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Surging South African Stocks Give Psychological Lift

  • Joe DeCapua

South African stocks have had their strongest showing since July 2008, reaching the 30,000 level. South Africa is considered a strong emerging economy and has become very attractive to international investors.

David Shapiro, director of Sasfin Securities, an independent banking and financial services group in Johannesburg, says, “First of all, psychologically to get back above 30,000 is very important. Remember, at the depth of the (economic) crisis we were down at about 18,000. So, we’ve recovered quite a lot of ground.”

He says, however, stocks are still about 10 percent below the 2008 level, which he says can now be viewed as an “artificial high.”

“It was just after the sub-prime (mortgage) crisis broke in America. At that stage, everybody believed that the sub-prime crisis was really confined to property in the U.S. and wouldn’t affect the rest of the world. So, as the dollar weakened, we saw commodity prices going up, believing that China’s demand would fill the void that America was going to leave.”

Then reality set in

“Of course, once Lehman Brothers fell and we learned that the crisis had spread around the world, we dropped away. So, we’ve clawed our way up,” he says.

Lehman Brothers, a global financial services firm, declared bankruptcy in 2008. It was the largest bankruptcy filing in U.S. history.

However, while investors reap the benefits of a rising stock market, Shapiro says there are unexpected “consequences” from having a strong rand.

“We’ve always believed that our currency was too strong and it needs to weaken. And if anything, we’ve seen our currency going the other way. We’ve seen huge inflows from foreign investors into the South African rand. Even at a time when our economy was laboring…the money is flowing in, deals are being done,” he says.

This includes the entrance of the U.S. based Wal-Mart and other foreign companies into South Africa to get a foothold on the continent. There have also been a number of major banking deals as well.

Shapiro says, “All these deals have sparked an enormous amount of interest in our market. Our currency, the rand, has gone very strong against the dollar, which is not helping our economy because, like everybody else, we want a weak currency to help our exporters.”

He adds, “Everything’s topsy turvy. It’s difficult to reconcile the underlying economy with the stock market. But if you’re an investor, I think you’re rejoicing and you’re quite happy to see the market at 3,000.”

No trickle down

The average South African, however, is not seeing the benefits of a rising stock market.

“Not really,” he says, “In fact, we don’t know how to contend with the strong rand. Because we sell in (US) dollars, but pay in rand, it means that margins are being shrunk. Yes, commodity prices are going up, but it’s been neutralized in dollars because of the strength of the rand. But local costs are going up. We’ve seen wage costs going up, the cost of electricity going up, food costs and other costs.”

Shapiro says many South African companies are “battling.” They’re making less money on exports, while consumers are buying cheaper imports.

“Our manufacturers,” he says, “are suffering on both angles.”

Diversifying South Africa’s economy could help deal with similar problems in the future.

“It’s a very free economy,” he says, “It’s a very open economy. And it’s something that we’ve been battling with over the last decade - just how to diversify our economy. We are trying to diversify. We need to diversify in order to create jobs.”

South Africa’s unemployment rate hovers somewhere around 25 percent.

“So we have to diversity our base here, but no one’s got the answers yet. It’s very difficult. We haven’t come out with an industrial policy that has made any difference,” he says.