By Stuart Theobald, CFA

Have a look at this graph. It shows the number of two different foreign exchange futures contracts that are open on the JSE at the end of every day. It shows clearly that there was a leap on Monday 27 March in both the June 2017 and December 2017 contracts (I’ll get to the technicalities of these in a moment, but stay with me while I explain the big point).


Source: Inet Bridge/JSE

At approximately 10h30 on Monday morning, SA time, news broke that president Jacob Zuma had “recalled” Pravin Gordhan from a road show in London where he was pitching South Africa’s capital markets to international investors. That led to an immediate and sharp fall in the rand, for reasons I explain here.

Could one profit if you knew of such an event in advance? The answer is clearly yes. One simple way to do so would be to buy those futures on the JSE. Each USD/ZAR contract has a nominal value of $1000, though they are highly leveraged so you only need to put down a small fraction of that to get the exposure. And it looks from the figures that on Monday a large exposure was obtained using two futures contracts. The graph indicates there was a 15% increase in the number of June contracts and a 167% increase in the number of December contracts on Monday.

The maths is a little complicated, but it works like this. You buy futures which gives you long exposure to the US dollar. Then if the dollar appreciates relative to the rand, you get to keep the difference.

Monday’s increase was of 105 000 contracts. Those have a nominal value of $105m. The margin the investor would have to put down, basically a deposit to cover potential losses on the exposure, would be approximately R400 per contract, so the investor would have had to put R42m in cash up front, so about a 30th of the exposure. The value of the rand fell from 12.4334 on Friday night to 13.1351 as of the time of writing. Because the holder of the position is sitting with dollars, a weaker rand means they’ve made a profit in rand. Assuming the full difference in contracts was the exposure, and it has been held until now, the current paper profit would be R73.8m.

That’s a pretty good return on R42m of cash in just a day or two.

This assumes that the contracts were opened before the Gordhan news broke. There is circumstantial evidence supporting the view that it was before the news. For one thing, the volume in the June contract, where most of the action was, spiked early on Monday morning. You can see that in the Bloomberg screen grab below, in the red circle (the top of the graph is the price of the contract, so you can see how whoever did that trade got in at the bottom). There is also a lot of action around 10.30 when the news broke and a large sale on Tuesday afternoon. Unfortunately, there is no intra-day data on the open interest on Bloomberg, though I expect the JSE will have that data, and a whole lot more. The movements in open interest were in those two contracts specifically – there was no similar movement in other dated contracts or in contracts involving other currencies like the pound. If this was a general post-news market movement, I would expect contracts at all dates and all currencies to move.


On a longer dated, view there is also suspiciously high volume that traded last Thursday. Have a look at this graph:


This is all circumstantial, but there is proper evidence out there. The broker that was used, and the clearing brokers who would have handled the trade, one of Rand Merchant Bank, Absa or Standard Bank, would also have the Fica information on just who was behind it. These are all protected by client confidentiality, etc, but the point is that if someone was front running the president’s announcement, someone knows about it.

It is not clear whether there are any clear laws that would have been violated. It is obviously highly unethical, as it basically profits from someone else’s ignorance in that you have information they don’t. And lets not even ponder the political implications of a politician giving information to people prior to major market-moving announcements. But insider trading rules are currently focused on company shares rather than foreign exchange.This was technically a derivative being traded on the JSE, so it may be covered by insider trading rules for that reason, but if its just treated as a currency exposure, there may be a gap in the regulations through which these traders could slip.

Either way, using JSE-listed instruments was a pretty dumb move. A trader wanting to profit from such advance knowledge would be better able to do it offshore, where it is much harder to see big movements in market exposures. You can also get much more leverage. Someone trading in this way out of, say, Dubai, would be almost impossible to detect.

May 2017
By Stuart Theobald
A version of this piece was published in Gradient, the magazine of Absa Investments, which can be downloaded here.

There is no doubt that economic growth is needed to reduce poverty. Those countries that have done it on a large scale have also had rapid GDP growth rates. That is particularly the case in South Asia where the proportion of people living in poverty fell from 29.4% in 2008 to 15.1% in 2013 . In East Asia and Pacific it fell from 14.9% to 3.5%. These were driven by high growth rates particularly in China, India and Vietnam.

But it was in Asia that concerns over the distribution of this growth first gained traction. The problem is that growth creates economic opportunities that are unevenly distributed. Those who are already wealthy or otherwise enfranchised are able to use their resources to take advantage of opportunities more quickly than those who are not. This is intuitively plausible: educated elites and established companies thrive in growing economies because they have the resources to pursue the opportunities that come with them.


For this reason, growth in Asia came with growing inequality. This is very difficult to measure – the statistics required have only recently begun to be collected in most developing countries. Data collected by Credit Suisse show that in India, for example, the richest 1% owned 36.8% of the country’s wealth in 2000, but in 2016 it was over 50%. Anecdotally, it was marginalised groups like lower castes, women and farmers who were said to be missing out. This may be because the opportunities were all clustered around services, which favours urban residents. This is not something rapidly developing countries are alone in experiencing: the US and Britain have shown the same trend of wealth moving to the top 1%. There are different reasons for this in the developed world, though more of them will apply in the developing world as it gets wealthier.

It is far from settled what the causes of growing inequality are, but it has coincided with a global structural shift of economic activity from resource extraction and manufacturing into services. In particular, low-skilled jobs in manufacturing were often relatively highly paid, but low skilled jobs in services are low paid possibly because it is much harder for labour to organise on scale in the services sector. Other social factors such as lower birth rates and increased participation of women in the workforce are contributors. That seems counterintuitive, but there is some evidence, particularly in the United States, that before the 1980s rich men tended to marry poor women, but now rich men and rich women tend to marry each other, such that inequality between households has increased. These factors are certainly having political consequences in the developed world, too, including Brexit and the election of Donald Trump. Developing countries can expect these factors to become increasingly relevant too.

According to Google Trends statistics, the term “inclusive growth” is overwhelmingly searched by Indian users – for every 100 searches since 2004, there are only four from the next biggest country, the US. In the 2009 Indian election, Manmohan Singh and the Congress Party campaigned on the basis of inclusive growth as a core policy, garnering enough votes to lead a coalition government. This was in response to accusations from the left that Congress had previously pursued “neo-liberal” policies. It again featured heavily in the 2014 election campaign of the Congress Party but this time the party lost to Narendra Modi’s Bharatiya Janata Party. Since then, inclusive growth has become less of a headline-grabbing issue in India. The Singh campaign was occasionally vague on what it meant by the term, but did point to focused rural infrastructure development, investment in education and health and various schemes that specifically targeted the poor with economic resources. Its political traction was driven mostly by a sense of unfairness about the pattern of economic growth that had occurred in India. To be sure, absolute levels of poverty had fallen dramatically, but the benefits of growth had gone disproportionately to the already well-off.

The concept has been working its way into South African policy discussions for some time, particularly alongside complaints that growth under the Mbeki administration was “jobless” and therefore failed to deal with inequality. In the National Development Plan that was finally released in 2013, inclusive growth was mentioned only five times in 489 pages, with no major substantive discussion of what it meant. However, the NDP’s policy proposals broadly reflect objectives that cohere with the concept as it was developing elsewhere in the world, with the plan dominated by a theme of eliminating poverty and reducing inequality. In 2013, Treasury’s medium-term budget policy statement included a chapter headed “Securing inclusive growth”. There wasn’t any discussion of what this meant or how it should be measured, but the specific policy initiatives included mechanisms that redistributed development in favour of the poor, including health and education, while budgets related to infrastructure, jobs, local government and community development were boosted.

When it comes to definitions of inclusive growth, one of the best comes from the Asian Development Bank: growth with social equity. The idea is that policy should be focused on “pro-poor” growth. In a 2014 document it pointed to three policy pillars for inclusive growth:
1. High sustainable growth to create and expand opportunities
2. Broader access to these opportunities to ensure that members of society can participate in and benefit from the growth
3. Safety nets to prevent extreme deprivation

Pillar one is in common with older notions of economic growth, though it too can be skewed towards focusing on areas of particular deprivation. Pillar two and three put the “inclusive” into the concept. Clearly these pillars can be in tension with one another – for example, social safety nets come at the cost of alternatives such as infrastructure investment that could be more growth-enhancing. But this cost is seen as a price worth paying for inclusive growth.

In practice, policies are all about ensuring economic opportunities for the poor. This means heavy investment in vocational and technical training in poor communities, access to capital to start businesses, support for early childhood development, and efforts to include new entrants into the economy, be they start-up businesses or unskilled workers. While South Africa has attempted to implement some of these, such as the Expanded Public Works Programme which created many jobs in deprived areas, we have been very bad at driving education and training for the disenfranchised. This is a result of the broad dysfunction of the Sector Education and Training Authority system and the collapse of the artisanal schemes it was meant to replace. The effectiveness of government spending on schooling is also notoriously poor. In these cases the policy intentions clearly align with inclusive growth but the delivery falls far short. Black economic empowerment has attempted to force economic opportunities away from big established businesses and towards small businesses and black-owned businesses. This has had the most success and, alongside the rapid expansion in the size of the civil service, can be credited for the growth of the black middle class that has taken place.

The third pillar is perhaps where South Africa has been most effective. The social grants system has expanded rapidly to the point where around 19 million grants are paid every month to over 12-million people, making South Africa one of the biggest social welfare systems in the world. It heled reduce the poverty rate rapidly from 2006 to 2008, but has stagnated since. This safety net is only meant to be a safety net. It is to protect those who cannot find genuine economic opportunities. It does not in itself provide any way for people to add value to the economy, to access opportunities that should be provided by pillar two.

Recently, a new concept has blazed into the policy debate, that of radical economic transformation (RET). While some have dismissed it as “radical economic gibberish” and there have certainly not yet been any proper expositions of the concept, one can point to some reasons it has gripped the public imagination. Inclusive growth requires the first pillar: high growth. Without it, questions about the distribution of economic opportunity are moot. Given the poor growth environment in the Zuma era, debates about the distribution of opportunities are like arguing what you are going to do on a summer holiday you can’t afford. Inclusive growth is motivated by the sense of unfairness that arises when elites are seen to be grabbing opportunities. In the absence of growth, that sense of unfairness is focused on the distribution of economic resources, rather than opportunities. And given South Africa’s still skewed distribution in favour of whites, this easily takes on a racial tone.

The problem for RET is just what policy stance to take. If it is to be the forced expropriation of assets from the wealthy and redistribution to the poor, whether this is through nationalisation, wealth taxes or other means, the consequences will be big for economic growth. It will end foreign direct investment and collapse domestic confidence, leading to a huge slowdown in the economy. That will put an end to any possibility of inclusive growth. So while RET has been described by some, including minister of finance Malusi Gigaba, as inclusive growth by another name, it is probably better to see them as standing in fundamental tension. RET is better described as a process of redistribution of wealth, for which the cost is growth, inclusive or otherwise. And given that we do not yet know what the long-term outcome of such a process is, considering the examples of Zimbabwe and Venezuela, such a direction of policy is very dangerous.

The difficulty is how meet replace voters’ sense of unfairness with genuine hope of a solution. To accept inclusive growth rather than RET, they will need to be convinced the growth with deliver for them. The focus must not be on growth for its own sake, but on growth as a means of opportunity for the poor. To provide such an argument in a way that voters can put their faith in it will require great political leadership. And that, ultimately, is the critical enabler for inclusive growth.

By Heidi Dietzsch

You might think that paper and pencil have gone the way of the dinosaur when it comes to market research. But the oldest quantitative data collection method is still useful in the right circumstances. While Intellidex specialises in digital data collection, sometimes it pays to go old fashioned.

Prior to the 1980s, almost all market research data collection was done via paper-and-pencil interviewing (PAPI), or face-to-face interviewing. An interviewer reads questions from a paper-based questionnaire and fills the respondent’s answers into the questionnaire.

PAPI questionnaires can incorporate multiple choice questions, rating scale questions and verbatim questions. There are distinct advantages. Interviews can be conducted in the respondent’s home or workplace, in halls, shopping centres or even on the street. When a face-to-face interview is conducted, emotions, behaviours, facial expressions, body language and tone of voice can be observed.A skilled interviewer will note these down as additional data that adds value.

When needed, for instance where the questions are open-ended, interviewers can expertly probe respondents to give more comprehensive answers. It will, of course, be more convenient for respondents to provide long answers orally than in writing. PAPI allows for more accurate screening which means that respondents cannot provide false information pertaining to race, age and gender.

But there are also clear downsides. Things become tricky when certain questions or sections of the questionnaire need to be skipped and interviewers need to page back and forth through long and cumbersome paper questionnaires. It is then very easy for routing errors to occur – by answering a question that is supposed to be skipped, or by skipping a question that is supposed to be answered. Also, interviewers have to lug around large piles of papers which, of course, means that data can easily get lost without any electronic back-up.

Interviewers who conduct PAPI interviews need to be highly skilled with the ability to build rapport with respondents. They need to ensure that a good quality job is completed by the deadline. PAPI is often used to reach target groups in remote areas and interviewers will need to be able to access these respondents. Sometimes respondents are illiterate, or the research topics are of a sensitive nature – in these cases interviewers will need to be able to handle the situation with the necessary empathy. Unfortunately, data integrity might sometimes be compromised if different language skills affect how well the interviewer and respondent understand one another.

Also, PAPI interviewers often have to singly endure unpleasant and even potentially dangerous situations and also approach strangers. Personal skills are important because respondents cannot be influenced in any way and interviews need to be objective.</span></span>

The PAPI process can be long, arduous and costly. Paper-based questionnaires have to be printed. After fieldwork, questionnaires need to be checked for interviewer mistakes and thereafter be captured by trained data capturers. This is also an expensive venture. After the data have been captured, it has to be cleaned and only then can it become available. This entire process may take a couple of months.

It is clear that PAPI has some weaknesses, but it can also be beneficial, especially when conducted by skilled and proficient interviewers. Intellidex complements digital collection methods with PAPI for the right projects, particularly when respondents are senior business people with little time to engage with digital methods and open-ended responses are needed.