Foreign investors are heading for the hills – Magnus Heystek

Magnus Heystek argues that investment returns on the JSE versus foreign equities, when measured over periods from 10 years down to 2 years, have been abysmal, hardly beating cash or even inflation. He says the reality and the longer term return comparisons do not always agree with the often hopeful outlook of South African asset managers. He says he has been “bliksemed” by many in the media for advising predominantly offshore investing for local investors, but says he has never, as these commentators often seem to suggest, said “offshore at all costs”. Read more of his views in his article below. – Sandra Laurence

Ramaphosa presidency has been a failure for SA markets

By Magnus Heystek*

Magnus Heystek
Magnus Heystek

Last week during an interview with Alec Hogg, Kokkie Kooiman of the Denker Group (Rbn AUM), took a vicious little swipe at me and my views on the SA economy.

Asked by Hogg about the impact of the possible greylisting on SA markets, he said the following: “.. the nature of the beast. Heystek seems to only want the worst for South Africa.”

My first instinct was to ignore this cheap little dig, because I know where it comes from. Local asset managers are starting to feel the effects of outflows of capital. Last week Coronation reported an almost R60bn decline in UAM to R574bn, not much changed from the R599bn in November 2016. For an asset manager, growth is oxygen: without it you wither and die.

The fact that I have been writing about and warning of the bad things for SA for more than 10 years now has always been based on facts and an interpretation of certain trends, most of them negative for SA and the JSE-linked asset management. The outflows from the JSE over 10 years now has been massive, as has the under-performance of the JSE versus the world. Likewise, the rand/dollar exchange rate.

My only objective is to reflect the ongoing financial situation as best I can for my clients and family who all are still in South Africa, thankfully, but with the bulk of their capital invested globally.

Sleepless nights

It is not my commentary that is causing sleepless nights. The facts themselves are doing that, thank you very much.

A year ago, Leila Fourie, CEO of the JSE, was quoted on a financial website  saying she “was losing sleep at night” about the outflow of capital from the Johannesburg Stock Exchange. At the time money was pouring out of the JSE from both equities and bond markets in record numbers.

She couldn’t have had much sleep over the past 12 months as not only has the outflow continued, but has it increased year on year thus far in 2022. Figures from the JSE show combined outflows from the equity and  bond markets now exceeding R260bn, and is on par for the largest outflow on record.

What makes the situation even worse is that the cumulative combined outflow of money from the JSE (bonds and equities) since January 2018, when the new ANC-regime under Cyril Ramaphosa commenced, now exceeds R1 trillion rand.

This dramatic outflow stands in contrast to the barrage of optimistic commentary from fund managers and political analysts during the run-up and subsequent confirmation of CR as leader of ANC and soon thereafter, president of the country. Most were adamant that his ascension to the throne would be very positive for markets, the rand exchange rate and the economy in general. “At long last we have a businessman in power who understands the economy and markets better than the former cattle herder,” was the general refrain.

On TV, radio and on websites these rosy outlooks were repeated ad nauseum. Today, almost 5 years later, we can see these hopes and forecasts were built on flimsy foundations as they all have been massively over-optimistic.

In fact, the Ramaphosa-presidency has been an outstanding failure in terms of the performance of the currency, the stock exchange and flows of capital.

Most South Africans, whether poor or rich, have seen a loss of prosperity over this period of time. See below a chart and performance figures of the JSE versus cash and three offshore indices.

The JSE has not beaten inflation or even a simple cash-investment on the JSE over the 5-year period October 2018 to date. And against offshore markets, the performance was even more abysmal. Offshore markets have more than doubled over that period, despite the sharp declines so far this year.

For example: R1m invested on the JSE 5 years ago in various investments looks like this today:

ALSI:                                                                     R12 887

MI-PLAN ENHHANCED INCOME FUNDS         R15 124

MSCI WORLD                                                         R16 568

DOW JONES INDEX:                                              R17 404

S&P500:                                                                    R19,318

NASDAQ                                                                   R23 358

This also coincided with a decline in the ZAR/USD exchange rate from around R12,40 in January 2018 to more than R18/USD earlier this week.

Local financial commentators and analysts quoted in that same article were hopeful that the JSE would soon drop to levels which would attract foreign investors, on the basis that shares generally offered very good value.

But offshore investors, mostly large foreign investment companies and pension funds, clearly do not share these ever-optimistic views. Local fund managers are often the go-to-place to get quotes on the local market, and the answers always tend to be overly optimistic.

Hardly a week goes by that one doesn’t read some (paid-for) plug for the local investment markets, but the reality and the longer term return comparisons do not agree with these ever-hopeful outlook.

Investment returns on the JSE versus foreign equities, when measured over periods from 10 years down to 2 years, have been abysmal, hardly beating cash or even inflation.

Local not lekker anymore

Investors who swallowed the “local is lekker” mantra have very little to show for it in real terms. In rand terms their  after-inflation wealth has remained stagnant, but more worrying is that in global terms their returns have been negative.

Looking back in time, the correct asset allocation should have been 100% offshore and zero in SA. But somehow that sticks in the craw of local advisors and media commentors. It seems disloyal and unpatriotic, like supporting the All Blacks when they happen to be playing the ‘Boks in the RWC-final.

Someone is likely to “bliksem” you if you wave the Kiwi-flag.

I have been “bliksemed” by many in the media for advising predominantly offshore investing for local investors.  I have never—as these commentators often seem to suggest—said “offshore at all costs”.

In fact, for many people I’ve advised not to take money offshore. Charles de Kock from Coronation once called me all kinds of names at an investment conference in Cape Town, Barnard Beukman , editor of Beeld described as me a “pedlar of bad news” while—my favourite one—a well-known investment advisor called me a “financial pornographer”, scaring readers with my articles and views on the local economy. He has subsequently written a book on how to invest on offshore markets.

My views are merely views, but the fact that foreigners have pulled more than R1 trillion from the JSE over 4 years is a more serious reflection of the state of the SA economy, yet it is very rarely reported on. These foreign investors are very smart people, and they are very well informed. They make decisions on facts and not emotion.

Long-term damage

The ANC has done far more damage to the SA economy that most commentators would like to admit. Our infrastructure is collapsing in parts, our railways has been destroyed and our ports are now pulling down our exports. The long-term damage Eskom has done to infrastructure, confidence and overall mood of the economy, will one day be calculated, and it won’t be a pretty picture.

In the decade from 2001 to 2010 we were the darlings of the investment world. Money was pouring in, the rand was strengthening and we also hosted a very successful Soccer World Cup in 2010.

Greylisting

Foreign investors are also very alert to the upcoming issue of “greylisting”.

The media initially seems to suggest it’s not a big issue, or maybe they simply don’t know how to report the coming financial apocalypse in financial markets. Yet a recent study done by the IMF suggest that SA being placed onto the so-called grey list means a massive dislocation in local financial markets, with a sudden stop of capital flows—both FDI and equity flows- equal to or even exceeding the great financial crash of 2008 or the emerging market crisis of 1998.

And you can only put this at the feet of the ANC and their bungling of the economy. In a last-ditch attempt to avert the grey listed, Parliament hurried passed some improved pieces of legislation ( to control and prosecute illegal money flows etc.) but it was too late.

This much was said by none other than adv. Xolisile Khanyile, head of the Financial Intelligence Centre (FIC) last week.   ‘Being placed on the grey list has dire consequences”.

SA will know its fate later this month. If—as widely accepted—we do get “grey-listed” life WIIL change dramatically when the transfer actually takes place in February 2023.

The world of money will enter a whole new era where the rest of the world thinks every financial deal with a South African is potentially an act of money laundering/terrorist financing.

It might make sense to open your foreign bank account –and fund it—sooner rather than later. In February it might not be possible.

  • Magnus Heystek is investment strategist at Brenthurst Wealth. Follow him on Twitter @MagnusHeystek

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