What’s happening with the Investors:

And this week’s best performer: The Circumspect Whore. Which makes sense – because the second-best performer was the South African Rand in general. And since the db x-trackers MSCI World Index ETF tracks the performance of stocks in the developed equity markets, it’s effectively a foreign-currency investment (and/or a hedge against the movements in the rand). So when the rand depreciates (which it did this last week), then the value of that ETF goes up as well, with possibly some extra for any good performance in the stocks in the MSCI World Index.

And there was some good performance. Apple shares, for example, form part of the MSCI World Index (specifically, just under 2% of the shares in the index are Apple shares – which is indicative of just how huge Apple is in monetary terms*). Apple shares had an awesome week, driving themselves up in frothy anticipation of Monday’s WWDC.
*The ETF is weighted by market capitalisation. Which (roughly speaking) means that Apple makes up almost 2% of the global equities market.

Here are the indicators (I’m comparing them to Week 8 – because that’s when I started tracking them):

In the last two instalments, I’ve been talking about weaving narratives from the data. So here are the main observations I’d make:

1. The exchange rate is weakening. As is the gold price.
2. The unemployment numbers are unchanged – but that’s got a lot to do with data lag. Labour force surveys are only done quarterly, with the results released 4 to 6 weeks after the end of the quarter. So we’re still talking about numbers from the first three months of 2014 – and that report was released only a month ago.
3. Inflation is up to 6.1% by official estimates.
4. The balance of trade is worsening (ie. South Africa is importing more goods than she’s exporting).
5. The PMI index is doing really unfortunate things, indicating general pessimism and bad times.
6. The GDP growth rate, as I mentioned in last week’s post, is negative.

So all in all, some doom and gloom. And it can now be turned into a story. So here goes.

South Africa is facing two significant pressures:

• Firstly, the awkwardness of being an emerging market currency in a world of free capital flows – and especially, a world of free capital flows that is feeling decidedly risk averse just now.
• Secondly, an appalling amount of labour action – and action in all the wrong ways.

Let’s deal with the second part: the labour action. So labour strikes tend to be contagious – they’ve spread from the Platinum Industry into construction (at the Medupi electricity plant) and the sugar industry. And now there are talks of “sympathy strikes” by the Food and Allied Workers Union in the food processing and beverages industry.

Strikes hurt everyone: companies stop operating, workers stop being paid, and it’s a game of economic chicken to see who wants the business to crumble least (the owners or the staff who depend on the business for their livelihood). So there are some impacts:

1. Production slows:
   1. in the industries which are not operating due to strikes (obvs);
   2. in the industries that supply goods and services to the companies that have halted production; and
   3. in the industries that supply goods and services to the striking workers.
2. There is a lock-up of liquidity because companies start slowing their payments and inventories don’t move. So companies also stop ordering.
3. You see this reflected in the terrible PMI (any figure below 50 is considered contractionary – South Africa’s figure of 44.3 is the lowest amongst the 52 countries that release monthly PMI reports).
4. You can also see in the contraction of GDP (if production is slowing, then the Gross Domestic Product also surely slows).

And then there is the exchange rate.

The exchange rate originally started weakening when foreign investors pulled out of Emerging Markets in the aftermath of America’s QE tapering. For South Africa, this meant that the industries reliant on imports saw their profit margins destroyed by the exchange rate movement, including manufacturing companies that import their raw materials (like the automobile industry).

And where the exchange rate could have been partially supported by the exporting industries – as it turns out, most of those industries are striking. Here’s an exports map from 2009*:
*thanks Wikipedia.

Hence the continuing currency depreciation and the worsening balance of trade.

And then, finally, you get inflation, because the rising price of imports have to be priced in at some point.

It’s all a bit depressing, not so?

If you’re feeling depressed, I have two potential upsides:

1. If I’m approximately right about things – then the return of the platinum miners to work will have a more positive impact that you might otherwise expect. And
2. I more than likely to be wrong. This is, after all, an exercise in plausibility: it’s not an exercise in facts.

Until next week.