Magnus Heystek: What ever happened to Ramaphoria?

Magnus Heystek, one of South Africa’s best independent financial advisors, gives his thoughts on the fundamentals underpinning South Africa as an investment destination. Since Cyril Ramaphosa came into power at the beginning of 2018, there was fresh optimism that a change in leadership would shepherd improved economic and structural reforms in order for South Africa to flourish. However, the economy hasn’t managed to reboot itself under Ramaphosa’s leadership and the euphoria of a few years ago has long diminished. Magnus, who is outspoken in his views regarding South Africa, has been one of the most successful financial advisors as a result of his bearish viewpoint on South Africa and bullish sentiment regarding offshore equities. He berates local fund managers, whose performance over the last 7 years has been abysmal given the under performance of the local bourse. These fund managers used to lambast Magnus for his opinions on the local economy, however, its years later and these same fund managers have become awfully soft spoken. – Justin Rowe-Roberts

Read also: Does SA have any good asset managers? Here’s why their investment performance is so dismal – Magnus Heystek

A dismal 3 years for local investors

By Magnus Heystek*

It’s been just over 3 years ago since Cyril Ramaphosa was (a) elected as president of the ANC and (b) two months later became president of South Africa when Jacob Zuma stepped down on 14th February 2018.

The media and commentators couldn’t be effusive enough about this development. This was the ANC’s break from the 9 year period of corruption, stagnation and economic decline the country suffered at the hands of Jacob Zuma and his inner circle – or so we were all led to believe.

Between December 2017 and March 2018 the markets too, gave the new president the thumbs up: foreign capital poured into the country and the rand strengthened to as low as R11.40 against the US dollar while the JSE had a nice rally, which to some commentators and assets managers was the start of great things to come.

Goldman Sachs, the giant global investment bank, gushed that SA – and by implication the JSE – was going to be the “big emerging markets story going forward.”

In a special report written by Ron Gray, Caesar Maasry and Sara Grut, which was published widely, the giant bank could not be more flattering towards the new regime in SA. It expected the country’s growth rate to improve dramatically (it forecast 2,8% for 2018) , the rand to strengthen and massive inflows of foreign capital. They could not have been more wrong in their predictions. In the end the growth rate barely made 1% for the year and the inflow of money turned into a torrent heading the other way.

Ramaphoria
Ramaphoria (Cyril Ramaphosa). More cartoon magic available at www.zapiro.com.

This optimistic message was repeated by Colin Coleman, head of Goldman Sachs SA at a breakfast very soon after Ramaphosa became president.

Goldman Sachs is notorious for being overly bullish about SA and then getting it completely screwed up. Is this perhaps done to curry favour with the ANC in order to get juicy contracts? Just asking.

In the end the growth rate barely made 1% for the year and the inflow of money turned into a torrent heading the other way.

Locally, fund managers too could not be more bullish. You didn’t dare turn on any radio station or watch TV or read a finance site, without one or more local asset managers imploring investors to climb into the market as it could only go higher. “JSE to be best investment market in the world over the next 5 years,” gushed the one headline, while local fund managers quoted were unanimous in their praise for the new president

“There is little doubt that SA is in a much better place than before. The perception is that the new ANC leadership will root out corruption and boost the ailing economy,” said Steven Schultz from Momentum, quoted in the February edition of Money Marketing 2018.

Equally bullish was Izak Odendaal, economist from Old Mutual Multi-Managers who predicted a further strengthening of the rand based on the power shift in the ANC and the expected elimination of corruption in government and  the country’s parastatals.

But Ramaphoria did not last very long. In fact, it died a gradual death and it’s been a long downhill- slide ever since. The rand weakened over the period to a low of R19.40 during the Covid-19 pandemic and even now at around R14.70 is still substantially weaker than when CR took the reins.  The much vaunted flood of foreign capital into our market turned out to be a marketing myth. In fact, since Ramaphosa took over as president the country has seen a massive outflow of capital over this period of time, primarily out of the JSE. Total outflows since March 2018 to December 2020 (which saw a small uptick for the first time in 28 months) was in excess of R350bn. In 2020 alone some R250m was sold out of the local bourse by foreign equity investors.

Read also: Magnus Heystek: Investing in ‘cheap’ JSE is still a bad idea, no matter how you slice it

Commentators who dared to voice a dissenting view on SA’s prospects under the new-look ANC were  subject to scorn and howls of derision. No-one, it seems, wanted to delve a little deeper into SA’s rapidly deteriorating economic prospects.

I can well remember the editor an Afrikaans newspaper calling me a “pedlar of bad news” when I sent him an article to be published on his hallowed pages, pointing out that the euphoric giddiness did not match up to the crumbling fundamentals of the SA economy and society. Needless to say, the article was never published. In the end, I actually paid for the article to be published on Netwerk 24 so strongly did I feel that the news should not be suppressed.

Fortunately there are still independent websites that publishes my articles.

Throughout the past three years I’ve watched the one local asset manager after the other coming out with their “now is the time to buy the JSE” story-lines. On radio shows and websites these messages were repeated ad nauseum without any whisper of dissent or disagreement by the media house concerned.

At times it was actually embarrassing listening to these one-sided interviews, broadcast on the radio programmes sponsored by the investment house of the asset manager concerned.

I fully understand that asset managers need to drum up business for the funds they run. Growing assets under management is the alpha and omega for asset managers. Careers, salaries and bonuses are dependent on these flows. I have yet to listen to a fund manager tell an audience not to invest in his or her fund.

That should be the role of the media–were it independent -or independent financial advisors.

But what about the investors who make all of this happen?

There are certain sections of the media which should hang their heads in shame for allowing this one-sided portrayal of the news to happen. For the losers are the Mom-and Pop investors who place an inordinate amount of trust in the large investment  companies to whom they’ve entrusted their hard-earned money. It’s heart-breaking to hear and see investors showing me their statements on their RA’s, endowment policies and even discretionary portfolios where there has been very little growth in 5, 7 and in some cases 10 years.

Lack of real growth over 10 years

Some of SA’s largest unit trust funds have made their investors NO MONEY over 3, 5 and 7 years. I would have thought an interview or two with such fund managers would be instructive, but I have yet to see one appear anywhere in the media. Yet, some of these perennial under-performers are the sponsors on some of the most popular financial radio programmes in the country. That’s one way of making sure your poor performance is hidden in plain sight: sponsor them into obedience!

But have a look at the investment returns of SA-based investments versus comparable global investments over the past three years, as per the table below. I calculated the numbers with a starting amount of R10 000 3 years ago and what they would be in rands, about a week ago.

In the table which I compiled, I used a random number of local and offshore investment funds available to local investors on the various LISP-platforms. I specifically excluded the high flying tech, biotech and FAANG-stocks which would have shown an even larger difference in financial outcomes.

And instead of using percentage returns, as is the norm, I used the actual outcome in rands and cents, which is a far better way to measure fund performance. The returns do not flatter the local market in any way.

Readers can make up their own minds as to how poorly local investors have performed over the past 3 years.

The asset class most impacted by the deteriorating SA fundamentals was the local listed property sector, for many years the darlings of the local investment world. Investors who believed in the good-news story and bought bricks and mortar funds have 60% left of their investment today. This has particularly hit hard many pensioners who might perhaps ignore the drop in capital values but who rely on steady dividends for their income. But even that is now under threat as many property counters have reduced or stopped their dividends entirely.

One needs to admit this sector has been hit very hard by the Covid-pandemic, but the deteriorating trend was fully place before the first lockdown hit.

How much R10,000 invested 3 years ago is worth today

Can the JSE catch up to the bunch?

Can the JSE suddenly jump around and become one of the top-performing markets in the world again, as some fund managers from time to time suggest?

For this to happen many things will have to fall in place (and then some pure luck): a commodity super-cycle, foreign investors returning, more free-market policies from the ANC and an improvement in the operational ability of Eskom, to name a few. I leave it up to investors to decide whether some or all of these preconditions will eventuate over the next few years.

  • Magnus Heystek is investment strategist at Brenthurst Wealth, SA’s Top Boutique Wealth Manager for 2020.

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