The net selling of JSE shares and SA government bonds by foreigners has been relentless, dwarfing the outflows of the Great Financial Crises and Global Economic Recession of 2008. Despite the brief "Ramaphoria" inflows, it’s been all one-way-traffic for both bonds and SA equities, with dumping of JSE shares contributing to 60% of total outflows shown below.
Seminar participants and clients often ask me why there is so much foreign selling. It’s really a combination of four things in my opinion:
- Emerging market (EM) risk on/off global sentiment
- Global interest rates rising, making us a less compelling carry-trade proposition
- Our continuous "shooting ourselves in the foot" and scaring off foreign investors
- An economy that is persistently among the worst performing in the OECD group and EM cluster
These "portfolio inflows" represent approximately 50% of the inflows recorded on the SA financial account, with Foreign Direct Investment (FDI) the next largest at 20% The fact that FDI has collapsed from 36% to 20% over the last decade makes us even more reliant on these portfolio inflows.
Do not make the mistake of blaming external forces beyond our control on our woes. Global interest rates we don’t have control over, but Emerging Market (EM) inflows have actually been on the up-and-up in 2019. And these EM’s are growing their economies at 3% or more, whilst we languish in GDP recession.
Apart from the myriad adverse effects this capital flight from SA has on our government twin-deficit finances and the Rand, it also implies massive tailwinds for the JSE, as we described in this late September 2018 article that warned of the upcoming 20% correction in the JSE.
The fact that much research has found that economic growth shares a positive relationship with both portfolio inflows and FDI and the real effective exchange rate, while sharing a negative long-run relationship with government expenditure, must surely give us pause for thought.
JSE monthly trading values are also languishing, which hints at the recent rally not being driven by institutional buying:
For any JSE rally to be sustainable, we need to see net foreign purchases and monthly trading values on the rise at the very least.
But believe me when I tell you that JSE headwinds are the least of our problems if the government can’t figure out how to regain battered foreign investor confidence, compete with the other emerging markets that offer a far better value proposition and come to the realisation that they can’t continue trying to spend their way out of this crises through above-inflation public sector wage increases, taxes that cripple the poor and middle-class, bloated ministries and life-sapping State Owned Enterprises (SOE’s).
Dwaine van Vuuren
RecessionAlert, Sharenet Analytics
Dwaine van Vuuren is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT.com (US based) and PowerStocks Research (now Sharenet Analytics) into companies used by thousands of hedge funds, brokerage firms, financial advisers and private investors around the world. An enthusiastic educator, he will have you trading and investing with confidence & discipline.