The hot war in Ukraine and the economic warfare being waged against Russia has dealt a heavy blow to globalisation. A retreat into autarchy will reverse the gains made by so many participants from freer trade and freedom to invest capital wherever it offered the best risk-adjusted prospects.
China has been the notable beneficiary of the free access it has had to global markets since the 1990s, and the access foreign-owned firms have had to Chinese consumers. Export- and import-led growth has transformed China’s economy, and the rest of the world along with it.
Yet this achievement has not won universal respect for the liberal orders that voted to open their economies to trade and investment flows. Political freedom has not followed prosperity in China or Russia, as was once the great hope. Their leaders are hostile to the democracies that offered them so much economic opportunity. They see weakness and have gained enough economic power to violently challenge the alliance of free nations.
One can only hope they will now recognise how much economic power the US and its allies still have to disrupt their economies and destroy hard-earned wealth when aroused to do so. As should SA — friends of enemies can become enemies very easily.
South Africans are engaging ever more heavily in global capital markets. SA financial institutions’ freedom to allocate their portfolios where they wish was enhanced meaningfully in the recent budget. Up to 45% of institutionally managed funds can now be allocated offshore, up from 30%. Active portfolio managers will now have an additional instrument to prove their worth. For any well-balanced fund 45% of rand-based portfolios held offshore will prove a theoretical — not practical — maximum.
Fund managers will be aware that translating dollar or euro returns for their investors into rand of unpredictable exchange value is likely to increase the volatility of rand returns — adding to the risks of investing offshore. For example, the local currency has been stronger against the dollar than expected of late, taking away some of the benefits of investing offshore, though the performance in dollars of the US stock market has more than made up for rand strength.
Also helpful to SA offshore portfolios has been the significant negative correlation between daily dollar returns provided by the S&P 500 index and daily moves in the dollar-rand exchange rate. The exchange rate has often moved in the opposite direction to the S&P benchmark, thereby smoothing the returns from investing rand offshore.
It should be recognised that this century the JSE has outperformed the S&P 500 when returns are compared in rand. Since 2010, after the global financial crisis, the S&P 500 has provided truly exceptional returns in dollars and rand — including dividends, they have averaged more than 19% per annum in rand and 14.6% in dollars. This compares favourably with a still satisfactory 12% annual average rand return realised by the JSE after 2010.
This truly exceptional past performance by the global equity benchmark over the past 12 years should not be extrapolated. It is not obviously explained, but surely has something to do with the highly stimulatory policy responses to the global financial and Covid-19 crises.
South Africans are investing significantly more of their savings abroad now than they have ever done before — R226bn of SA savings flowed out in 2021, equivalent to 3.6% of GDP, while the economy generated a record foreign trade surplus of R448bn, equivalent to a near record 7.2% of GDP.
But this should not be regarded as good news, even as our credit rating improves and the rand is supported. The capital flew away for want of opportunity to invest locally. Local savings now far exceed capex, generating large capital outflows and a formidable excess of exports over imports.
The challenge for SA is to improve the opportunity to invest locally, on its own strict competitive merits. And to attract rather than repel savings, including our own.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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