Political turmoil, a weakening rand and credit downgrades have hit South Africa’s economy hard. And South Africans – compared to their global counterparts – are becoming poorer as a result, according to Magnus Heystek of Brenthurst Wealth. The risk is that SA will likely become poorer and Heystek argues that if it weren’t for Naspers, the local stock market performance would be far worse off. Looking offshore then is increasingly becoming a bigger focus area for South African investors as they deal with third world risks and first world returns in their own home market. And with the local political situation heating up towards the key December ANC elective conference, it looks like the roller coaster ride that is South Africa’s economy is about to become more intense. – Gareth van Zyl
By Magnus Heystek*
Offshore investing has been a cornerstone of the Brenthurst Wealth strategy over the past five years and more. We started recommending greater offshore exposure in around 2011 at about the time the commodity boom came to an end. We actively promoted this recommendation, a long while before it became a general theme amongst wealth and investment companies.
Our initial argument for making a case for greater offshore exposure was met with great resistance from existing and potential new clients, with many fearing a repeat of previous cycles of offshore investing that ended in tears for many investors.
However, an analysis of the relative investment returns over the past five years (and even more) clearly shows that offshore returns have been double and in certain cases triple the returns of comparative asset classes in South Africa.
In short: those investors who did not increase their offshore investment exposure in recent years have suffered a tremendous opportunity cost and in some cases, particularly over one, two and three years, have not seen any real increase in the real value of their investments in rand terms.
Add to this equation the fact that the SA residential property market has not, on average, grown in real terms for almost nine years now.
The net result is that without any meaningful offshore exposure most South Africans have suffered a sharp decline in the real value of their overall wealth, not only in US dollars returns but also more recently in rand terms as well. In short: South Africans are becoming poorer at an alarming rate.
It is our view that this situation won’t turn around any time soon and, in the face of more credit downgrades by international credit agencies later this year, the situation could get even worse.
Enclosed find an informational chart which has not been published widely in South Africa. The reasons are not hard to find: it does not tell a good story. In reality, it tells a shocking story but one which has implications for each and every South African investor!
Investment returns on the JSE over the past five years have badly lagged the returns (rands as well as USD) investors earned on the major global markets over the same time. If the investment was a marathon (which in certain instances it is), the South African investment market (as represented by the JSE All share-index) would be running stone last at the moment, when compared to the major regional groupings in the world. They are the US, Europe, Asia (ex-Japan) and Europe.
Even more worrying is that over the past three years – and in particularly since the Nenegate-saga in December 2015 – the JSE started to badly underperform against its peers in the Emerging Market Index, despite being one of the largest constituents. So the argument that emerging markets have been underperforming against developed markets is only partly true in the case of South Africa.
SA is now not only losing ground (in investment terms) against developed countries but also against its peers in the emerging market space. This is deeply disconcerting and something that is hardly likely to have been missed by overseas investors.
A further downgrade of SA’s global and local credit ratings by Moody’s — which is expected in the near future — could lead to the withdrawal of substantial amounts of money from SA’s capital markets, especially the bond markets.
As it is, SA’s equity market has experienced severe outflows of capital over the past 18 months and an estimated R163bn has been withdrawn from the local market during this time.
This partially explains the sideways movement of the JSE over three years. During this time the JSE All Share Index has bounced around between 48 000 and 54 000 with very real upward movement in average prices. The JSE has not managed to beat or match the average consumer price index (CPI) over the same period of time, the first time this has happened in many years. Again, investors with the bulk of their assets held on the JSE via pension funds and stock market portfolios need to take note of this development.
Naspers has been a significant driver of the local bourse, as this company makes up almost 20% of the market capitalisation of the JSE. Without the influence of Naspers on the index over this period, average returns would probably have been negative.
This has happened despite the fact that about 65-70% of the earnings of JSE-listed companies emanate from their offshore operations. The JSE — which is a large listed company in its own right — would like investors to remain invested in the local market, but the fact is that such an investment strategy has not been very successful of late.
So why then this large under-performance?
The first is that mining and mining holding companies make up a great percentage of those companies, but that uncertainty about mining rights is causing large foreign investors to stay away from this sector.
This was evident in the recent statement by Neal Froneman, CEO of Sibanye Gold, when he said that his company “would not invest another cent in South Africa” until the government “gets its house in order”.
Froneman made this statement on the 3rd of May in New York when Sibanye received approval for its $2bn takeover of Stillwater Mining, the largest platinum producer in the US.
Quite telling was a quote from a foreign investor who attended the World Economic Forum Africa in Durban last week: “We can choose from over 200 emerging and developing countries to invest in. We heard nothing at the conference to entice us to consider an investment at the present time. SA offers us first world returns with third world risks” (as quoted in the Huffington Post, 4 May 2017).
The third world risks he was referring to was probably the recall (from an international roadshow in Britain and the USA) and overnight firing of Pravin Gordhan as finance minister on the night of 31 March 2017 by President Jacob Zuma and his replacement with Malusi Gigaba, a Zuma-acolyte who has had disastrous stints as cabinet minister in two other key departments. One of Gigaba’s first decisions was to appoint Professor Chris Malikane as his economic advisor. Malikane is a well-known Marxist economist at Wits University who openly recommends the nationalisation of banks, mining companies and life insurance companies as part of “radical economic transition”; the new thrust of ANC economic policy.
Gigaba was quick to point out that Malikane’s views were his personal views, which naturally is rubbish. There is no such thing as “private views” from an advisor, in our view. That is the advice he will be giving to is paymaster.
Further third-world risks the foreign investor must have been referring to was the clarion call by the minister for small enterprises Lindiwe Zulu who, at the same WEF conference called for land confiscation without compensation.
Truly independent advice
The investment world in South Africa is dominated by a handful of very large financial institutions such as Old Mutual, Sanlam. Stanlib, Liberty Life and Alan Gray. They have massive advertising budgets and they carefully control the flow of information to their clients and the general public. They are also very tightly regulated by the SA Reserve Bank, Treasury and Financial Services Board. Don’t expect them to rock the boat.
While they might not be allowed by law to give investment advice directly to the clients or the public, they exercise control by means of their massive distribution networks. They would prefer that most of the assets they control remain in SA. There is often the risk that once it leaves SA the money could end up with much-larger foreign investment companies.
Brenthurst is not aligned to anyone of the large investment companies and as one of the largest independent advisory firms (now with six offices countrywide and 13 financial advisors) we can offer truly investment advice without the constraint of “Big Brother” watching and telling us what to do.
Many of the top performing funds we have included in Brenthurst’s investment portfolios (FT Biotechnology, Fidelity Demographic and Health Care funds) are funds that we identified and had included in the range of funds our advisors can offer their clients. The biotechnology sector has been the best asset class in the world over many years and more and Brenthurst Wealth is probably the company with the largest exposure to this sector in the whole of South Africa!
South African investors not only face the normal and ever-present risks in markets that investors face all over the world. They also increasingly face potential massive state intervention in their personal wealth in the near future such as a wealth tax, increased exchange controls, property confiscation without compensation and many others too numerous to mention.
It is — in our view — foolish to disregard such potential threats as mere “political rhetoric” and that it “could never happen here in SA”. It might well never happen or not happen in a manner we currently foresee, but we remain steadfast in our view that an increased direct offshore allocation remains a very prudent and possibly farsighted investment strategy to consider.
- Magnus Heystek is an investment strategist and director at Brenthurst Wealth.