Real Estate Investor Magazine South Africa November 2016 | Page 35

A

s the days counted down to the end of September 2016, all was
looking pretty rosy for the Rand.
It had enjoyed three weeks of gains and had all but regained the
ground it had given away in the latter half of August – and was closing in on
its strongest levels this year.
And the outlook was more positive still. The US Fed had decided to keep
interest rates on hold, things had calmed down in the spat between the
Hawks and Pravin Gordhan (for now!) and the market had just received the
‘good’ news that SAB Miller had clinched a deal in a $103bn takeover by
London-based Anheuser-Busch InBev, with these inward flows expected to
provide further impetus for the Rand’s positive run.
Yes, things seemed to be looking rosy – or so the local economists thought!
Because all it took was a couple of days for the headlines to change to
“Rand continues puzzling decline” with mainstream pundits perplexed and
confused by the seemingly inexplicable weakening back above 14.00 to the
Rand – for no reason at all.

What had happened?

The Rand obviously had not been reading the news.
Or perhaps those players that ‘move the markets’ had also not been keeping
up to date on these positive events.
So, why had the Rand just lost 65 cents in less than 3 days?
Thinking about today’s headlines, it made me realize that economists –
and conventional wisdom – would like us to think of financial markets as
physical objects that merely react to Newton’s First and Second Laws of
Linear Motion (remember them?)…
1 An object in motion stays in motion with the same speed and in the same
direction unless acted upon by an external (unbalanced) force.
2 An object will accelerate in the direction of and in direct proportion to
the net force acting on it.

So, based on this, this past month prognosis for the Rand was
easy:

a The Rand had been heading stronger for three weeks so unless any
unbalanced force acted on it, it would continue to strengthen. ✓
b There was additional good news (net force in the right direction) which
should have the effect of causing the Rand to accelerate still stronger. ✓
But the market did the opposite, which has puzzled the ‘experts’ out there.
But perhaps they forgot about the fact that, IF
financial markets did abide by Newton’s Laws of Linear Motion (a big IF –
more on this later), then we would need to apply his Third Law too, which
states:
3.“For every action, there is an equal and opposite reaction.”
Of course, what this would mean is that news that is considered positive
by one person could be perceived to have negative implications by another.

Which is very often the case.

And, in fact, is exactly how I feel about the touted SAB Miller AnheuserBusch InBev (ABI) deal. What is positive about this deal? Some might
think a $103bn inflow is great, but let’s put this in context.
Isn’t this one this country’s prime income-generating assets? That is now
being sold off to a foreigner,..meaning that all future profits will no longer
be for the benefit of the local economy? And instead will add to our already
swollen Services Account deficit through dividends and interest payments
offshore (as all the other FDI deals have done)?
NOVEMBER 2016 SA Real Estate Investor

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