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Extra Virgin - January 2010

Money
Money Madness and markets, specifically financial markets, sit together in a sentence like Vuvuzelas in Soccer City, writes Craig Gill.

How often have you heard the refrain, "we’re only as good as the weakest player in the team"? Yes, I know: too often. It's most often trotted out during some or other corporate ‘spanbou’ session, where everyone is supposed to spontaneously and collectively pull their socks up (or, as my rugby coach used to say, butchering the metaphor; pull your socks together!)

The reality though, in finance and football, is that it is often true. And the natural repercussions, where many suffer at the hands of poor performances by the few, are also valid. The brief discussion of the own goals being scored by Europe’s team member Greece in last month's column illustrates this point to a degree. But what do we, basking here on the Southern Tip, care about some far flung team or economy struggling with a serial problem player in their midst?

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A good analogy to use when trying to "understand the Rand" is to think of the ZAR as the price of a company called South Africa Inc, listed on the World Stock Exchange. It reflects sentiment as well as all external or foreign economic activity that goes on with SA Inc. Viewing RSA through this lens - and taking the current government to be the executive management team of this company – allows us to step back and have a measured, rational look.

SA Inc's financial situation actually looks quite healthy when compared with other small/medium/emerging ‘companies' listed on the World Exchange. Our fiscal situation is under control, the current account on the balance of payments is stable and improving fast.

The economy is recovering from a severe recession and all sectors, particularly agriculture and manufacturing, are showing signs of growth. Inflation, according to the official published statistics, seems to be under control - and the executive member tasked with overseeing all these departments, while new in the job, seems to be a steady and rational fellow. I refer of course to Mr. Pravin Gordhan.

In addition, the external consumer environment for products and services produced and offered by SA Inc, has been highly favourable of late. Low interest rates globally have fuelled demand for our attractively priced - and high yielding - savings products. Both domestic stocks and bonds are attracting huge inflows; that is, the ‘buying’ of SA Inc. Commodity prices have risen globally, making one of our export products, raw materials, fly off the shelves – again, buying SA Inc. Last, but not least, we are hosting one of the world's greatest sporting events in a short while - this has elevated SA Inc’s profile and interest in all things SA Inc dramatically.

In short, SA Inc is up over 25% over the last twelve months – maybe a strong rand is not so mad after all?

Certainly, we have challenges all around us. For people living and working for SA Inc, the prospects appear less rosy sometimes than they do from a distance. When you dig below the surface, some of the challenges could be disastrous for the balance sheet and income statement of SA Inc, What, for one, happens after the World Cup? How bad is the hangover?

Is it difficult to gauge where the Rand is going to be next week? You bet. Next year? Impossible. But where it seems irrational it may just be complex. Like all things, perspective and a considered view are the best defence against being labeled, with hindsight, utterly mad.