This is the thirteenth a series of articles that makes a fundamental macroeconomic sectoral flow analysis of the economies of key countries across the globe.
The purpose of the review is to see if the local stock market is worth investing in via exchange traded funds (ETFs). These funds are available to all investors, even for non-residents or those not able to trade in the stock market of that country directly.
In this article, we examine South Africa from a sectoral flow analysis perspective to see if the private sector, containing the local stock market, is getting the support it needs from the government and external sectors to continue its march upward.
Details of the methodology employed to analyze these opportunities are available in the sectoral analysis section found later in this article.
The magic formula for success is:
P = G + X
And you can read more about that below.
Which Countries Are Doing Well?
The first port of call is the ETF page at Seeking Alpha and a look at country ETFs and how they are performing.
The chart is from early December 2016. In that time positions have changed a little as the chart below shows.
One notices from the list the following items:
Latin American countries head the list; what are they doing right?
No European countries are lagging in the list, except Norway.
Only three "developed" countries are near the top of the list.
The U.S. is green and showing promise, though far down the list. Why?
Mexico, a Latin American country, is near the bottom. Why? What is it doing wrong?
All these questions and more will be addressed in forthcoming articles on a country-by-country basis from top to bottom. Most countries on the list are in the red and are of no further interest, though we could learn from them what to avoid, as could their governments and politicians. But, as investors, we will leave that to them.
Since the start of this series of articles, South Africa has risen from twenty-eighth to fifth place. South Africa is moving up the chart.
South Africa shows a 46% growth rate over the last twelve months.
One can find the iShares MSCI South Africa Index (ETF) (NYSEARCA: EZA) near the top of the SA ETF list, and the current fiscal situation is as follows:
A review of the latest government budgetary papers reveals the following:
"Government is committed to reducing the budget deficit and stabilizing the debt. Despite weaker GDP growth, the projected deficit for 2014/15 is 3.9 per cent of GDP, just below the October 2014 estimate.
Main budget non-interest expenditure has been reduced by R25 billion over the next two years compared with the 2014 Budget estimate.
Capital is the fastest-growing area of non-interest expenditure over the medium term, while goods and services decline in real terms. Compensation stabilizes as a share of total expenditure.
Taxes will increase by R16.8 billion in 2015/16 as a result of higher personal income tax rates, a 30.5 c/liter increase in the general fuel levy and various excise duties. The Road Accident Fund fuel levy increases by 50 c/liter, generating R9 billion over the next two years.
The Unemployment Insurance Fund (UIF) monthly income contribution threshold is reduced to R1 000 for one year, with no change in benefits. This will reduce the UIF surplus by about R15 billion in 2015/16. Risks to the fiscal outlook include weaker-than-expected GDP growth, an increase in the wage bill that is significantly higher than inflation and the weak balance sheets of several state-owned entities. The government is actively managing these risks."
The brief starts out with all the wrong intentions for the private sector: An explicit intention to both reduce the deficit and move to surplus and on top of that more taxes. So the economy is to be shrunk from both ends at once with less government expenditure and also higher taxes.
That stated public policy outcome is a negative for the private sector and one can only hope that it changes going forward.
The near-term government budget picture is shown in the chart below.
The chart shows that the government sector is steadily declining the deficit and adding less money each year into the private sector. This is not a good trend for stock market investors. On the plus side, the government is net adding and this is good for the private sector.
The long-term government budget picture is shown in the chart below:
Long-term the government sector has been consistently net adding to the private sector and in total has been a supportive element for the private sector. Long-term though one does note that the trend appears to be forever smaller deficits that will lead to a recession.
This again is not a good trend, but on balance, the government sector can be seen as a positive force net adding to the private sector. One can see how the declining deficits and then small surplus into 2006/7 helped bring on and deepen the GFC in South Africa, a budget pattern common to most countries.
South Africa has mixed foreign trade position. The near-term can be seen in the chart below.
The chart shows that the balance of trade is at best balanced with neither a net add or drain to the private sector.
The long-term balance of trade picture is shown below:
The chart shows that South Africa has had at best a stable trade situation over the long-term. Decades of surpluses are followed by decades of deficits. Overall there has been a net drain.
South Africa is a country endowed with a rich treasure chest of natural resources from which to leverage a strong and vibrant economy and export sector. With this in mind, one can say that the balance of trade has room for improvement and a very strong potential.
South African does not keep capital flow information, and the nearest and best alternative is foreign direct investment.
The chart below shows the near term flow situation.
The chart indicates that net inflows are adding to the private sector in South Africa and this is a good thing as it expands the circular flow of income by that exact amount. The long-term trend is shown in the chart below:
Long-term the trend is very healthy with strong, consistent and rising capital flows. This speaks well of how the business world perceives South Africa as a place to invest money for a future return.
Sectoral Analysis Methodology
Each nation state is composed of three essential components:
The private sector
The government sector
The external sector
The private sector comprises the people, business and community, and, most importantly for investors, the stock market. For the stock market to move upward, this sector needs to be growing. This sector by itself is an engine for growth and innovation. However, it needs income from one or both of the other two sectors to grow.
The government sector comprises the government with its judicial, legislative and regulatory power. The key for the stock market is that this sector can be both a source of funds to the private sector through spending and also a drain on funds through taxes.
The government through its Treasury also sets the prevailing interest rate and provides the medium of exchange. Too much is inflationary and too little is deflationary. It puts the oil in the economic engine.
The external sector is trading with other countries. This sector can provide income from a positive trade balance, or it can drain funds from a negative trade balance.
One should note that a negative trade balance also means that a country has traded currency, that is in infinite supply, for real resources that have a finite supply.
For the stock market in the private sector to prosper and keep moving upward, income is required to be put into the flow. Otherwise, the sector can only circulate existing funds, or is being drained of funds and is in decline.
The ideal situation is that the private sector has a net inflow of funds and is constantly growing, thus giving the stock market headroom within which to expand in value. For this to happen, one or both of the other sectors have to be adding funds to the circular flow of income.
This relationship can be expressed by the following formula:
Private Sector [P] = Government Sector [G ]+ External Sector [X]
P = G + X
For the best investing outcome, one looks for countries where the government sector and external sector are both net adding to the private sector and causing the local stock market index to rise with the receipt of additional funds.
South Africa is a buy and is on the move right now.
The government sector is net adding to the private sector even if it has the misguided intention to do less as time goes on. This is a concern and must be watched as the government clearly has the destructive contractionary budgetary bias that has washed over world economies since the GFC. Austerity mania is alive and well in the South African government.
Despite massive natural resources for export, the external sector is a net drain on the private sector however it has vast upwards potential. A sleeping giant ready to wake up when the "developed" world recovers from its austerity-induced neo-liberal economic coma.
Capital flows are very strong, consistent and are accelerating upwards indicating that the rest of the world thinks that South Africa is worth investing in.
One can get investment access to South Africa via these ETF funds.
ISHARES III PLC ISHRS MSCI SOUTH AFRICA ETF USD (NYSE:ACC) (LON: SRSA)
ISHARES III PLC ISHRS MSCI SOUTH AFRICA ETF USD (LON: IRSA)
HSBC ETFS PLC HSBC MSCI SOUTH AFRICA UCITS ETF (LON: HZAR)
LYXOR INTERNATIONAL ASSET MANAGEMENT LYXOR ETF SOUTH AFRICA (FTSE JSE TOP 40) (LON: AFSL)
ISHARES VII PLC ISHARES MSCI SOUTH AFRICA B UCITS ETF (LON: CSZA)
HSBC ETFS PLC HSBC MSCI SOUTH AFRICA UCITS ETF $ (LON: HZAD
ISHARES VII PLC ISHARES MSCI SOUTH AFRICA B UCITS ETF (LON: CZA1)
LYXOR INTERNATIONAL ASSET MANAGEMENT LYXOR ETF SOUTH AFRICA FTSE JSE $(LON: AFSU)
HSBC MSCI SOUTH AFRICA UCITS (SWX: HZAR-USD
Lyxor SOUTH AFRICA (SWX: LYAFS-EUR)
iShares MSCI South Africa UCITS ETF (SWX: SRSA-USD)
Some of the above funds trade in USD so one can minimize currency exposure and so guard real total return on your investment.
In the next article, we will take a look at Thailand.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.