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Liberate South African public pension from stock market
SA investors’ addiction to equity has come at the price of growing unemployment and income inequality
by Dominic Brown
27 March 2020

Globally, stock markets are reported to have lost more than $13-trillion dollars over the past month. South Africa was not spared. On March 12 and 13 the Johannesburg Stock Exchange (JSE) dropped by 10%, the biggest single fall in the JSE since 1997.

The all share index (the largest 164 listed companies on the JSE, accounting for almost the entire market cap and liquidity of the market) has fallen by more than Rand 2.3-trillion since February 17, and by R4-trillion since the beginning of the year, a loss of more than 30% of its value.

The savings of poor and working people have been permanently damaged, thanks to the wonders of institutional investors (private pension and provident funds.)

Unlike many who attribute the economic collapse to the coronavirus itself, Éric Toussaint convincingly points out ( see why the global economy (the South African economy being no different) is built on a petrol-soaked, house of cards and that the outbreak of Covid-19 is therefore not the cause, but merely a spark that caused the inevitable fire that’s burning the house down, this time.

Even though it may seem that the cause of the current financial crisis is the decline in labour supply due to the social-distancing required to slow the spread of the virus, this financial crisis, like the 2008/2009 global financial crisis, and many of the national crises since the 1990s have occurred as a result of increased financialisation of the global economy.

With this, an increased emphasis on investing in equity with quick and easy returns became the name of the game. This is, in fact, investment in “financial capital”, a form of capital without any links to the real economy and production, which has given us speculative bubbles, which, when they burst, wreak economic havoc.

This is what happened in the 1997 East Asian crisis, the dot com crisis of 2002, and the 2007/2008 financial crisis. Financial speculation absorbs capital, which could have and should have been invested in fixed long-term capital, which can create real value and, consequently, many more jobs.

For the past four decades, investing in financial capital has been very profitable for corporations, more so than in productive or real capital. This incentivised greater and greater levels of investment in financial capital, globally and in South Africa.

It is estimated that since the 1980s the total share of the financial economy has grown four-times the size of the world’s GDP. This has resulted in the development of a whole range of exotic financial instruments such as derivatives, asset backed securities, credit default swaps, and so on.

This has given rise to the practice of non-financial companies deriving more of their profits from financial speculation, including many corporations actively buying back their own shares, increasing their share price, instead of using surpluses to invest in their productive capacity. Sometimes, corporations even borrow to purchase their own company shares. This results in the over-value of stock markets (and rising corporate debt), that continue to grow, despite declining productive capacity, growing unemployment and inequality.

The South African stock market is similarly overvalued. A stock market that’s valued at more than 115% to GDP is overvalued according to the Buffett indicator — a measure of the size of a country’s stock market as a percentage of the country’s GDP — named after multi-billionaire Warren Buffett. In December 2019, the JSE was valued at 343%-to-GDP, making it one of the most overvalued stock markets in the world. In spite of the JSEs recent collapse, the Buffett indicator remains extremely high at more than 200% to GDP.

The Public Investment Corporation (PIC) is one of the biggest contributors to the massive overvaluation of the JSE. More than half the Rand 2.1-trillion in assets under the PIC’s management is invested in the JSE. The majority, almost 95% of these assets, belong to the Government Employees Pension Fund (GEPF) (Rand 1813bn) and the Unemployment Insurance Fund (UIF) (Rand 160bn) [1].

Addiction to equity

The high concentration of investment in the JSE is not only overly risky; it also has very little benefits for the 460 000 pensioners and the 1 265 000 workers currently contributing to the GEPF [2]. The fall in the JSE has resulted in the GEPF losing more than Rand 200bn.

An alternative would be for the PIC to redirect that investment to much-needed productive capital aimed at improving people’s lives. This would have meant that much less than Rand 200bn would have been lost as a result of the massive decline of the JSE. While the GEPF pensioners, public-sector workers and the more than 10-million unemployed South Africans enjoy minimal benefits from this investment strategy, they will be the ones who suffer the costs as the bubble bursts.

Besides the massive losses on the stock market, SA investors’ addiction to equity, has come at the price of growing unemployment and income inequality, due to the lack of investment in an industrialising, job-creating strategy coupled with declining real wages. To make up for income shortfalls, many households have become increasingly indebted with household debt estimated to be as high as 70% of gross income.

While the losses of the JSE cannot be reversed, to mitigate these investment risks the GEPF and the UIF should demand that the PIC review its investment policy, reducing the level of investment in equity and redirecting these investments to government bonds. Furthermore, this crash in the JSE and the consequent impact it has on the GEPF underscores the importance of shifting the pension fund back to a pay-as-you-go scheme.

Doing this would mean that significant amounts of accumulated reserves could be liberated for a pro-poor fiscal stimulus, that first seeks to ensure there’s sufficient resources to effectively deal with the pandemic; and secondly, once there is stability, to introduce greater measures aimed at kickstarting the economy.

This would dramatically reduce the level of risk associated with the PIC’s investment and effectively guarantee a return of investment between R15bn to R20bn each year at an average return on investment of 5%. This move would require a change in the Government Employees Pension Law as well as a break from the government’s draconian budget that proposes more than Rand 260bn in cuts (including Rand 160bn to the public-sector wage bill) over the next three years.

Footnotes :

[2GEPF Annual Report 2018/2019 downloadable at

Dominic Brown

Dominic Brown is an activist and leads the economic justice programme at the Alternative Information & Development Centre, Cape Town, South Africa .