SA is shining, Tech is tanking

It is quite pleasant to see some positives coming out of South Africa for a change. Over the last few weeks, and even months, we have been holding on to record highs on our share market; we have seen the rand strengthening to around R14 against the US$; we have seen mining output increase by 21% year-on-year; and we have even seen Ace Magashule and some other high-profile ANC cadres suspended.

In contrast to all that, we have seen the very popular Big Tech companies in the USA come crashing down. The question now is: should we adjust our investments to reflect this new SA-positive and USA-negative environment?

Firstly, we should look at why SA is doing well and whether this will last. Over the last decade we have experienced a very negative reality in South Africa, spearheaded by the corrupt factions in the government and resulting in the destruction of a healthy, productive and stable business environment. Many businesses have closed down, unemployment has risen explosively and the tax base have emigrated. Our country has been driven to near-bankruptcy, with an out-of-control government debt level and downgrades to junk by all the rating agencies. Lack of infrastructure spending and state capture have rendered our SOEs useless and our basic services inept.

So why the sudden recovery? On the coldest day even a little ray of sun can go a long way towards warming you up, which is exactly what is happening. Most of our new-found joy is due to external factors. Our rand weakened owing to the flight to the safety of the US$ during the pandemic and is now back at 2019 levels. Our equity market had almost no growth for ten years, making the shares very cheap. They can now return to some sort of normality with the shock of 2020 over and investors unable to find returns in the developed economies. Commodities are our biggest exports and with the increase in demand and prices we have seen the benefits in the rand strengthening and share prices rising. And we are seeing some action being taken by Cyril Ramaphosa against the gangsters who have stolen from our country.

On the other hand, Technology shares are having a very rough time after a stellar 2020. The so-called FAANG stocks are all well below their all-time highs and we only have to look at the price of Apple (-12,5%) and Amazon (-9%) to see the pain. The peculiar thing is that all of the big technology companies had spectacular financial results recently, but now their share prices are coming down. It is, however, very easy to explain this anomaly. Shares are forward-looking. Investors will look at the potential earnings of a company six to twelve months into the future and pay a price for the shares now that takes into consideration those higher or lower earnings. So the price of a share outruns the underlying earnings and when the earnings are confirmed, the price adjusts to reflect the fair value.

The question for investors is whether to change their view regarding SA and international investments? The answer will lie in what your expectations are going forward. Will the external factors driving the stronger rand and higher SA equity prices continue? Will the ANC follow through with their cleansing of the corrupt element in the government? Will fiscal and monetary discipline prevail, curbing government spending and supporting free enterprise? Will the populist philosophy continue or will pro-business, capitalist principles be adopted? And looking at Big Tech: will Apple, Amazon, Facebook, Google, etc., continue selling products and services to the whole world, innovating and changing the way we buy, communicate, work and play?

Looking into the future from where we stand, we would be very hesitant to take what is happening now and extrapolate it. We are very happy with the new-found strength in the SA situation and we hope this will continue. We are also very comfortable with the deflation of the overvalued technology sector and the reflation of the consumer-driven companies in the developed world. We see this as a broad strengthening of equities as our longer-term asset class.

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