Four scary reasons foreign investments will outshine JSE

EDINBURGH — Magnus Heystek is the former journalist behind Brenthurst Wealth Management. Unlike many in the the investment industry, he has never been afraid to speak his mind or rattle the financial services sector cage. In the latest Brenthurst Wealth Management newsletter, Heystek and team have outlined how billions of rands have flowed out of South Africa during the years under Jacob Zuma. Worryingly, this trend is set to continue. The investment advisors outline four reasons funds will continue to flow out of South Africa – and why you should seriously consider having most of your wealth offshore. For more, read Under Zuma and friends, a staggering R400bn has left SA and Magnus Heystek: Everyone is paying price of wealth destruction. – Jackie Cameron

From Brenthurst Wealth Management

The local investment industry, until recently, was not a great proponent of offshore investments. They only became cheerleaders for offshore investments when they could not hide the massive under-performance of the JSE versus global investment markets anymore. The reason is simple: it makes more money with local as- sets under management as the fee structure of international fund houses is substantially lower than local funds. The local asset industry has one of the highest cost-structures in the world and therefore it stands to reason that local investments are preferred.

As an example, the recently launched Brenthurst Wealth Global Equity Fund, which only invests in exchange traded funds (ETFs) has a total costs structure of just over 1%, compared to 2-2,5% of the more popular offshore funds owned by SA companies.

Another reason why the local industry does not strongly recommend offshore investments is the fear (a real one) that the money taken offshore will be invested with international competitors. This fear is real as many of the best-performing sectors in the world (health care, technology, 4th industrial revolution funds) do not feature amongst the SA-owned companies, mainly due to scale.

Most investors know by now that the year 2018 has turned out to be a “annus horribilis” in many respects. The economy has slumped into a recession (two quarters of negative growth), unemployment has reached a new record high of almost 28% of the labour force, the rand weakened from R11.50 to lows of R15.70 earlier this year, and returns on the JSE have been negative by 16% so far this year.

Read also: Magnus Heystek: How to grow your wealth in 2018 – avoid Top 40 and head offshore

The Medium Term Budget Review delivered by the new finance minister Tito Mboweni further revealed the depth of SA’s fiscal problems. SA’s total debt, now standing at around R3 trillion, already costs taxpayers an estimated R158 billion per year in interest costs alone. Any further downgrade by Moody’s will lead to an increase in interest cost in order to service this debt and potentially a further outflow of foreign capital.

The SA Reserve Bank earlier this month released its second annual financial stability review and highlights the following risk factors of having a “high” probability of happening:

  • Decline in global economic activity.
  • Uncertainty about land expropriation which raises uncertainty about property rights which could lead to uncertain investor sentiment.
  • Governance issues at State Owned Enterprises and possible bail outs which could exacerbate SA’s already fragile financial position.
  • Consumption expenditure constrained by VAT increases and high petrol prices.

We would love to tell you that things are about to get better and that the weak performance on the JSE, in particular, will suddenly turn around and start galloping ahead. We simply do not see that in any piece of economic statistic at this point in time. However, we will be the first to inform you when we start seeing any green sprouts of an economic revival. For the time being we remain underweight SA equities and overweight SA cash, and global equities.

As advisors we have been consistent in our recommendations to our clients to reduce local exposure and increase offshore exposure.

To some clients, who have an international lifestyle we have recommended a 100% offshore exposure, which has been a great recommendation. Have enough cash in SA (which earns a high interest rate) to fund local liabilities and have the balance of investment portfolios invested fully offshore. We think that this trend will increase over time as investors become more accustomed to offshore investments, despite the short-term volatility at times due to the vagaries of the SA rand.