lenders rather than borrowers in the capital market. Their savings- relative to capex – increased markedly during Covid and has remained unhealthily positive since.

The growth prospects of the SA economy would much improve if the nonfinancial corporations undertook more capex and raised finance from foreign and domestic lenders to do so. On the optimistic presumption, not always fulfilled by the SOE’s in the past, that the capital raised would generate a cost of capital beating return. A business sector that generates cash rather than invests in growth will be able to return cash to shareholders – in dividends and buying back shares- but without growth in GVA and despite satisfactory returns on capital invested they will not command higher P/E’s or Price over Book values – absent growth. It takes growth as well as cost of capital beating returns to add value for shareholders. Paying dividends or buying back shares with excess capital can do no more than stabilise returns infused with large paybacks of excess capital to shareholders. Who are very likely to invest this cash offshore rather than in SA businesses.

What would it take to induce a growth seeking state of mind in the average SA corporation? They would have to be encouraged to add capex by much stronger demands for their goods and services and a sense that capacity was under strain. It would take significantly stronger growth in demands by the household sector. For this response lower borrowing costs would be essential to the purpose of stimulating growth. But are they likely given the recent petrol and diesel price shock to disposable incomes. And that higher borrowing costs are likely to be imposed by the Resbank to add to pressure on spending emanating from the petrol pump. Alas a revival of household spending that could turn businesses that save too much into businesses that confidently invest in growth is likely to be postponed until inflation subsides again.

Fig. 12; RSA Nonfinancial Corporations Savings/Capex Ratio and Net Lending (R million) 1995-2025

Ratio S/Capex Net Lending

R million

Fig.13 NFC Savings and Capex to GVA ratios – and the share of NFC Savings in All Gross Savings (RHS)

Clearly this reluctance to undertake Capex is an unsatisfactory state of Affairs.

The case against hedging- some lessons for SA shareholders and their managers

The CEO of gold mining company DRD, Mr. Niel Pretorious, made the following commitment when reporting good recent results.

“For the foreseeable future, the company will stick firmly to its preference for funding growth without leaning on debt. DRD Gold has also promised not to lock in elevated gold prices through hedging. The one undertaking that I do give is that for as long as we can, we will remain unhedged, and we will give you full exposure to movements in the gold price…..”

Shareholders in DRD no doubt approve of their exposure to the gold price. They typically hold shares in gold mining companies as a small part of diversified portfolios. They are well hedged generally and appreciate the extra upside gold shares can offer to the gold price. As DRD has succeeded in doing. Since 2015 the value of a DRD share has increased by nearly nine times faster than the gold price itself. Providing more gearing to the moves in the gold price for DRD shareholders than have any of the other gold miners listed on the JSE. At August 2026, the ratio of the DRD share price to the price of gold in ZAR was 8.73 times (2015=1) Since August 2015 this gearing ratio for Harmony (HAR) was 6.99, 6.18 times for PanAfrican (PAN) 4.96 for Gold Fields (GFI) 4.45 for Anglogold( ANG) and 1.49 for Sibanya (SSW)

Ratio of Share Price to Gold Price ZAR; August 2015=1

Source; Bloomberg and Investec Wealth & Investment

The annual average increase in the rand gold price since 2015 has been an impressive 17.6% p.a. average. There are peaks and troughs in this cycle – though the gold price itself has been on an almost continuous long tear higher since 2000. The annual average increase in the rand price of gold has been 16.9% p.a. since 2000 with few and limited declines. Why do gold mines ever hedge gold price risks? Other than perhaps to secure less risky finance for new ventures – perhaps to diversify – acquiring a copper mine or two – as has Harmony.

The answer is surely because the senior professional managers of any business are mostly much less diversified than their shareholders. The present value of their expected benefits from continued employment will likely far exceed the value of any company shares they may own. Hence their observed reluctance to retain shares awarded to them as a part of their packages. They may be encouraged to join the ranks of shareholders to act like them. But they prefer not to do so because they have a very concentrated interest in the companies they work for. They accordingly are likely to be more risk averse than the average shareholder and so more likely to hedge to help secure their futures. Which is why knowledge of the skin in the game of directors, the value of their shares, may indicate where hedging activities may take the company. There is however one sure lesson in hedging strategy. Keep your shareholders well informed about your hedging strategies, as DRD has done so that shareholders can knowingly choose to share in the risks or not.

Every company will have its own risks to cope with or take advantage of. For example, should South African domiciled businesses hedge their exposure to SA specific risks? Knowing also that their SA shareholders have full opportunity to diversify SA risks, holding a diversified portfolio of shares with foreign jurisdictions. Similarly, their foreign shareholders will also be well diversified and expose themselves to SA risks for the potential upside. Foreign investing in SA is not typically a safety-first decision. As with the miners the interest of shareholders and managers may not be fully reconciled as may be the case with the miners. SA managers may have better reasons investing shareholders capital offshore than their shareholders.

The Gold Price Cycle (% Change p.a.) and the Gold Price ZAR per ounce 2000- 2026; Log scale – LHS

Source; Bloomberg and Investec Wealth & Investment

The value of such direct investments inward and outward has grown strongly over recent years from very limited beginnings. Direct Investments by SA businesses have grown to a value of over R3000 billion in 2024- first exceeding inward direct investment of about R2000 billion – in 2013.

South Africa; Foreign Direct Investment by Private Business Enterprises – outward and inward 2000- 2026.

Source; SA Reserve Bank and Investec Wealth and Investment

Direct investment is defined as those made by a controlling foreign investor, one owning more than 10% of the shares in issue. Clearly not all these investments by SA companies abroad have succeeded for shareholders. There have been many conspicuous failures yet also several successes, including recent investments abroad made by the originally SA mining companies.

Perhaps the lessons are well demonstrated by the performance of foreign direct investors in SA. They invest here for its expected return on capital, doing so for the same reasons they invest globally. It is not to diversify exposure to their domestic economies, but much better to profitably scale up the application of their Intellectual Property in the SA market.

SA businesses when investing abroad should not be doing so to diversify SA risk. Shareholders are perfectly capable of doing so for themselves. The understandable interest managers will have in diversifying their SA employment risks, should not be the compelling purpose. The confidence of the managers in their ability to scale up their own Intellectual Property should be the primary motivation – a goal not easily satisfied it should be stressed. Investment decisions should rely on business properties powerful enough to enable them to compete successfully with well-established and capable and well capitalised domestic operators. Without this essential capability the case for investing abroad will be a weak one- that potential and actual shareholders will recognise and resist and value their shares accordingly.

South Africa has a growth story. Cape Town provides one.

I well remember when spectacular Clifton, on Cape Town’s Atlantic coast, served a very different residential community. Among their number were artists, writers and poets. Accompanying them were a few remittance men with a well-developed game of beach bats. Best played on a late summer evening. They lived modestly on land leased cheaply from the municipality. Upon which comfortable wooden bungalows, as we called them, were perched on the steep inclines. Life indeed was a beach for those who somewhat mysteriously had acquired valuable residential rights and easy access to brilliant sunsets.

And then the City did something very sensible. It offered the established residents the opportunity to convert their land leases into freehold at a very attractive rate. And rents and the value of renovated homes then began an upward spiral that continues to this day. And the locals mostly sold up and cashed in their windfalls to be replaced by the rich and not so famous.

The originals preferred not to sacrifice the rental income they would have done owner-occupying, or to delay realising their capital gains. They moved on to other less valuable locations and lower rentals. They traded off consuming what had become less expensive accommodation for more of the other necessities of life. Consistently so given their limited incomes and overweight real estate. And the renovators, demolishers and builders moved in to satisfy those who could afford and consume more valuable homes on Clifton beach. Homes that have proved to be good investments that offset higher rentals and higher real estate taxes levied on the market value of the homes. And also providing a growing flow of revenue from rates levied on the market value of the Clifton Villas for the City.

A Clifton type story is now evolving widely in Cape Town and environs. Where rents and property values have been rising and are expected to increase further. High rise real estate developments are well under way to meet the demand for space at rentals high enough to encourage developers and owners to speculate on increases in rentals to come. Providing jobs and incomes way up the supply chain that includes the supply of labour. The average price of a home in Cape Town and the Western Cape has increased by 60% since 2020. In Durban or Johannesburg house prices on average have increased by only 12% since 2020.

Average House Prices in Cape Town, the Western Cape, Johannesburg and Durban. Monthly Data 2020=100

Source; Stats SA, Investec Wealth & Investment

There are however well recognised downsides to a successful City. More congestion for the established residents and visitors. And more strain to deliver water and electricity, refuse collection, roads and flyovers and to fight the fires. The other downside for those who do not own is more expensive accommodation for those who rent for cash. You could live a lot cheaper, rent at much lower rates per sq. metre, in Johannesburg and Durban. Or in the less expensive suburbs of Cape Town.

The answer to the growing scarcity of any good or service, including accommodation, is to increase supply. Build Baby Build. All who travel to inner Cape Town from the North or the South will notice that there is an abundance of undeveloped land close to the City. Turning that low or zero yield land into many more homes is surely possible. The City, by adding at its own expense, the infrastructure to connect vacant land to essential services, would help deliver increased supplies of land for building on. Lower costs attached to land translates into lower prices for the buildings erected on them, given competition. The extra income collected every year from the rates to be charged on the additional housing stock would help re-cover such costs. Investing in infrastructure can provide good long term returns in kind and in cash for a growing City.

Property developments can be made more viable when higher permitted bulk is exchanged for additional so-called social housing as appears to be under way in Cape Town. Accommodation supplied at a subsidised rental for those fortunate enough to win such a lottery. But a number questions need to be answered by social housing. The poor will not be able to afford even heavily subsidised rentals in high rise buildings that have to be well and expensively maintained. The essentially middle-income, or soon to become middle income teachers, health workers and administrators could qualify. But how will they be selected? And will they be permitted to do a Clifton? Rent out or sell up because it makes sense for them to spend less on what becomes expensive accommodation and more on the other essentials.

A successful City armed with a growing stock of taxable real estate can exercise choices with a budget that provides for improved amenities. That in turn add to property values. The tax revenue helps maintain the municipal capital stock and fund additional capacity to meet growing demands. Which supports and reinforces property values that then further improve flows of revenue. A virtuous circle made possible in Cape Town because it avoided being captured by its own officials. A fate suffered by many other SA municipalities.

The value of taxed real estate in CT has been rising at an about seven per cent p.a. rate over the past ten years, more than doubling from about 1 trillion rand in 2016 to nearly 2.2 trillion rands in 2025. The average rate of the wealth tax on this property has been a consistently average (0.07%) per month-about 1.33% of property values per annum. Taxes collected on Property have been rising at about the same rate. Also more than doubling from R6.5 billion in 2015-2016 to R13.92 billion in 25-26. The City Budget expects R15.8 of income from rates in the 26-27 fiscal year an increase of 13.7%.

Cape Town- Property Values (Left Scale) and Income from Rates (Right Scale) Annual Data R billions

Source; City of Cape Town Financial Statements and Investec Wealth & Investment

Cape Town can however be charged with spending and funding too conservatively. It should be encouraged to do more with its very strong balance sheet (minimal debt) and rising revenue streams and flows of cash. It could raise debt to add further to its infrastructure- in ways that would further reinforce property values and revenues. More boldness is called for.

The Message from the Government Bond Markets – updated 13th August 2026

The Fed and the SARB surprised the markets after their recent meetings. The Fed by providing less forward guidance than was expected and the SARB by not raising short term interest rates. But still leaving expectations of higher short rates to come over the next twelve months largely unchanged. Long term bond yields in the US and SA immediately kicked higher but have since stabilised at higher levels in the US and returned to pre-meeting levels in SA. The US market is currently pricing in a 58% chance of an increase in rates at its next meeting in September while in SA short rates are expected to be about a half a percent higher in twelve months. Expectations that in themselves are not helpful to the bond market.

This minor kerfuffle in the all-important US Bond market has come after a most extraordinary and extended period- since 2010 – sixteen and a half years – of poor returns – and returns more damaging to investors when compared to the excellent returns from US equities realised since then. Seldom if ever has a search for safety in the global bond and money markets been more expensive. In the form that is of extraordinarily good equity returns foregone. Between 2010 and July 2026 the S&P 500 realised an average annual return- capital gains plus dividends- calculated each month of 13.82% p.a. was realised. An index of US Treasury Bonds provided average returns of no more than 2% p.a. over the same period while cash delivered 1.5% p.a.

A realised equity risk premium of over 10 % p.a. is truly exceptional – and a rational reaction to bottom line index earnings growth that averaged over 11% p.a. over the same period. The exuberance of investors in publicly listed shares was justified by a growing bottom line. A case of valuations consistently catching up with underlying performance. 100 dollars invested in the S&P 500 in 2010 with dividends reinvested would have grown to 938 dollars by July 2026. The bond portfolio with interest reinvested in the Index would be worth only 138 dollars by now and a money market fund with interest reinvested in the money market is unlikely to be worth more than 130 dollars after 16 years. Understandable reasons for the risk averse to be crying in their cups.

What is helpful to shareholders – strong economic growth and increasingly profitable businesses- that are willing to invest heavily in future growth– all immediately growth encouraging – adds to the demand for financial capital – for savings – and will tend to raise interest rates. Especially when government fiscal deficits and bond issues are increasing – as they are in the US.

Bond yields in the US have risen recently not because more inflation is expected. Rather because more growth is expected to add to the competition for global savings. A competition that is well reflected in the higher real yields available to investors from low risk fully inflation protected US Bonds. The real yield on a 10-year inflation protected US Treasury Bond is now 2.3% p.a. – higher than at any time since 2010. By coincidence the breakeven yields are also currently 2.3%. That is the extra yield offered to investors in bonds exposed to the risk that inflation may rise unexpectedly. This spread can be regarded as an objective measure of inflation expected in the US over the next ten years. And is very close to the Fed target for inflation of 2% p.a.

Fig. 1; US Long Term Interest Rates- Nominal and Real 10 year Treasury Bonds – and their Spread. Monthly data 2010-2026

Source; Bloomberg and Investec Wealth & Investment

Update to August 13^th Daily Data – Yields trending higher- the RSA gives some more

The SA bond and money market provided much more competitive returns to investors since 2010. The difference between the JSE All Share returns and those of the bond and money market- the realised equity risk premiums- have been much more modest- of the order of 3-4 per cent p.a. On average the share market has delivered average rand returns of 13% p.a.- compared to the ALBI Bond Index that delivered an average 9.2% p.a. on average and the money market that delivered 6.3% p.a. on average since 2010. A R100 invested in 2010 would have grown to R734 by July 2026, dividends reinvested, the Bond Index with interest reinvested would have compounded to R478 and a money market fund with interest ploughed back in the fund would be worth R282 by now.

The performance of the RSA bond market since post-Covid 2023 and post the oil shock of March 2026 can be regarded as very helpful for the economy. Long term interest rates have come in and most important the spread between the cost to the SA taxpayer of borrowing dollars for five years rather than rands – the sovereign risk premium – has declined by 2% p.a since 2025 when the GNU was formed-to just over 1% p.a.. And declined further this year despite the oil shock. SA dollar denominated debt is now trading in the debt markets at close to investment grade.

Fig. 2: RSA Longer term Interest rates. 5 year bonds. Daily data

Source; Bloomberg and Investec Wealth & Investment

Daily Data 2026

Update- RSA doing well

Daily Data; July -August 2026. Inflation expected over next five years(breakeven) still elevated- but lower recently as are the respective 5 year and 10 year carries. That is the expected value of the USD/ZAR is lower than it was. The ZAR has recovered strongly across the board. Outlook for inflation therefore declined.

How much more can the SA bond market offer investors? The answer will depend on the fiscal outlook for the SA economy. Will the fiscal deficits be well contained and the debt to GDP ratio continue to decline? If more economic growth were expected the answers would be affirmative in the best sense for interest rates.

The latest news from the fiscal front is now very encouraging. Tax revenues are rising significantly faster than expenditure. Perhaps an extra R90b of revenue this fiscal year ahead of the 2026-27 Budget is possible. Which if it materialises offers some growth and bond market encouraging possibilities. Possibly less to be borrowed and perhaps more adventurously providing capital for essential infrastructure improvements. But growth can only follow if the extra capital so employed can offer cost of capital beating returns. More capital with private sector partnerships, is essential to such purpose. And if expected to be sensibly practiced will add strength to the bond market and reduce the cost of capital to investors in SA. And in turn encourage more private capex to dd to the growth momentum.

The mighty ZAR July =100. Daily Data

The rand rebounds strongly against the AUD, the EM Basket and the USD

To bet or not to bet. Being realistic about sports betting in SA

July 22^nd 2026

South Africans enjoyed full access to the World Football Cup – as they do to the Springboks and most important global sporting events. Who paid for such valuable access? Thanks are due to the punters betting on the outcomes. The competing Sports Betting Bookmakers and their advertising budgets cover much of costs the television programmers incur for the rights to broadcast the events. Without the punters, their telephones, internet connections and the bookmakers taking and advertising their bets, watching the games at a distance would be far more expensive- perhaps unavailable.

Sports betting has become the dominant form of gambling in South Africa. Before Covid, licensed Casinos in South Africa accounted for approximately 56% of all gambling activity and Sports betting 22%. By 24-25 the sports betting houses claimed 70% of all legal gambling and the share of Casinos had fallen to 26.5% – with the Casino operators adding on-line sports betting to their portfolios to compete better for the gambling rand.

Source; SA Reserve Bank Quarterly Bulletin. March 2026.

How much then do the punters pay to back their teams? The answer is perhaps less obvious than it may appear on the surface as the transactions with their bookmakers heat up. It depends on not how much the punters bet, rather on how much they lose collectively to the gambling houses, the bookmakers. An amount known as Gross Gambling Revenue. (GGR) That is the money with held by the book makers and Casinos after paying out the winners. The amounts returned to punters in SA are about 94% when playing games of chance in Casinos. (a 6% average loss ratio) Sports betting appears to offer less generous odds paying out less than 92% of what they took in 2025.

The notion that all gamblers must lose is therefore not accurate. A significant number of the bets laid will be winning ones – on a day, month year or lifetime of gambling – depending on the distribution of the outcomes around the average loss ratio. If the distribution around this average loss ratio of 6% were a normal one, around 27.0% of all punters would break even and 11.5 % of the punters would more than break even or better. The number of successful gamblers- those who broke even or better and who presumably had some fun along the way -would fall or rise with the GGR.

Since 2015 the Turnover (Revenue) of all licensed gambling houses in SA has risen from R358 million in 2015 to R1501m in 2024. An increase of 4.2 times. Over these 10 years GGR or what may also be described as the Gross Operating Surpluses increased from R26.3m to R74.5m, a lesser increase of 2.8 times. Perhaps a sign of a more competitive market.

The share of GGR in Gross Household Consumption Expenditures grew from 0.9% in 2015 to 1.6 per cent in 2024. The biggest loser from this shift in spending patterns was spending on other forms defined as Recreation and Culture that fell from 7% of estimated household spending in 2015 to 5.8% in 2024. That is minor shifts in consumption patterns towards gambling have occurred – inspired by changes in technology – but hopefully not enough to inspire panic – or successful attempts to interfere with essential freedoms of adults to spend as they wish.

Of the R74 billion GGR in 2024 a significant proportion was paid in taxes – that is not returned to punters. Specific taxes on the GGR, amounted to R5.8 billion (7.8% of GGR) in 2024, of which the Sports Betting houses contributed 59% or R3.4 b. It was R240 m in 2018/19. The betting houses will also be liable for income taxes on their earnings which will be less than their GGR after taxes.

The temptation to raise the specific taxes to discourage gambling will always be a force. As it is with excise taxes on alcohol or tobacco the consumption of which is much disliked. Raising such excise taxes, as we have noticed in our lawless society, may however not even lead to increased tax revenues. It most obviously adds encouragement to illegal production and smuggling. Even to the point where the prices on the streets decline as the producers of contraband compete away some of the extra margin higher tax rates wittingly or perhaps unwittingly provide them.

The price of an opportunity to gamble is the pay out ratio- that part of the bet paid back in winnings. Forcing the bookmakers to pay over more to the receiver of revenue is very likely to reduce their pay-out ratios. And therefore to encourage the illegal operators to improve their odds to encourage more flows and GGR their way. And so less for punters and the tax man and sports lovers.

But there is another new force in the gambling market that may be an even bigger threat to the bookmakers and Casinos than higher taxes on GGR. It is the increasingly important role now being played by the Prediction Markets. Polymarket or Kalshi do not make money by “being the house” and taking the opposite side of your bet. They operate more like exchanges where users trade contracts with one another betting on a huge variety of possible outcomes, sporting or financial or political. Their profits come primarily from facilitating trading activity rather than from gamblers losing. And they charge fees to do so, as would a stock or commodity exchange. Indeed Kalshi is licenced and regulated in the US as such an exchange.

One source, my helpful BOT, analysing Kalshi’s 2025 activity reported as follows. Trading volume: $22.88 billionFee income: $263.5 million- That is 263m/2288m =1.15%Which is a formidably high payout ratio – over 98% – and one very likely to encourage the odds conscious and well informed large punters- or perhaps better described as hedgers rather than gamblers. The sooner SA licences such an exchange to reduce illegal gambling the better.

Kevin Warsh is a central bank reformer.

The highly influential tribe of central bankers gathered in Sintra Portugal last week at the invitation of Madame Legarde, President of the ECB. Some of their leaders, Legarde, Governor Baily of the Bank of England, Maklem of the Bank of Canada and Kevin Warsh, only four weeks into his tenure as Chairman of the Board of Governors of the Fed, agreed to take part in an unrehearsed panel discussion expertly led by Sarah Eisen of CNBC. The Q&A can be found on Youtube [1].

The Mantra strongly shared and proclaimed by the panellists was NO FORWARD GUIDANCE. That is no insights at all were offered on how the central bankers saw their economies evolving over the next twelve months and more. And all attempts to extract such information about the expected direction of interest rates or the size of their balance sheets guidance were firmly rejected with Walsh leading the resistance. Predictably given his already widely shared objections to the public prognostications of his FED colleagues.

And despite his obvious acknowledgment that monetary policy works with “long and variable lags” for which some reliable sense of where the economy might be heading would surely be required when setting interest rates today, to work their magic tomorrow. But if they have such forecasts the central bankers were determined not to have to share them.

The ECB and the BOE have in fact refused to offer forward guidance. For fear that in an unruly world their forecasts might prove embarrassingly wide of the mark and might have to be defended despite their errors. Legarde spoke of the necessity for framework guidance, that is to inform the financial markets of the process of reasoning that informs the ECB. That is to foster a better understanding of what is the “reaction function” of the central bank. Upon which market participants would draw when predicting the direction of interest rates. Something they will continue to do to avoid losses or to make profits when central banks decide to move their key interest rates higher or lower as they are bound to do. Which participants in financial markets will continue to make every effort to anticipate- using all the information they collect to do so.

But Warsh’s resistance to forward guidance- sharing his forecasts- is not based on the chances that the forecast might prove inaccurate. His objection is one of deeper principle. He thinks that the central bank should not look forward. And only observe as accurately as it can the actual current state of the economy to which it reacts with changes in short term interest rates. Which he regards as the most important instrument of monetary policy.

He does not wish the Fed to feed the market with news – to add grist to the hedge fund mill that leads the market – and thrives on uncertainty and accompanying volatility. He would rather have the well-informed marketplace feed him with better and more timeous information about the current state of the economy, to which he could then react appropriately. Removing or spiking up the punch bowl as we used to say. Thus he would wish the Fed to become more, not less data dependent, but with superior data drawn from the current state of the economy rather than to act on unreliable forecasts.

Which is indeed the actual state of monetary policy. In an essentially unruly world monetary policy is in fact very largely data dependent. It reacts to the observed state of the economy as best it can. Though the financial markets will always be driven by expectations of the future and the developments on the financial markets- on share and debt markets – that profoundly influence the real economy through wealth effects – will be forecast dependent. Hopefully such financial market behaviour will be highly rational, rational also when interpreting the reactions of central banks and not blindly momentum driven. Momentum that can easily reverse.

The panel referred to significant changes in the government debt markets. And as seasoned central bankers who survived the GFC are well aware of the risks, the unknowns that might abruptly change the course of financial markets. To which they may be forced to react – having to act outside of their normal lanes – as the phrase goes -in ways that they would prefer not to do. And be correctly blamed for having to do. But such grave potential dangers that might soon call upon all the skills and resolve of central bankers were not top of mind of the panel.

What was top of mind of Kevin Warsh’s mind was clearly AI and its huge promise for the US and other economies. He is aware that the demand side of the US economy is being greatly stimulated by the extraordinary investments being made in rolling out AI. He refers favourably to these impressive real forces rather than financial engineering that is driving the stock markets rather than financial engineering. And he is optimistic about how the supply of goods and services will increase in response over time. He mentioned of this being the most consequential time to be a central banker. I would suggest that having to wait and see these supply side responses makes higher interest rates in the US less not more likely this year.

Warsh hopes his six task forces of the best and brightest will help him do a superior job managing inflation and the labour market. Perhaps point the way to superior sources of data about the economy. And hopefully also point to better ways of managing supply side shocks and understanding inflationary expectations that are not simple mindedly extrapolations of past inflation. I was struck by one lacunae in the panel discussion. When asked about the key indicators the central bankers watch or ignore none mentioned the money supply or financial conditions more generally. Perhaps the task force can explain again in an old-fashioned way, why the money supply and bank credit can go a long way in explaining and containing inflation.

US Money Supply (M2) and Inflation Annual y/y % Change

[1] https://www.youtube.com/watch?v=LvHNpbQx_EU

The Bond and Share markets- moving in opposite direction for good reasons

Bond Yields have been rising almost everywhere – though RSA yields have largely resisted these higher yields lately. An extended period of lower bond yields in response to the Global Financial Crisis of 2008-09 and the Covid lockdowns has ended. Not only have nominal yields moved higher, so more tellingly have inflation protected real yields risen- adding to the real cost of capital. In 2022 investors had to accept a negative 3% a year on a German 10-year inflation linker. Or in other words investors had to hand over 3% a year to buy inflation protection from the German government. The same German bonds now offer close to 2% a year after inflation and are accordingly now worth much less than they were. A 10-year US Tips (Treasury Inflation Protected Stock) now yields over 2% p.a. after inflation- providing real yields that only turned positive in 2022 as the financial repression practised by the US Treasury and the Fed came to an end.

Fig. 1; Government Bond Yields – 10 year Nominal. Daily Data.

Source; Bloomberg; Investec Wealth & Investment

Real yields have risen revealing elevated demands for capital. More inflation expected has had a lesser influence on nominal interest rates- higher nominal yields have been driven higher by mostly higher real rates. The gap between 10 year nominal and inflation protected yields in the US- the so-called breakeven rates – that are presumed to reveal inflation expected – is now 2.4% p.a. for US and 2.3% for German Bonds. In early 2020 the break evens were 1.8 and 1 respectively indicating less inflation expected back then.

Fig 2; Government Bond Yields – 10 year Real Inflation Protected Yield; Daily Data

Source; Bloomberg; Investec Wealth & Investment

Despite the competition for capital the share markets have marched higher. Ever higher but for a brief episode in 2022 when short and long rates leapt higher as inflation proved more than temporary to the Fed. Long bond yields in the US have stabilised at the higher levels first reached in 2023. Yet the share market moved still higher this year as long term bond yields ticked higher. Since early 2020 the S&P has delivered a very impressive average annual returns of 14.5% while a Bloomberg Index of US government bonds has delivered negative annual returns of (-0.78%) It has been a very good time to own equities rather than bonds.

The returns from the average equity has been well supported by the reported growth in earnings. The P/E ratio for the S&P 500 has increased by about 20% since 2020. Earnings have grown very strongly, by 15% over the past 12 months are expected to grow as strongly over the next year.

Fig 3: The S&P 500 and US Government Bond Yields 10 y

Source; Bloomberg; Investec Wealth & Investment

Fig.4: S&P 500 Index and Index earnings 2020=100

Source; Bloomberg; Investec Wealth & Investment

There are impotent other features of the current US stock market that will have contributed to upward pressure on interest rates. The Capex and R&D spending by the IT scalers have been growing very rapidly- by an extra trillion dollars and more per annum – as they compete for space in the new brave world of AI. Spending enough to have had observable macro-economic consequences for the US economy. That is resulting in faster growth and more employment. But also introducing enough extra borrowing to meaningfully increase their calls on the capital market- and thus to influence interest rates themselves. Substantial Free Cash have fallen away given the scale of extra spending on capex and R&D. Free cash flow that would until recently have added to gross savings, have had to be augmented by debt raised to fund highly ambitious growth plans. These extra calls on the capital markets when combined with ever larger large US Treasury Deficits, extra borrowing has presumably made for more stressed capital markets and higher borrowing costs.

The case of RSA bonds is somewhat different. Nominal bond yields have been falling in response to strong signs of fiscal sustainability. The SA sovereign risk spread, the difference between dollar denominated RSA and USA bond yields has narrowed sharply in recent months. The yield spread on five-year RSA Yankee bonds has fallen below 1% p.a. – to put RSA debt in Investment Grade territory. Also narrowing has been the spread between RSA nominal bond yields and their US equivalents, indicating less ZAR weakness expected.

Fig 5; Risk Spreads- RSA Yankee Spread over 5 y US T bonds and US Investment Grade Spread over US T Bonds

Source; Bloomberg; Investec Wealth & Investment

But there remains a RSA bond market anomaly. The RSA inflation protected yields have not declined. They continue to offer high and inflation certain returns of over 4% a year. Real yields that were under 2% p.a. in 2012. The reason for such impressively high low risk returns is not at all obvious. Clearly foreign investors would not easily be attracted to such yields. They would receive rand returns at exchange rates that would be expected to weaken and to reduce returns expected when expressed in USD. But rand investors would confidently expect high real returns. Perhaps the appetite of local investors for inflation linkers has been more than satiated. Inflation linkers account for a significant 17% of all marketable national government debt – perhaps too much to ask for thus making for expensive debt. Not good for taxpayers- but surely helpful to lenders.

Foreign trade and the exchange value of the ZAR. Description and explanation

Trade with foreign partners plays a very important role in the SA economy. Exports add about 30% to the demand side of the economy and imports add about the same 30% to the total supply of goods and services. Such trade is almost all conducted in a foreign currency – mostly with the USD – at a rate of exchange that is highly variable and thus very hard to predict. For exporter or importers and those competing with imports knowing what their rand revenues or rand costs will be- that is how profitable their operations will be – is subject to much uncertainty. Such risks to business plans are a clear discouragement to foreign trade. The volatile exchange rate is a burden SA business has had to cope with as best they can- by partly hedging, expensively, their short term exposures to exchange rate movements .

In the chart below we show just how variable that USD/ZAR exchange rate has been- indicating that the volatility of the rate of exchange has not declined much, even as the ZAR has performed much better and inflation has receded since 2023. The oil price shock, as do all globally important events, adds to ZAR volatility. The annual increase in the rand cost of a dollar change (USD/ZAR exchange rate) since 2000 has average by about 3.7% p.a. – with wide spreads about the average- the Standard Deviation about this average has been over 15% p.a. Measured on a six month or three-month basis volatility has also been highly pronounced as we show

The movement of the USD/ZAR exchange. % Move over 12, six and three months. Daily Data 2000-2026

Source; Bloomberg and Investec Wealth & Investment

The movement of the USD/ZAR exchange. % Move over 12, six and three months. Daily Data 2020-2026 and average annual move 2.38% p.a

Source; Bloomberg and Investec Wealth & Investment

The openness of the economy moreover makes the exchange rate a very important influence on the prices of goods and services in general as reflected in the CPI or PPI. Where the exchange rate goes prices follow in the same direction. Moreover, the exchange rate movements, wide as they are, have led rather than followed the direction of the inflation rate to help level the foreign trading field. What is gained for exporters with a weaker USD/ZAR exchange rate is taken away with more inflation of their local costs of production. And vice versa for importers who are hurt by a weaker exchange rate but assisted by the faster rate at which the costs of local competitors will be rising following rand weakness.

Though as we will show the foreign trading field has not been a consistently level one. The ZAR on average has weakened by more than the difference between SA and US Inflation. SA inflation between 1995 has averaged 5.7% p.a. while US inflation has averaged 2.6% pa, an average 3.16% p.a. slower while the annual move in the USD/ZAR has averaged 6.3% p.a. over the 30 years.

It has made the USD/ZAR a consistently competitive rate of exchange – encouraging presumably more profitable exports and discouraging more expensive imports of goods and services. That is the exchange rate Vs the US dollar has weakened by more than the difference in inflation rates between SA and the USA. In the chart below we show that had the exchange rate largely followed the difference in inflation rates since 1995 ( purchasing power equivalent (PPP) exchange rate) a USD would now cost less than nine dollars. We show also that the ZAR came close to PPP in 2010. The ratio of the USD/ZAR exchange rate to its PPP equivalent has nevertheless averaged well over one to one.

USD/ZAR exchange rate trends. The ZAR/USD exchange rate compared to its Purchasing Power (PPP) equivalent

Source; SA Reserve Bank and Investec Wealth & Investment

Though unfortunately faster export led growth has not followed a very competitive exchange rate. Volumes of Exports and Imports have largely stagnated as we show. Largely for the same reasons that SA growth generally has remained highly subdued. The rising cost of electricity and the failures of Transnet have been headwinds slowing growth and exports. The failure to offer competitive returns for investing in SA mining is another reason why exports have not grown faster despite highly favourable metal prices in USD and more so in ZAR. But this is not the place to catalogue the reasons for the failure of the SA economy to grow faster. But export led growth remains a route out of stagnation if SA could get its act together.

The volatility of the ZAR is explained largely by forces that are beyond South African control. The forces that drive highly variable flows of mobile capital to and from the US and into emerging markets generally of which SA is an actively traded part have moved the ZAR. Global forces much more than SA specific risks explain much of what happens to the USD/ZAR and other exchange rates. And will continue to do so. We should continue to expect exchange rate volatility. Capital flows are far more important flows than trade on the forex markets. Yet the Reserve Bank could do a much better job of not reacting with higher interest rates to exchange rate volatility over which they have little influence.

The volume of SA exports and imports (constant 2015 prices)

Source; SA Reserve Bank and Investec Wealth & Investment

The major force driving the ZAR has been the rates of exchange at which Emerging Market (EM) Currencies as a group have exchanged for the USD. If we could predict the direction of a representative sample of EM currencies we would be able to predict the USD/ZAR exchange rate with a high degree of accuracy. But unfortunately, such a forecast, essentially a forecast of where the USD will be going VS the other major currencies, is a very difficult task.

Nevertheless, the ratio of the USD/ZAR exchange to the basket of EM currencies can help explain much of the behaviour of the USD/ZAR exchange rate over the years as we show below. When the ZAR moves away from its EM foundations a movement back to equilibrium can be predicted with some confidence. There has been very little change in the EM/ZAR exchange rates over the past ten years as we show below. It is striking that in recent years with a degree of USD/ZAR strength the ratio ZAR/EM exchange rates is now close to one to one even as the USD now cost about 2.5 times its rand cost of 2000. SA specific risks have not been harmful as they have been in the past. Hopefully these risks will continue to be contained.

The USD and the basket of EM currencies – exchange rates with the ZAR. 2000=1

Source; SA Reserve Bank and Investec Wealth & Investment

The EM/ZAR exchange rate. 2000=1 (ZAR weakness indicated by higher numbers > 1)

Source; SA Reserve Bank and Investec Wealth & Investment

Date: 06/01/26 Time: 14:39
Sample: 1/03/2000 6/01/2026
	GZAR	GZAR6M	GZAR3M
Mean	3.699710	2.420598	1.157351
Median	5.277807	1.517241	0.744312
Maximum	57.26489	55.22295	56.45716
Minimum	-44.21883	-28.47029	-24.67861
Std. Dev.	15.33566	11.29241	7.748092
Skewness	-0.378492	0.581650	0.932699
Kurtosis	3.192620	4.130874	6.475632

Jarque-Bera	175.1832	755.7540	4467.587
Probability	0.000000	0.000000	0.000000

Sum	25494.70	16680.34	7975.303
Sum Sq. Dev.	1620407.	878603.3	413626.9

Observations	6891	6891	6891

The Risks in Index Tracking – some thoughts and evidence

Brian Kantor and Carig Evans

27^th May 2026

Investors who over the past year (since May 2025) have invested in a portfolio of shares that passively replicate the S&P 500 Index or the JSE All Share Index have every reason to be pleased. The value of their US portfolio, with dividends reinvested in the S&P Index will have grown by 27% over the past twelve months. This year, despite the Middle East war and despite significantly higher US bond yields, the Index has returned nearly 11%. It has gained further momentum, after the war began. Up about 9% up since February. US 10 year Treasury Bonds yielded 4.17% p.a. in early January. They now offer 4.5% p.a.

Investors replicating the JSE All Share Index have gained even more – up 24% in ZAR and 37% in USD since May 2025. But the war has damaged the JSE down nearly 11% in USD since February 2026.

Share Market Indexes S&P 500 and JSE All Share Indexes (2025.05=100) Month End Data

But Investors in the S&P 500 and the JSE should also be highly cognisant of the risks they are running holding shares strictly in proportion to their market value represented in an Index. The S&P 500 Index, while storming ahead, has become ever more concentrated and dependent on the performance of a very few stocks. The S&P Index has become significantly less diversified and thus more exposed to the risk of a draw down. The top ten counters, included in the Index, by market value, now account for 38% of the Index. A top ten share that has probably never been higher. In 2019 a different top ten contributed a mere 16% to the Index.

Source; Bloomberg and Investec Wealth & Investment

Source; Bloomberg and Investec Wealth & Investment

Source; Bloomberg and Investec Wealth & Investment

The JSE has on average over the years has been more highly concentrated than the S&P 500. Since 2019 the top ten companies by market value included in the All Share Index have accounted for about 50% of the Index and this average has not varied much over recent years. Though in recent years the Index has come to be dominated by Resource Companies buoyed by much improved prices for precious and other metals.

Of the 49% share of the ALSI accounted for by the top ten, Resource companies account for nearly 20% of the Index. With gold mining companies Anglogold and Goldfields making up 13% of the Index between them. Clearly these concentration risks are risks that the average risk averse active fund manager would be reluctant to take. It is not safety first to hold 8% of a portfolio in a chip producer or 13% in two gold mining companies.

Source; Bloomberg and Investec Wealth & Investment

The JSE provides at least one conspicuous example of how blind index tracking can hurt. After an extraordinary run – a ten bagger and more -Naspers came to dominate the JSE All Share Index with its extraordinary growth in market value. In 2020 Naspers and its associated company Prosus accounted for over 25% of the JSE All Share Index. That share is now down to 9.6% but still enough to make Naspers the largest company on the JSE with a near 8% share. However, after it peaked at 25% in early 2020 Naspers and Prosus significantly underformed the Index to fall away in relative size on the JSE Holding 25% of a share portfolio in Naspers and Prosus in 2020 proved to be a very bad idea that presumably most risk conscious active investors had hopefully not subscribed to. But a danger Index trackers could not avoid.

JSE Vs Naspers Vs Prosus. Total Returns (2019=100)

Source; Bloomberg and Investec Wealth & Investment

Much of the underperformance of Naspers and more so of Prosus came in 2021 and 2022. These two counters are currently again lagging well behind the Index.

Differences in Total Returns JSE- Naspers and Prosus. 2019=0

Source; Bloomberg and Investec Wealth & Investment

Undiversified portfolios are risky by nature. Nature demands that higher expected returns come with increased risks of failure. Stocks that come to dominate an Index may also be more volatile day to day than the average stock adding market risk and one time market leaders can become laggards that will drag down the value of an Index tracking portfolio.

Financial history tells and warns us so. Passive Index tracking is clearly not without risks. It all depends on the Index tracked and the less diversified they are or become, the more risky they are. Some Indices will be more concentrated than others. The Korean Kospi – also now running strongly – is dominated by two only chip producers. Nokia used to account for 90% of the Helsinki Index. Gold mining companies at one point, when the gold price took off in the seventies, accounted for 60% of the JSE.

Active investing is not only about realising market beating returns. It is as much about managing risks of the ultimate shareholder in a sensible way. But the risk averse investor would almost inevitably underperform the Indices when they are running hard led by a few counters as has been the case recently in New York and Johannesburg. Be they Nvidia on the S&P or Goldfields on the JSE driving the Index consistently higher.

When the race has been run and the outcomes are known future conscious risks, the before race odds, become irrelevant. And too few appreciate risk avoiding strategies when the risks, with good luck or perhaps judgment have proved to be over-estimated. It takes a market draw down to appreciate risk avoidance and appropriate diversification strategies. Not to be wished for but to be planned for.

The Chairman of the Fed – In with the new- if not out with the old

The Fed will have a new chairman of its Board of Governors. He will have to contend with the outgoing chairman of the Board, Mr. Jerome Powell, continuing to participate in the 12 member meetings of the Open Market Committee (OMC) that sets short term interest rates. Warsh remarked in his Senate hearings that he would prefer more debate and dissonance on the Committee which has been remarkably absent in recent years- “messier meetings without pre-rehearsed scripts”. No doubt he will get more of it if he is prepared to listen.

There is enormous attention paid and constant pressure from the politicians for lower rates in the US Borrowers clearly have more political heft than lenders apparently. Yet why short-term interest rates as set by the Fed matter as much as they do in the US is something of a mystery. Given that much borrowing and lending, including mortgage lending, is undertaken over extended periods of time at pre-determined fixed rates. And rates for longer term lending and borrowing can be lower than short term rates. As they have been consistently so in recent years. Because the market always looks ahead and has been acting on the expectation that the Fed will be lowering the short-term rates in the future. (Note below how longer-term rates lead the fed Funds rate)

Fig 1; US Short (Fed Funds Rate and Longer-term rates – US Treasury Bond 2 year yields) Daily Data (2010- 2026)

Source; Federal Reserve Bank of St.Louis and Investec Wealth & Investment

Walsh also indicated that he did not approve of the Open Committee members sharing their views about the future direction of the interest rates over which the OMC exercise control. The argument for doing so is presumably to better inform the market about direction of interest rates so that the Fed would be less likely to disturb the forward-looking actions taken by the market makers. Surely monetary policy should act in a predictable way so as not to surprise the market that will always be doing as well as it knows how to anticipate Fed action? And if its expectations are well informed this will allow for better planning, better debt management and less risk.

Less uncertainty about interest rates, less risk priced into the marketplace, is surely one of the objectives of monetary policy. Economic policy can logically only help fine tune the economy, moderate the business cycle, by acting in advance of the market based on a presumed superior ability to forecast the state of the economy. The economic forecasts of market participants are as likely to be as good as those of the central bankers whose actions will be anticipated and reflected in forward looking forecasts of interest rates and financial markets generally. A market waiting for the Fed to act does not describe reality. A market that anticipates Fed action to avoid losses or make profits describes the forces at work.

Ordinarily data dependence for the Fed and its watchers, as opposed to forecast dependence, will serve the economy well enough. If spending is running observably too hot – driving up prices – the case for raising short-term interest rates – to cool down the economy -is obvious enough and predictable. And vice versa, should the data indicate that the economy could grow faster and more spending, encouraged by lower borrowing costs is called for and will also be easily predicted. The problems arise when prices are rising for supply side reasons. When prices generally are rising because less is being supplied –for example when energy prices or food prices are shocked higher -leading to higher prices generally. Such temporary shocks do not call for higher interest rates. Higher prices act to restrain spending and shocks will reverse. And the best the central bank can do is to do very little – and be expected to do so. This should be the expected policy reactions to supply side shocks.

But the central bank may believe as the European Central Bank and the SARB currently asserts, that a temporary shock to prices may lead to more inflation expected over the long term and hence permanently higher inflation -regardless of the state of demand. My view is that prices do not do simply what they may be expected to do – they depend also on what the market will bear. And a stagnant economy – too little demand – must restrain the prices set regardless of extrapolated expectations. But the playbook for dealing with supply side shocks is by no means agreed either by central banks or their watchers. Which adds to the difficulty of predicting policy reactions adding to market risk.

Warsh in its testimony was very critical of the Fed’s reactions to Covid when it believed (quite wrongly) that the shock to prices in 2020 was temporary and did not raise interest rates accordingly “The Fed missed its mark,” he said. “The fatal policy error” of 2021 and 2022 “is still a legacy that we’re dealing with.” What he said is needed now is “a regime change in the conduct of policy,” which “ includes a new inflation framework, new tools and a new approach to communicating its messages” The Fed missed because it allowed a short-term supply side (Covid) shock to supply to be accompanied by an extraordinary increase in the money supply. Caused by large direct transfers from the Federal Government to the bank deposits of households and firms stimulating demand and raising inflation. Central Bankers should know better than to ignore money supply and financial conditions generally when assessing the state of an economy.

Fig. 2; Growth in US Money Supply, Bank Credit and Consumer Prices; Monthly Data (2019-2026)

Source; Federal Reserve Bank of St.Louis and Investec Wealth & Investment

Walsh has more uncomfortable legacies to deal with than a failure to model inflation. He has a balance sheet to manage with a huge load of Federal Debt (some 12 per cent of all Federal Debt) and a US Treasury now spending at close to Covid levels while adding to Federal Debt (now about 120% of GDP) at about a 2 trillion annual rate. Keeping the Fed within a narrow monetary policy lane, as he intends, will test all the acumen and political savvy of the new Chairman.

Fig 3; US Federal Debt and Federal Debt held by Federal Reserve Banks

Source; Federal Reserve Bank of St.Louis and Investec Wealth & Investment

US Federal Government; Expenditure Revenue and Deficits

Source; Federal Reserve Bank of St.Louis and Investec Wealth & Investment

Export led growth would be a blessing

A path to faster growth in SA could be export led. There is no lack of global demands for valuable goods and services that could be delivered from SA with the right incentives to do so. The most obvious incentive would be a consistently favourable relationship between the revenues, realised producing goods and services at home for foreign customers and their costs of production. From an exporters perspective and from the perspective of a local producer competing with imports, the wider the gap between exchange rate movements and inflation rates, the better for growth in output and incomes with more exported less imported.

To encourage the demand for exports and discourage the supply of exports the exchange rate should weaken predictably by more than the difference between inflation in SA and its trading partners. The weaker the exchange rate movements compared to the differences in inflation rates, the better for competitive local production. But ideally the exchange would weaken at a modest rate, but also one that consistently exceeds a hopefully still modest rate of inflation. Indeed, a slow rate of currency depreciation is an essential ingredient for sustaining low rates of inflation. Yet still allowing enough of a predictable gap between exchange rate weakness and local inflation to make exports and replacing imports a consistent driver of faster growth.

The South African rand ever since the economy opened to significant inflows and outflows of capital in 1995 has consistently had much more purchasing power at home than abroad. As any tourist local or foreign would attest. SA is among the very cheapest destinations. The 50^th cheapest Big Mac cheeseburgers are to be found in SA. We pay about USD 2.78 for the privilege. Compared to an average $5.79 paid in the US (tip 20% – strongly recommended, excluded)

You would only pay marginally fewer dollars and cents for your Big Mac in Egypt, India Indonesia and Taiwan than in SA. Surely a boost to incoming tourism. The most expensive Big Macs are to be found in Switzerland, priced at over 2.8 times their USD cost in SA. Switzerland struggles to maintain the competitiveness of its jewellery and watch manufactures and Alpine holidays in the face of safety seeking capital flows that raise the cost of a Swiss franc and everything else in Switzerland. Perhaps a high-level problem to have when you can convince the wealthy of the world that their money is safe with you. According to the WSJ the average price of a margin enhancing and buzz inducing cocktail in the US is now $13.61. Equivalent to R225 rand. Which with luck and judgment your local speakeasy will charge you half as much- maybe R110.

Fig.1; The Price of a Big Mac around the world. A multiple of its dollar price (2.78) in South Africa

Source; Google and Investec Wealth and Investment

But this ratio between the foreign exchange value of a rand and its purchasing power equivalent has been a highly variable one. Since 2000 the rate of inflation in SA has averaged about 2.4% a year faster than in the US, with minimal volatility. The USD/ZAR exchange rate has weakened by an average 5.8% p.a. providing for a generally competitive exchange rate with the USD but a margin with very high volatility. Making the budget calculations of exporters and importers highly uncertain A highly variable real exchange rate is not good for sustainable business. We should hope for less volatility.

Fig.2; SA Vs US Inflation Differences, and USD/ZAR Exchange Rate Movements % p.a. Calculated monthly.

Source; Bloomberg, Fred, Investec wealth and Investment

A purchasing power equivalent (PPP) exchange rate would fully compensate for differences in inflation rates between SA and the US. If the exchange rate (R3.6 in 1995) had simply compensated for difference in SA and US inflation since then, the USD would now trade for less than 9 rand – about 54% of its current market. Roughly equivalent to the double we pay in rands for the goods and services we consume abroad

Fig.3; The market and PPP equivalent USD/ZAR exchange rates

This ratio of the market value of the USD/ZAR to its PPP equivalent has however varied from a peak of 2.4 times in 2002, to a brief one-to-one relationship in 2010. A very good time to have travelled Whereafter under Zuma inspired threats to capital took the ration back over 2 in early 2016, a ratio that has remained similarly elevated and internationally competitive since.

Fig 4; The Real USD/ZAR exchange rate Market/PPP Ratios. (1995=1) Higher numbers indicate improved foreign competitiveness.

Source; Bloomberg, SA Reserve Bank and Investec Wealth & Investment

Yet despite the stimulus of a competitive exchange rate, export volumes and revenues in USD and have been largely stagnant since 2010. There was very strong growth in the years before. And imports have kept pace with exports. Clearly other well recognised forces have restrained economic growth generally as well as limiting the capacity to export and compete with imports.

Fig 5; Exports and Imports; USD values.

Source; SA Reserve Bank and Investec Wealth & Investment

But the case for export led growth remains compelling. It needs the right supply side encouragement. A more predictable exchange rate – both nominal and a competitive real exchange rate would be very helpful to the purpose. But very recent global events and its impact on the ZAR- a high beta emerging market exchange rate – have reminded us how unlikely is this prospect. And low inflation itself can be a mixed blessing for exporters if it means a stronger real exchange rate. South Africa should seriously consider the actions that would convince investors to support the economy with capital. And to learn to manage exchange rate instability and inflation without destabilising the real economy.

A luta continua. It does not have to be so difficult to grow faster

Since 2016 in ten years the annual growth in real GDP has averaged a miserable 0.69% p.a. and the growth in household disposable incomes has grown by an immiserating 0.46% p.a. average. By sharp contrast the increase in the wealth of South Africans has been very impressive. Net SA wealth held offshore was substantially negative before 2014, it amounted to over 2 trillion rand by 2024. The result of capital gains realised in portfolios rather than net inflows into AUM. Relieving forex controls has worked very well for SA balance sheets.

Fig 1; SA; Growth in Net Foreign Assets 96-2024. Annual Data

Source; SA Reserve Bank; Investec Wealth and Investment

Fig 2; SA Foreign Assets and Liabilities. Market Value (R million) Annual Data.

Source; SA Reserve Bank; Investec Wealth and Investment

The income received from assets held abroad still lags well behind the payments of dividends and interest to offshore investors. An income gap that has remained a very wide one and a major contributor to the deficit on the current account of the balance of payments. South African issuers of debt or equity pay out at a much higher rate than we receive. Currently the yield on SA securities held abroad is over 5% p.a. compared to the 2% yield received.[1] Measured in rands that are expected to lose value over time.

Fig 3: Foreign receipts and income from SA assets and liabilities held offshore (R millions) Annual Data

Source; SA Reserve Bank; Investec Wealth and Investment

Fig.4 Foreign receipts and income from SA assets and liabilities held offshore. Yield per cent per annum. Annual Data

Source; SA Reserve Bank; Investec Wealth and Investment

Better perhaps to be a lender with a strong balance sheet rather than a borrower. Yet capital inflows from abroad used to fund capex would be very welcome. Both the savings and capex rate in SA are unsatisfactorily low and a symptom and a cause of slow income growth. Slow growth in incomes and in the demand for additional goods and services discourages scaling up production and capex to do so. Faster growth would stimulate capex improve returns on capital invested and attract the foreign capital to fund that growth. It is striking that the when the economy grew much faster in the mid 2000’s the ratio of capex to GDP rose to 22%- it is now 14%- and the widening gap between Capex and Domestic Savings was closed, as was the deficit of the current account and the deteriorating balance of trade of the balance of payments, by larger net inflows of capital. Faster growth in spending widens the gap between exports and imports and the current account deficit (an unnecessary concern) But will only prove possible when funded by inflows of capital. The capital makes possible the current account deficit. Current account deficits and capital inflows are most helpful when growth is accelerating.

Fig 5; The Ratio of Capex and Gross Domestic Savings to GDP. Annual Data (1996-2025)

Source; SA Reserve Bank and Investec Wealth and Investment

Fig 6; SA Balance of Payments Flows and Identities (96-2025) Annual data

Source; SA Reserve Bank and Investec Wealth and Investment

Faster growth must be accompanied by an increase in the demand for goods and services, imports add to the supply of goods and services. Demand= supply is the National Income Identity. Both sides matter. And faster growth becomes possible without inflation should the exchange value of the ZAR hold up. The prospects of faster growth are very likely to encourage capital inflows to fund any widening of the current account deficit and help to stabilise inflation as it did in the boom years 2002-2007. Faster growth with less inflation is very possible should the global capital market approve of the improved growth prospects and supply the capital that supports the currency.

It is surely apparent that shocks to the USD/ZAR and other exchange rates lead inflation in both directions. As it will again after the oil price shock. And policy determined interest rates are likely (misguidedly) to rise to further inhibit the growth in spending already under pressure from higher prices. Unfortunately, the case for investing in SA has deteriorated, as has the outlook for inflation.

Faster growth over the past ten years has been an economic impossibility because the demand side of the economy has been so severely and consistently depressed by highly restrictive monetary policy. And faster growth- anything above 2% a year – will remain an impossibility, unless interest rate settings become more accommodating of higher levels of spending by households and firms accompanied by faster rates of growth in the money and credit supplies.

The growth in the real supply of bank credit since 2016 has averaged less than 0.5% p.a. and the money supply (M3) as grown at an average annual rate of 1.9% p.a. Much too slow for comfort. Unless these key monetary growth rates are allowed to accelerate faster growth will not happen, indeed cannot happen. And inflation as before will depend mostly on the exchange value of the ZAR. Which will be decided in the Strait of Hormuz, not in Church Street, Tswana. Without lower interest rates the supply of money and credit will continue to grow as slowly as it has over the past ten years and frustrate any growth potential supply side reforms may make. An increase in supply requires an increase in demand.

Fig.7: SA; The supply of money and bank credit- After inflation (2010=100)

Source; SA Reserve Bank; Investec Wealth and Investment

[1] The yield is calculated as Income as per the balance of payments accounts divided by the value of the assets or liabilities.

Wealth effects were much larger than income effects in SA in South Africa in 2025. A welcome reality

South Africans grew their wealth at a much faster rate than their incomes in 2025. Household assets, less household debt, was 15% larger than the year before. Up by a very tidy R3,200b. The disposable incomes of households grew at a much more pedestrian rate of 4.7% or by R230 billion in 2025. Household spending on consumption goods was 5.7% up on a year before. A respectable real increase given consumer goods inflation of only 2.2% in 2025, so helping the economy along. Nominal GDP grew by 3.9% in 2025 that lost only 2.8% of its purchasing power delivering real growth of only 1% in 2025

Household Net Wealth and Disposable Incomes (R billion)

Source; SA Reserve Bank. Quarterly Bulletin and Tables December 2025. Investec Wealth and Investment

If we regarded the increase in net wealth as income and added it to the disposable incomes of households, the increase in household income, including unrealised capital gains, was close to an imposing 3.5 trillion rand and more than 10 times the increase in disposable incomes last year. The household wealth to disposable income ratio in 2025 was nearly five times- close to the long term ratio.

Growth in SA Household Incomes- including capital gains

Source; SA Reserve Bank. Quarterly Bulletin and Tables December 2025. Investec Wealth and Investment

Source; SA Reserve Bank. Quarterly Bulletin and Tables December 2025. Investec Wealth and Investment

The largest contribution to this impressive increase in the wealth of SA households was the increase in the value of the assets held for retirement. The claims of Households on the pension and retirement funds managed for them amounted to over 9 trillion rand in 2025, having added as much as 1.36 trillion rand to net HH wealth in 2025. Pension fund rights account for about 40% of the net wealth of SA of households and homes about 35% worth about 7.7 trillion in 2025. The value of pension rights closely follows the JSE All Share Index and 2025 was a banner year for the JSE, buoyed as it was by dramatic increases in the prices of precious metals that play a significant role in SA exports and income tax. The JSE returned about 30% in 2025.

Pension and Retirement Fund Assets of Households compared to the JSE (2020=100)

Source; SA Reserve Bank. Quarterly Bulletin and Tables December 2025. Investec Wealth and Investment

The formally employed in SA are mostly required to contribute a proportion of their incomes to retirement and medical aid funds to which their employers often add a contribution which should be understood as a salary sacrifice, not as charity. The share market has served the many employees, who are the owners of SA companies, very well over many years. The shareholders of SA companies, through their pension rights are many and a highly diverse, representative of the work force. They incorrectly do not register as BEE qualifying.

Clearly changes in household incomes that include capital gains are not only much larger than disposable incomes. They are also much more variable, given exposure to financial market forces. Retirement funds moreover are less immediately accessible than income from work or from dividends or interest income that compounds most usefully when reinvested in retirement funds, rather than when paid out and consumed. Banks will lend when secured by incomes. They are apparently much more reluctant to regard pension fund assets as security for their credit. Is this appropriate, to encourage saving up rather than down? By households many of whom live from paycheck to paycheck and incur expensive debt doing so. Cheaper credit would be very valuable to them.

Though households are drawing increasingly, in as far as they are allowed to by the two-pot system, to cash in their pension fund gains. The number of such drawdowns, repeated drawdowns, have been increasing. Though the amounts drawn down to fund current expenditure given the growth in the market value of pension fund assets has not had a significant negative influence on the funds managed. Favourable wealth effects will have helped to stimulate household spending in SA in 2025 and compensated for a general reluctance or inability to commit funds to capex. For want of business confidence to do so and for want of capacity of SOE’s to do so.

Despite the ubiquity of pension funds for the formally employed the distribution of SA’s wealth has surely been less equal than the distribution of incomes. Especially given that so many South Africans, earn or report no incomes at all and rely on the taxpayers to fund their consumption of private and public goods. So reducing significantly differences in actual consumption if not in earned incomes.

But an inevitably unequal distribution of wealth and of the savings of net income, including capital gains, undertaken mostly by the better off has a major upside. It means more capital for the economy to fund productive real capital, plant equipment, infrastructure and also R&D. The higher the ratio of capital- that is wealth to the labour force – the higher will be incomes from work. The rich make their contribution not only by producing and earning more (when earned in the old-fashioned honest way not corruptly) But also by saving more to help fund capex.

Expenditure on consuming goods and services by rich and poor has an opportunity cost. It means fewer goods and services left over to be consumed by others, in the wider community. But saving, accumulating wealth and not spending it all, postponing spending, provides a public benefit. It enables and funds the growth in the real stock of capital. It should be encouraged. As should the incentives to allocate capital domestically rather than abroad.

The best laid plans of mice and men (and women)

March 2026.

Mike Tyson famously remarked that a plan was all very useful until you were smacked in the mouth. The SA economy has taken a snot-klap in the form of an oil price shock accompanied by a further shock in the form of a weaker ZAR. An unexpectedly disappointing development but by no means unprecedented. Oil price and currency shocks have been a regular feature of recent global and economic history. Any helpfully realistic plan for the SA economy should include a credible plan to deal with an oil price or currency shock. Do we have one?

We have often been here before as the oil price cycle in ZAR and USD reveals- though it also reveals that the oil price cycle when measured in USD or ZAR looks very much the same. One can identify at least seven such shocks – in both directions – since 2000. And the stock market reacts in the same direction- share price volatility rises and falls with the oil price. An oil price shock is bad news for SA facing businesses -understandably so – and for their shareholders in pension and retirement funds – because of its negative implications for generating sales and earnings.

Recognising the Oil Price Cycle. USD and ZAR. Daily Data to March 2026

Source; Bloomberg Investec Wealth & Investment

What is our economic plan and how has it been disrupted? The plan is to realise consistently lower inflation ( for all the benefits lower inflation delivers for the long-term growth outlook- easily exaggerated I would add) Yet To achieve lower inflation a helpfully stronger ZAR and stable oil price is essential to the purpose. But both are not at all influenced by SA interest rate settings. The supply side of our economy (the cost of imports) as we painfully observe, is not under our control. Yet the demand side of the economy and its impact on prices can be managed to a degree with interest rate settings.

Policy determined interest rates and the cost of credit for an extended period have therefore been set high enough for an extended period to effectively restrain the strength of the demand side of the economy (to a fault –I would argue). A mixture of demand repression and very welcome supply side support- stable oil prices and a stronger rand with support from much higher precious metal prices and a weaker USD – has helped bring down inflation in 2025. And led us to an inflation target of 3% p.a.

Though despite the severe monetary policy setting there were some encouraging preliminary signs of a cyclical pick up in credit and money supplies and in household consumption spending. By year end 2025 household spending was ticking higher – by about 1.2% more than the quarter before as were the growth rates in money and credit supplies. And perhaps even more important for a sustained upswing, precious metal prices provided good support for the ZAR, the Treasury and the value of pension and retirement funds of the working and retired South Africans in 2025

The chance of a cyclical recovery have now receded sharply- on the assumption that inflation will rise and the Reserve Bank will increase rather than cut interest rates over the next twelve months- as was the market expectation until two weeks ago. The money market is now pricing in about 50 bp higher short-term rates in twelve months. The broader bond market view is also anything but sanguine with interest rates rising similarly- though still below levels of a year ago.

Perhaps realistic expectations but, if they are imposed on a stagnant economy, would surely mean a serious and avoidable policy error. The ZAR, while helpfully little changed over a twelve-month period, has unhelpfully also weakened marginally against the major currencies and other emerging markets.

Forward Rate Agreements in the Money Market

Source; Bloomberg Investec Wealth & Investment

Long dated bonds – five-year RSA and USA Bond Yields and Inflation Expected; Daily Data 2025-March 17^th, 2026

Source; Bloomberg Investec Wealth & Investment

Interest rate trends and the rand oil price (March 2026=100) daily data

Source; Bloomberg Investec Wealth & Investment

The Exchange Rate Cycle. The annual per cent movement in the ZAR vs the USD, the Euro and the EM basket. Daily Data to March 17^th, 2026.

Source; Bloomberg Investec Wealth & Investment

It is not good sense to raise interest rates when a price shock is already damaging disposable incomes and undermining the willingness and ability of households or firms to spend. Adding higher interest rates to the debilitating impact of higher prices- an oil price tax- on spending – adds to the misery. And can have no impact on inflation expected. Inflation and inflation expected will take its cue from the oil price and the ZAR. And judged by past performance- neither the oil price nor the ZAR can be expected to continue in the same direction into an indefinite future. The rational expectation is that these trends must reverse and inflation trends will reverse in the same direction. Wisdom is for monetary policy to stand aside and let it all work out. The broader plan should include a plan to deal with a supply side shock to prices. A plan that ignores supply side shocks to help the economy ride through impact of a temporary increase in prices. By not raising interest rates and expected to do so.

There is some consolation for dependents on the SA economy in current circumstances. We are not dependent on imported oil or gas to generate electricity, as is Europe for example. Domestic coal is the feed stuff for our energy that also provides a domestic source of chemicals and refined petroleum. And renewables will play a more important role in the future. As will electric vehicles. We should have planned for a reserve of refining capacity but appear not to have done so. Should we now optimistically plan for a more stable oil market, one much less disrupted by choke points in the Middle East?

Identifying quality companies listed on the JSE

Brian Kantor and Craig Evans

A “ Quality” company consistently delivers a market beating return on the shareholders capital they allocate. (see BD December 4th 2025) A quality company will be growing its profits and investing in additional capacity to scale up its operations. The quality firm will be able to fund its growth from its own cash flows after funding its capex and R&D even able to pay dividends, or buy back its shares, or repay debt that strengthen its balance sheet. Strong balance sheets – a high ratio of market value to debts incurred -means reduced risk of default that reinforces quality. The higher the cash content of these earnings, the less reliance the earnings depend on write offs or write ups of assets, the more reliable will be the reported earnings. Quality is defensive.

We have examined the largest companies listed on the JSE for their quality characteristics revealed over the past ten years and ranked them accordingly. We have ranked them on six measures of performance and taken a numeric average of these rankings to determine their overall Quality ranking. The criteria we used to judge quality are, the real return on cash invested over the past ten years (CFROI). We add the volatility of CFROI and the ratio of CFROI to its volatility (risk adjusted CFROI) as further quality measures to be ranked. We then add growth in Operating Profits (NOPAT) and its volatility to the mix. The chances of a company default and the cash contact of earnings are added as additional criteria to be ranked for our overall Quality Index.

Our ranking order is shown below. Clicks demonstrated the highest quality by a fair distance, with Vodacom ranked second and Capitec ranked third. They are followed by BHP, OUTsurance and Shoprite. Mr Price ranks sixth followed by Platinum miner, Valtera. Bid Corp and BAT bring up the Top Ten. There is little difference in the observed Quality of the other Banks, ABSA. First Rand Standard Bank. They find a place in the Top 15 quality companies demonstrating good returns on capital but rank lower because of moderate growth in profits.

Some summary comment on the rankings.

The recent surge of the Gold and Platinum miners to the top of the boards on Growth in NOPAT and Return on Capital calculations should be noticed. They consistently rank very highly on market return calculations that have been boosted by the recent surge in precious metal prices. But the volatility of earnings will continue to detract from the “Quality” of any mining company as will their inability to influence the prices received for their production.

Valtera ranked 8th on Quality, 13th on return on capital but 36th on the volatility of these internal returns. Growth in its NOPAT has been impressive with an average 31% (CAGR) Northam, another platinum miner, presents similarly. It is 13th ranked by overall Quality, 9th on return on capital, 32nd on volatility of returns on capital, ranking 2nd on growth in NOPAT and 19th on the volatility of NOPAT growth. Its earnings are also almost all covered by cash.

Clicks is Ranked First for Quality, its real return on capital. CFROI has been 20.3% p.a. over the past ten years. – ranking 3rd behind BAT (46.7% p.a) and Anheuser (22.72%) on this important metric. Shoprite lags behind Clicks on the return on capital ranking, ranking 12th on return on capital (10.52%) but with a very low Standard Deviation of these returns.

Capitec has delivered the 4th highest average CFROI (19.38 %) It ranks a less impressive 22nd on the Growth in NOPAT table (11% p.a) First Rand ranks 6th on real return on capital but much lower, ranked 31st, in growth in NOPAT. It’s relatively slow growth in NOPAT is the 2nd most predictable. Standard Bank has grown operating profits similarly to FSR but with a lower return on capital.

Richemont appears not to be a top-ranking quality company on the JSE. It ranks 22nd on real return on capital, 14th on risk adjusted CFROI, 20th on growth in NOPAT and 26th on the volatility of NOPAT growth rates. Vodocam presents more quality than MTN. On a risk adjusted CFROI, VOD ranks an impressive 7th and MTN 22nd. VOD lags MTN on the growth in NOPAT, 11% p.a. compared to 26% p.a. for MTN. VOD has delivered less variable growth ranked 9th compared to MTN ranked 22nd for its volatility of operating profits. VOD is ranked as the 4th least likely to default on its debt. MTN ranks 26 on this measure. While on the cash to earnings comparison VOD ranks highly as 4th while MTN appears well down this ranking order.

We compare below the stock market performance of the Top Ten (market cap weighted) with the JSE all share Index over the past ten years. The Top Ten Index would have outperformed the JSE All Share Index marginally over the past ten years. Yet the relationship between “Quality” and share market returns is not a clearly positive one. Investing in quality will not always outperform. Suggesting that investors have been willing in the past to pay up for the defensive characteristics of a quality company that is much less likely to fail its shareholders. And by so doing reduced realised returns. Investors should seek companies that will be improving quality over time and do so before their upcoming quality is widely recognised in its share price.

The Top Ten Index vs the JSE; Total Returns (2000=100) February 2000- February 2026. Monthly Data

Source; Bloomberg, Holt and Investec Wealth & Investment

The Top Ten Index vs the JSE; Total Returns (2000=100) February 2000- February 2026. Monthly Data; 1 year to ten-year comparisons

Source; Bloomberg, Holt and Investec Wealth & Investment

The Top Ten Quality Index Vs the JSE. Rolling Annual Returns 2000-2026. Monthly Data

Source; Bloomberg, Holt and Investec Wealth & Investment

The Performance Tables

Wind in the SA economy’s sails – can we sail on to faster growth?

Every time the SA economy picks up momentum it is preceded by a surge in the USD prices of metals and minerals, our major exports where exports account for 30% of all output. We can hope with past performance in mind, that this time, led by much higher precious metal prices, will not prove an exception.

The favourable wind into the sails of the SA economy has continued to blow. That is the price of gold and platinum in USD have held up at what are very high levels, though off their highs of late January 2026. They are now still about 30% more expensive than they were on October 1^st 2025.

The ZAR and RSA bonds continue to reflect the improving upside for the SA economy. The ZAR has added strength against all currencies and has been especially strong Vs the EM basket since October. The market in RSA bonds continues to reveal improved ratings – a trend that began in April 2025 with the survival of the GNU. The risk spread between a five-year RSA dollar denominated bond and a US Treasury of the same duration is now about 30 bp lower than the spread of early October and about 1.30%. p.a. Not quite investment grade credit but not far away from it.

These recent increases in the price of SA’s major exports rival those of the early 2000’s- the last time the economy sustained faster growth for an extended period. We can hope that these higher precious metal prices are sustained and that past performance- that was the highly stimulating of demand, credit and money supply responses to higher metal prices of the 2000’s – repeat themselves to some degree.

Growth in the USD Price of Gold and Platinum ; Comparing 2001-2007 and 2023-2026; Monthly Data

Source; Bloomberg and Investec Wealth & Investment.

After 2002, in response to a persistently stronger gold and platinum prices, the growth in the supply of money and bank credit grew rapidly as the rand recovered, inflation receded and interest rates fell away. By late 2003 bank credit supplied to the private sector was growing at a very robust 20% p.a. rate and continue to increase by 20% p.a. until all the strong growth was so rudely interrupted by the Global Financial Crisis and one might add the debilitating Zuma presidency.

Inflation having fallen from 12% p.a. in 2002 to close to zero in 2004 in response to a strong recovery in the ZAR and higher interest rates then followed much faster growth in the supply of money and credit. GDP growth averaged about 4.5% p.a. between 2002-2007. It was a welcome combination of credit reinforced demand accompanied by additional imports that added to supply. And inflation was contained by a strong rand- supported by increased flows of foreign capital – willing to fund faster growth.

The responses of the SA economy to the higher metal prices of 2025 and a stronger ZAR are still somewhat muted. Short term interest rates have receded by 1.5% but remain high relative to much lower inflation. Yet to encourage spending, the money supply and credit cycles have clearly turned up. The supply of bank credit to the private sector is now up by over 8% compared to a year ago. And with consumer prices largely unchanged over the past six months, credit and money are now growing strongly in real terms.

The Bank Credit and Money Cycles 2022-2026. Monthly Data

Source; SA Reserve Bank, Investec Wealth & Investment

There is a new feature of the economy today that could add impetus to the growth in bank credit and the money supply. SA Banks now hold significant amounts of excess cash reserves, some R140 billion of them. The banks would surely like to convert into loans if only there were credit worthy demands for them. Which there would be if the economy could sustain faster growth. The ability of the Reserve Bank to control the demand for these cash reserves, paying interest on them, to prevent their too rapid conversion into bank lending, might be tested for the first time.

The SA Banks. Excess Cash Reserves

Source; SA Reserve Bank, Investec Wealth & Investment

Should the rand retain its strength allowing inflation to remain at about 3% p.a. the case for lower interest rates will be hard to resist. The negative impact of a strong rand on local manufacturers, is now very apparent, known in the economics literature as the Dutch Disease, might well lead to attempts by the Reserve Bank to inhibit rand strength with lower interest rates. Yet grist to the money supply mill.

Rand stability would contain inflation despite a pick-up in domestic spending. Indeed, should faster growth materialise, it would further improve the fiscal outlook and help further reduce the risk premium attached to capital invested in SA. And attract foreign capital to fund faster growth and further support the ZAR. It is not too much to hope for a sustained virtuous cycle of faster growth and less inflation stimulated as it has in the past, by metal prices sustained at high levels? May the onshore favourable winds continue to blow.

How to promote competition- leaving well alone.

The wider the market the less monopoly power any seller can have over it. If households choose, as they will, between all of the many goods or services households offered them, there can be no monopoly power. No one seller can command more than a very small share of the household budget that can easily be reallocated in response to higher prices or inferior service or changes in tastes and fashions. And households account for more than 60% of all final expenditure in SA.

Intense competition for their spend comes not only in the form of price settings. But is also revealed by the ability of suppliers to meet demands anywhere at the prices set with supply chain management- another key area in which suppliers compete. As important, as a source of competition for the household spend, will come through innovations in the form of new products or services introduced to the marketplace.

The all-important competition for revenues and profits is reflected in the updated menus presented to households and individuals. The new offers are disruptive of established interests in the status quo ante. Part of a dynamic evolutionary process that is good for consumers and tough on producers who are given no guarantees of consumer loyalty.

The great majority of business organisations will have a degree of power to set the terms at which they will transact, including the prices they charge and the payment terms acceptable to them. The economy is mostly made up of price makers who must judge what prices their customers will bear and the prices and terms that will be worth supplying them at. Making crucial business decisions to justify the scarce capital and labour and natural resources employed in satisfying their customers.

It therefore would be best to let the many competitors for the household’s spending decision to slug it out without regulatory interference. That is accept that the market economy broadly defined and left alone will work well to satisfy consumers. And that the survival of any business will depend on its ability to compete successfully for scarce capital and labour with which to serve households with the variety of goods and services that are willing to pay for.

Successful businesses have every incentive to increase output and to add to the capital and the labour and natural resources they employ- not to limit them with discouragingly high prices or unattractive terms. While businesses who fail for want of an ability to supply households at a profit should be encouraged to release the resources they are wasting for better use by other firms.

Economic efficiency demands no less. Given this competition by a very large number of firms who supply goods and services for a tiny, but potentially very valuable, share of the household budget. Is there any good reason to worry about what may or could be a temporary and limited degree of monopoly power that might be abused? Worry enough to actively conduct an expensive pro-competition policy to force unknown changes in the evolving structure of an economy? I would suggest not.

An active competition policy can however provide perverse incentives. Competition policy can be utilised to limit competition in the interest of the established firms. The case of Lewis Stores intervening in the proposed amalgamation of the household furniture and appliances divisions of Checkers and Pepkor seems an obvious case of this. On the face of it, any merger that led to fewer competitors, in an artificially and narrowly defined market segment, would be welcomed by the other potential suppliers, from smaller rivals with currently smaller market shares (so defined) hoping to take advantage of any complacency or abuse of market power.

But this presumably is not the Lewis Stores view. I presume they wish to block the merger because they fear the extra competition for the household spend from a now stronger rival. In this dispute the specific market to be affected has been narrowly and arbitrarily defined as the market for household furniture and appliances accompanied with credit provided by the retailer. Yet one where the potential seller also competes with the on-line offers of a Takelot or an Amazon offering goods sourced from all over the world.

The share of furnishings and household equipment in the CPI- representing the share of the household budget spent on furniture etc in SA, is now of the small order of 1.8%. And the price of furniture has risen by only half the rate of consumer prices in general, in line with cheaper communications. Food and beverage prices with an 18% share have risen by 20% more than the average while housing costs – including the rent attributed to owner occupiers with a weight slightly heavier than food, is now about 10% lower in real terms than it was in 2010. All evidence of a highly dynamic economy with real price competition.

The SA competition authorities, if they approve the Pepkor-Shoprite deal, are very likely to order the new venture not to reduce its workforce. That is not allowed to reduce its costs to become more efficient, more price competitive and hence made less able to compete for a larger share of the household spend. Providing another case of competition policy in SA inhibiting rather than encouraging competition and an efficient economy.

Relative Prices (2010=1) and Share of CPI

Source; SA Reserve Bank and Investec Wealth & Investment.

Being creative in an AI world

I like to think about and discuss business. It is what economics has helped me do. It was why I was attracted to a career in economics in the first place. I was posed an issue by a tenant of a landlord that planned to compete directly with their retail offering. I applied my mind, essentially following the money trail, for clues about the rationale for the intended action of the landlord and its likely consequences. And finding arguments for the tenant to advance as to why the landlords might be persuaded not to proceed- in their own interest essentially – and to the advantage of the tenant

Economic action is not a game played once off for amusement or small stakes. It is played over a lifetime of endeavour for cumulatively very large stakes. Rationally – in a present value maximising over the long-run – using pattern recognition –repeated trial and error- as the path forward. If it seems to work the action is repeated until it doesn’t and the business, to survive or better still prosper for its owners and managers, adapts and innovates according to the continuous flow of evidence of sales and costs.

The assumption of Homo economicus following the money – if you can understand and describe it well enough – will be essential to the purpose of the analysis of any business enterprise. An essential tool with which to identify the business model, the theory and strategic insights that drives the actions observed. The well-informed investment analysts who are rewarded for valuing any business will identify the moats that protect the business from competition and the runway of future opportunities to grow profitably. And recognises the KPI’s that drive the remuneration of the key executives and therefore the actions of a business enterprise.

I thought I would test my reasoning and logic by asking the same landlord-tenant question of AI. And the answer received immediately, and almost exactly, repeated my own reasoning and conclusions. Not surprisingly, because the question had been asked before and answered similarly. As the bot was able to recognise from the complete record of thought and action. AI did as well as I did much more rapidly and conveniently in answering an interesting but clearly not an original question. In other words, if you are having to cope with a complex issue with contractual implications that will affect future income, refer conveniently to the bot and take seriously what they come up with. An expensive authority is not necessary to the purpose.

What matters most in economics is the importance of the question asked. If the question is interesting and relevant, the answers then follow almost automatically. The best economists identify interesting questions to ask – and provide their own compelling answers for them. Which by now will be picked up systematically by the computers that power AI. The test of any student utilising AI, as not in the quality of answers provided by AI, but rather have they asked an interesting question- and are they capable of interpreting the answers provided?

But what then of the role of true originality? New questions asked and answered that move forward so helpfully, the frontier of knowledge to be applied creatively. That then become part of the wisdom to be recorded digitally. Academic research has been valued for its originality. For the citations earned by scholars in the same field who recognise the contribution made by the inventor of an idea and its formulation. Published research is for the record. It is public knowledge freely available- and now collected systematically and comprehensively by the bots.

The reward and incentive for the original researcher comes in the form of salaries and research grants and promotion up the academic ladders. The laws that protect copyright and confer time limited monopolies of intellectual property in the form of patents can usefully encourage originality. Patents limit property rights, but the limits are sensibly not such as to inhibit invention. Pay for copyright can perhaps be extended to the actions of bots that are being monetised for their owners.

More important than solving the ownership of intellectual property issues raises another question. Can the bots however do more than keep the record? Can they advance knowledge originally in ways that can further advance the human condition? Can they observe the world around them to observe patterns and come up with helpful explanations and actionable theories that add to output and utility. As scientist and analysts of all kinds, including economists do.

Much scientific enquiry is a mixture of observation and generalised theoretical explanations that hopefully can be tested with evidence from repeatable experiments. An interdependent mixture of induction – seeing the patterns – and deduction – making sense of them. The bots can record and measure and summarise the established questions and answers. But can they be creative in the way the best scientists and analysts are creative? Can they see the world from their data centres and exercise the imagination of the intended experiments that is the stuff of true creativity? I would suggest not. Creativity, originality, rather than the literature review mastered by the bots, is the path to true excellence in science and the arts. Which raises the further question. How can creativity be stimulated by individuals or teams of them? And further what can educators do to foster creativity?