We have made the point recently that the companies listed on JSE, have become increasingly exposed to the state of the global rather than the SA economy. Hence the close links between JSE earnings (and performance) in US dollars and emerging markets earnings.
Continue reading the full article with figures and graphs in the Daily View: Daily View, 21 Feb, 2011: SA Economy – Moving in Step
When analysing the relationship between the earnings per index weighted share of the Financial and Industrial Index of the JSE (FINDI) and the SA economy, we were therefore somewhat surprised to discover that the links between the FINDI and the SA economy had become stronger rather than weaker over recent years. That is despite the much more global character of the FINDI itself.
The explanation for this apparent conundrum soon became apparent. The closer links between the FINDI and the SA economy can be understood by observing the relationship between the global and SA economy. This linkage has become that much closer, in fact extraordinarily close, over the years, so making the JSE and its FINDI simultaneously, but not coincidentally, a play on both the SA and Global economies, that behave very similarly. And so the FINDI is better explained by the global aspect than the SA economy: they just happen to move closely together.
As we show below the SA economy and household consumption in recent years have been growing almost exactly, almost uncannily, in line with world growth. This, as we also show, was not at all the case before the world opened up to the SA economy after 1994.
The correlation between global and SA annual growth since 1996 has been close to one while, in the fifteen years before, the correlation of annual growth rates was insignificantly low. It was the severe political confidence shocks to the SA economy in 1985 – 1986 and again in the early 1990s that caused the SA economy to diverge from global growth. But it was politics and a most uncertain political future that denied SA access to much foreign capital before 1995 that separated the SA economy from global capital market forces.
Accordingly South Africans were forced to rely on their own savings to finance growth. Thus when demand to grow the capital stock exceeded domestic savings and the current account went into deficit, domestic demand and output growth had to be more or less immediately scaled back, because foreign capital would just not be forthcoming to help prolong a period of faster growth.
This is no longer the case. It was access to foreign capital that helped to extend the consumption and investment boom that began in 2003. And capital continues to flow into and out of SA in response to global economic forces. The better the performance of the global economy the higher will be the prices of commodities and so the greater the strength in emerging markets. This however becomes vice versa when the global economy deteriorates. Favourable global forces, as recently, have encouraged capital to flow to SA, thus providing for rand strength, lower inflation and so lower interest rates that have been so helpful for reviving domestic spending.
And so the SA economy in 2010 is growing again closely in line with the global economy and the JSE is performing closely in line with emerging equity markets. One wonders whether this relatively new virtuous growth cycle is well enough appreciated by commentators and indeed monetary policy settings in SA?
The limits to growth in SA are not set by SA savings. They are set by the ability of the SA economy to attract foreign capital. This capital is most easily attracted by improving SA growth prospects. Therefore monetary policy in SA should have growth as its primary objective, so as to help attract foreign capital that will support the rand and hold down inflation. Faster growth and less inflation is a distinct possibility for SA, given access to foreign capital. Higher interest rates can threaten growth and weaken the rand, as they did in 2006 and 2007. We may hope the authorities do not repeat the mistakes of 2006-2007 and act pre-emptively to restrain sustainable growth with uncalled for higher interest rates. Brian Kantor