Magnus Heystek: February’s probable greylisting of SA likely to spark a run on currency, shares, bonds

Fiercely independent financial advisor Magnus Heystek has turned even more bearish on SA assets after taking a deep dive into researching the implications of a threatened ‘greylisting’ of the country’s financial system in February 2023. Heystek says such action has never before been applied to a country of South Africa’s size and consequences are likely to be dire. He reckons it could be similar to the massive fallout experienced in December 2015 after Nenegate which, he says, started the slide into SA’s precarious position. In this sobering interview with Alec Hogg of BizNews, Heystek says the likely greylisting trumps all other factors for investors weighing up their options – and urges them to adopt an even higher offshore weighting for their savings.

Excerpts from the interview with Magnus Heystek

Magnus Heystek on if the bear’s got its claws pretty well tightened around market participants right now

No doubt about it, the year 2022 will go down as one of the worst for stock markets globally in history. And, you know, you can go back to many crashes and bear markets that you and I have lived through. But this one is particularly bad in the sense that no asset class has managed to protect your capital somewhere in our diversified portfolio, if you’re talking about global investing. And that’s really unusual because normally when you have, let’s say, the typical 60%, 40% equity bond spread, equities go down, bonds go up. So your portfolio is quite protected and vice versa. But for the first time in 67 years, the bond market is in a bear market. I’m talking about the US bond market. It’s now lost 21% of its value, which is, I mean, you’re talking to experts who say that they’ve never seen this, they’d never seen it coming, but we’re having it now. We have a bear market in bonds because since 1980, I mean you always have that bond market just going down and lower and lower. It’s always just been a backstop to any global portfolio. So this year, the MSCI is down 25%. Some countries are down 50%. The best performing country year on year is -15. So no place to hide, with the exception of small markets in the Dubai UAE region, which is driven by oil. 

It’s been an absolute bloodbath for investors. You’ve got the rising interest rate spectre in the United States. You’ve got this roaring dollar, which is just unbelievable how strong the dollar has been against everything. And then, of course, you’ve got the situation in Ukraine with Russia, where you have Putin threatening a nuclear war every now and then. It’s not been good for markets, has not been good for European markets. And of course, we were dragged into it after a brief rally. And commodities are supposed to succumb to it. And at the same time, you have signs of a military conflict between China and Taiwan, which is concerning people. You also have the absolute collapse in Chinese trade, which is also going to impact South Africa. And then to really make your day, South Africa itself is faced with a very idiosyncratic problem: the greylisting is coming, and what impact that could have on markets needs to be considered – so all round, t’s not great for market participants.  

On  whether things can come back up again, or is it darkest before the dawn? 

The South African market is driven by other stuff. I mean we have Eskom as another additional sector which by all accounts has probably pushed us into a recession, combined with the situation in China, which is our biggest trading partner. I still remain negative on these equities and I know that other people disagree. We just have to see what happens. But I think the risk in SA is substantially higher than any other part of the world. So I would probably start sniffing around places like Austria, Switzerland and even the United Kingdom. It’s all been massive dislocations in bond markets and equity markets and that normally in time, in the fullness of time, you say not a bad time to have got into that market after the crash. Most people get it wrong, and it can go down further. There is value starting to happen but it’s not going to be very quick unless there’s a deal between Ukraine and Russia. And that’s a big one. And it’s a non-financial thing, although it has tremendous financial ramifications. If there’s somehow a deal, that’ll be one of the signs, in my view, to start allocating some more cash to global markets. 

On the outflow of global investment funds from SA since Cyril became president in 2018 – a trillion rand – and the impact this has on an economy like ours 

Well, it does have an impact. You cannot deny that. And that’s one of the reasons why we’re not bullish on the US market. There’s simply too much money flowing out of our market. There’s no buying power. There’s no cash chasing assets up and pushing up the valuations because it’s all leaving the country. The calculations were done by one of our partners, DFM Global, who does discretionary fund management for some of our funds. I mean, I was shocked when I saw the numbers. It’s one of the things that I look at from time to time, but they basically show that for three consecutive years, the outflows have increased every year – and substantially – so both equities and bonds, very little money coming into the market. The calculation was done by the analyst Jason Nguyen back in 2018. There were some inflows in April, January, around about 2018. And since then it’s just been very, very negative. The JSE is feeling the fact that we’re not the favourite kid on the block, the global fund managers who drive this, this is not individuals, this is global fund managers have reacted to the negative situation in South Africa, the Eskom situation, the downgrades and they’ve moved their money elsewhere. And I spoke to one of these global fund managers a while ago and he said, South Africa keeps on scoring own goals the whole time. Every time they would like to allocate capital to South Africa, something happens either on the political field or the financial field, and then they pull back. It’s a combination of many things and it goes back to, you know, the Zuma days. But the changeover from Zuma to Ramaphosa we initially thought would be boom time and ‘Ramaphoria’ would kick in. It’s something that hasn’t happened; it’s a very bad time for South African equity investments. You haven’t beaten inflation, you haven’t beaten cash money and the currency has dropped by 50% or 45%. So the last five years have not been great for wealth creation for the average South African. 

On whether opening up electricity and the railway market to the private sector is moving in the right direction

I try to look for optimistic signs and I read all these optimistic forecasts and I question the assumptions that are used to make some kind of sense of what the heck is happening. And I’m afraid I just don’t see it changing, you know? Yes, electricity. But we shoot ourselves in the foot. We need to export stuff that the world wants. Transnet goes on strike and declares a force majeure. So we become unreliable suppliers of the stuff that the world still wants to buy from us. Transnet is an example. And then of course all the other stuff that happens and then the electricity issues, where decisions were just not made correctly or were ignored or swept under the table. And nobody takes accountability for those massive mistakes. We still have the same people in Cabinet, the same guys who are messing up. I can talk at length about the commodities and the mines and the mining rights issue, but we really have unskilled, unqualified people running very, very important portfolios, absolutely vital to South Africa’s exports, tax revenue. And we still can’t get it right. So we live in hope. But the reality is showing us something else that, you know, political short termism is ruling everything. And it’s always jockeying for power to satisfy the political infighting in South Africa. 

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