By Alec Hogg
Like many others fascinated by the investment world, I was surprised at recent research from Credit Suisse and the London Business School showing that since 1900, South African equities performed best in the world.
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It didn’t seem to make sense. For more than half that period SA laboured under political structures designed to suppress rather than stimulate human ingenuity. And if, as we are told, stock markets mirror economic growth, how was it possible for a country dragging such a heavy millstone to outperform?
The answer was delivered through excellent research published this week by Allan Gray’s global cousin Orbis which compared these equity returns with economic growth rates. The conclusion shatters an investment myth: an assumption that equities perform best in economies that grow fastest.
The Orbis report shows between 1900 and 2009, Japan topped global GDP growth at 3.3% a year. Bottom of the table was not-so-well-managed South Africa, with a modest 1.2% pa figure. But on a comparison of share market performance, the countries swapped places – SA leading the global pack with 7.1% annual real growth; Japan bottom at 3.7% a year.
On reflection, it is obvious. Capital is like a moth to the flame of growth. It flows towards where better returns exist and away from where little is anticipated. Quite logically then, this vital ingredient in the creation of new businesses is abundant where opportunities appear to be greatest and becomes scarce elsewhere.
When newcomers enter a marketplace they enhance competition which in turn reduces the profit available to existing players. And ultimately, the return delivered by individual companies is determined by their profitability – not the rate at which the overall environment is expanding.
In a slow growing or even stagnant economy capital gets diverted away into more attractive geographies. That means fewer local start-ups and foreign entrants. In SA’s case, many a potential newcomer has been scared away by decades of uncertain politics. Over time, this lowers competition which translates into higher profitability for incumbents. Which, by definition, means enhanced returns for their shareholders and more rapidly rising share prices.
All bets are off if complete incompetents take political charge and, Zimbabwe-style, put the economy into a tailspin. But for as long as economic policies are idiotic rather than destructive, shareholders in slow growing economies will reap outsized rewards.
Put it all together and the real time to start to worry about SA equities will be when the Government starts attracting foreign participants. But as there is little risk of that happening anytime soon, shareholders in JSE-listings can sleep easy.
