Heystek: What needs to happen for me to change my mind about investing in SA

Magnus Heystek, a fiercely independent financial advisor and founder of Brenthurst Wealth, wrote a piece for BizNews this week where he argues why South Africa has reached the “suddenly” stage of a financial crisis. In this interview Heystek went into greater detail on his article, discussing various alarming trends, including the collapse of the residential property market, the depreciation of the currency, poor stock market performance, and declining consumer confidence. So what would it take for SA’s arch bear to switch sides? Quite a bit, as you might imagine – but it’s not impossible. – Alec Hogg

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Relevant timestamps from the interview

  • 00:00 – Introductions
  • 01:38 – Magnus Heystek on South Africa’s property market
  • 06:33 – Heystek on whether an opposition win in the 2024 national election would change his outlook on SA investment
  • 09:09 – On the NHI Bill
  • 13:10 – On the impact of a possible oil/gas boom on SA’s economy
  • 14:57 – On the causes of SA’s economic decline
  • 16:20 – On the importance of off-shore investment
  • 19:41 – On Old Mutual and other SA fund managers
  • 22:07 – Concludes

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Edited transcript of the interview

Alec Hogg: Magnus Heystek is an avid reader of the renowned author Ernest Hemingway who famously wrote: “You go bankrupt gradually, then suddenly.” Well, Magnus has been reminding us of this quote since November 2015, and now he believes that South Africa has reached the “suddenly” stage. We’ll find out what that means. Magnus, you sent through your latest contribution to BizNews last night, and it immediately caught my attention and disrupted my Sunday evening reverie. Thousands of people have already read it, and you’ve made some compelling points. But before we delve into that, I want to share my dream with you. One day, I hope to hear you say that South Africa is once again an investable country. That’s something we can explore later in this conversation. Unfortunately, the calamity we find ourselves in doesn’t seem to be improving. Let’s begin with the residential property market. Recently, I came across data showing a 17% year on year decline in mortgage grants. In your article, you’ve presented even more alarming numbers, especially at the top end of the market.

Magnus Heystek: I actually wrote this article a week ago. I almost didn’t send it because, after doing my research and writing it, I hesitated. But I believe someone needs to point out the obvious. The media, collectively and individually, are bombarded with negative news. But we owe it to our audience to present the facts and let them interpret those facts for themselves. These are not my opinions; these are factual observations. I was horrified when I came across FNB’s latest report about ten days ago. The property market, especially at the top end, has collapsed. It’s simply collapsed. Properties take months and months to sell, and when they finally do, the selling price is usually 20-25% lower than the initial listing price. The statistics over the past five years clearly show that property prices above R1.5 million up to R5 million and above have declined by 30% in real terms. This means a significant amount of wealth has been eroded in South Africa on average. While I acknowledge that the Western Cape is an exception, reports indicate that Johannesburg, Pretoria, Durban, and even Polokwane are experiencing even worse conditions. Many people I speak to share their struggles to sell their properties, including large properties that were once part of their retirement plans. These properties have now become burdensome assets to offload. There are multiple factors contributing to this situation, including emigration, rising municipal taxes, and overall poor management of municipalities, which affects infrastructure, roads, and water supply. This financial predicament extends to many individuals. Some might argue that these are wealthy individuals who can handle it, but it remains a fact nonetheless. Meanwhile, the hits just keep coming. The currency exchange rate has depreciated significantly over the past year, going from R14.50 to R19 against the US dollar. The stock market enjoyed some gains during the Russian invasion and the COVID period, driven by commodities, but that trend is now quickly reversing on the Johannesburg Stock Exchange (JSE). In the last six months, the JSE has once again become one of the worst-performing markets globally. Additionally, BER’s economic research reveals that consumer confidence is at a 44-year low, which spills over into confidence in buying property, cars, and durable goods. It’s a combination of all these negative factors hitting us simultaneously, including the challenges faced by Eskom and the country’s foreign policy positioning relative to Russia and Ukraine. Consequently, South Africa is currently under immense financial and psychological pressure. We don’t even discuss it enough, but if you carefully analyse the mortality rates among insured individuals, you’ll see a sharp increase in murders and suicides. This ongoing situation is taking a toll on the mental well-being of many South Africans. Therefore, it’s not a great time to comment on these issues positively. Nevertheless, I hope that one day I’ll be able to tell you that South Africa is once again an investable country. I’m not afraid to say that, but as of now, I don’t see it happening, Alec.

Read more: Heystek: SA’s slow decline hits “suddenly”; ANC leadership guarantees more calamity

Alec Hogg: Indeed, as a nation, we have shown great resilience, and we can be thankful for that. You mentioned that the hits keep coming, and that has been the case for quite some time. Now, here are a few things I’d like to discuss. We have an election coming up in 2024, and many pundits predict that the ANC and the EFF will gain enough support to continue the current state of affairs. However, some of us believe that the people are smarter than that and that we could see a change in government. If that were to happen, would it change your perspective?

Magnus Heystek: Absolutely. The political landscape is a significant factor right now. If there is a possibility of increased support for the DA or a viable coalition that could potentially unseat the ANC, that would be a game-changer. Most South Africans I know are loyal and would love to invest in property and start businesses again. This is their home, and they are not going anywhere. However, the current environment is extremely negative, and the ANC continues to stumble along, engaging in corruption. Politics is one aspect, and then we have Eskom. Can they actually fix Eskom? Ultimately, there needs to be a fundamental change in the government’s approach to the economy. Their vision seems to be a centralised state-controlled economy. I watched your interview with Dr. Crisp about the national health insurance (NHI), which is on the horizon. If it is not handled well, it could have severely negative consequences for our future. These are all the negatives. Yes, we could potentially be rescued by another commodity cycle, as they tend to turn around. The agricultural sector has performed well, but there are numerous uncertainties. It’s crucial for investors and ordinary South Africans to be aware of these challenges. Apart from outlets like yours and a few others, I can’t find any mention of the property market collapse in traditional media outlets. It’s as if it doesn’t exist, but the facts are undeniable.

Alec Hogg: It’s a peculiar phenomenon, perhaps people are choosing to close their eyes to the reality or they don’t want to be labeled as negative. But your point about the NHI is interesting. I’ve been thinking about it a lot. The feedback on social media regarding Dr. Crisp’s interview has been mixed. Some responses demonstrate ignorance, while others acknowledge that in theory, the NHI isn’t a bad idea considering the current state of affairs and the rampant corruption. However, the concern is that the ANC will only make things worse. It leads me to think about the Western Cape. It has shown that with proper governance, things can be done correctly. The public hospitals in the Western Cape actually function and deliver results.

Magnus Heystek: I believe that will be the litmus test. Your interview with Dr. Crisp was quite revealing when you asked him about corruption and cadre deployment, and he refused to address those issues, saying it’s not his responsibility. That’s the biggest concern for most South Africans. The ANC has a track record of mishandling virtually everything: water, roads, electricity, state-owned enterprises. We saw during the COVID crisis how they mismanaged emergency expenditures. And now they present this grand scheme, ten times bigger than Eskom potentially in terms of reach, money, and impact. But when you ask the critical question about corruption, cadre deployment, they evade it and say it’s not their concern. This makes people question Dr. Crisp’s credibility. The ANC has a history of almost 100% failure in everything they touch. Now they propose a scheme that sounds fantastic in theory, but can it actually work? What will be the reaction from doctors, healthcare practitioners, hospitals, and medical aids? If it’s not handled correctly, it could be a tremendous calamity. Today, I read an article in the Daily Telegraph by an economist discussing the dire state of the national health insurance in the United Kingdom. It’s collapsing, affecting the economy due to increasing bureaucracy and taxes, and people have to wait six months to see a doctor. What makes us think that won’t happen in South Africa? I believe it will be a repeat of that situation if we follow the same model.

Read more: Dr Nicholas Crisp – Case for NHI (and why vested interests are pursuing Operation Fear)

Alec Hogg: Yes, we mustn’t overlook the demographic differences. The UK has a different demographic, where they are keeping older people alive for much longer. So, it’s a different situation.

Magnus Heystek: That’s true. What I personally have a problem with is why take away my choice? If I want to belong to a medical aid and I’m willing to pay for it, don’t strip away my freedom of choice, regardless of the cost. It’s like buying an expensive car or buying expensive food. Don’t impose it on me through the state, saying we all get the same treatment. That’s where I believe there will be a backlash from ordinary people and even the remaining wealthy individuals in South Africa. They will see it as the last bastion falling and decide to leave the country, unwilling to live or let their children grow up in an environment where the medical system has collapsed.

Alec Hogg: I interpreted it differently. Dr. Crisp mentioned that there will still be private healthcare available. But it’s a complex subject that will take years, if not decades, to unfold, as Ryan Noach from Discovery has explained. There will likely be strong opposition from the private sector in the courts due to the trust deficit with the government. Now, let’s discuss something else: the potential oil and gas boom. James Lorimer, the shadow minister of minerals and resources, who isn’t an ANC supporter, has done extensive research on this. He likens the opportunities in the oil and gas industry to the transformative gold and diamond booms in South Africa’s history. What if he’s right? What if we see South Africa become a major global player in oil and gas?

Magnus Heystek: If an oil and gas boom were to happen, the hope is that the ANC would handle it differently than previous governments handled their booms, such as the gold and commodity booms. They should set aside funds during prosperous times, creating a sovereign wealth fund like Norway and other Scandinavian countries have done. However, there’s a danger that the ANC or any party in power might see the boom as a license to spend more money, which is concerning. The key lies in how the politicians in charge of the resources manage and allocate the funds. If spent wisely on education, healthcare, and other essential areas, it could be positive. But if history repeats itself and the money is looted, as seen with the 30% quota, it will lead to negative outcomes.

Alec Hogg: Indeed, the trust deficit is significant now, considering the ANC’s performance over the past three decades. The Zuma-nomics period and State Capture were truly appalling. It’s something that weighs heavily on people’s minds. Now, returning to the concept of “gradually then suddenly,” Magnus, do you believe many South Africans are experiencing the “suddenly” stage? You mentioned a significant decline in the number of South African millionaires, from 44,000 to 30,000. Is this primarily due to the weakening Rand or driven by immigration?

Magnus Heystek: It’s a combination of factors. Many South Africans are internationally mobile, seeking better opportunities abroad and then returning. However, toxic politics, BEE (Black Economic Empowerment) ratios, and the perception that the government discriminates based on race against their children and grandchildren for the actions of their forefathers are driving people away. They don’t want to live in such an environment. They set up structures, move their money, and establish businesses in countries like Australia, New Zealand, and Mauritius.

Read more: Discovery Health CEO challenges NHI, begs closed door ANC to open its eyes and ears

Alec Hogg: So, the idea is to stay in South Africa but keep your money in a safe, offshore destination. Is that part of the philosophy? Protect your assets by moving them to a stable, hard currency environment where the risk is lower?

Magnus Heystek: It’s not just about safety and lower risk; it’s also about better returns. This investment philosophy has been sound for the past 30 to 40 years in most countries worldwide. For example, Australians have a significant percentage of their assets invested globally, as do the Swiss and Germans. Americans, with their large domestic economy and leading tech companies, tend to be more insular. However, smaller countries like South Africa benefit from diversifying their investments internationally. It’s common sense. Currently, there’s a massive boom in AI (artificial intelligence) companies like Nvidia, Apple, and Microsoft. South African companies don’t offer exposure to these industries. To invest in them, you need to go offshore or use asset swap funds like the Signia Fangs Fund, which has seen a 70% return in the past six months by investing in offshore companies. The same principle applies to investing in oil fields, genomics, or any other sector. It’s a sound investment philosophy. There has been a long-standing debate between local and offshore asset management, with each side presenting their chosen statistics. However, it’s crucial to have a healthy allocation to dollar-denominated assets, regardless of whether you plan to leave the country or not. In the current climate, with many young South Africans leaving, you may face expenses denominated in dollars, such as visiting them or covering travel costs. If you have invested solely in Rand, you will fall short. That’s why a healthy exposure to dollar-denominated assets is necessary.

Alec Hogg: You’ve always been independent, Magnus. I’ve known you for 40 years, and you’ve never shied away from speaking your mind and doing thorough research. Interestingly, financial institutions that previously ignored the realities are now starting to acknowledge them, or at least that’s what you suggested in your column for BizNews. There seems to be a diverse strategy among companies like Old Mutual, who are not fully accepting the realities, and Coronation, who are taking a different approach. Could you elaborate on that?

Magnus Heystek: It’s important to understand that asset management companies and investment firms are businesses, and they have their interests to protect. Old Mutual, being a traditional life insurance and pension fund manager, has a large portion, around 80 to 90%, of their assets invested in South Africa, with only a small offshore exposure. On the other hand, younger firms like Ninety One, Coronation, and Allan Gray don’t have the same legacy assets, which gives them greater flexibility. Ninety One, for instance, has been an offshore company for a long time, so they can freely discuss both local and offshore markets. It doesn’t matter where they manage your money. They have been very successful in this regard. I found it interesting that Coronation, one of our top asset managers, has increased their offshore exposure to 45% of their allowed offshore allowance over the past 12 months. They have even closed their international feeder funds, meaning that they and their clients have moved their investments offshore through Coronation structures. I believe you would find a similar approach with 91 and Allan Gray. Smaller fund managers have to defend their books, but to summarise, if you don’t have a substantial offshore arm or connections to global offshore companies to offer your clients, your company will struggle in the current environment. You cannot rely solely on the JSE, which is shrinking both in real and nominal terms. Clients demand a global offering, and if you don’t provide it, they will turn to companies like Templeton, Vanguard, and BlackRock. That’s exactly what has been happening. Old Mutual, I believe, has suffered significantly by not being able to offer offshore products to their clients, while Ninety One, Coronation, and Allan Gray have been successful in providing offshore options.

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