Magnus Heystek: Implement Plan B to avoid Vicennium Horribilis

The hard-hitting Magnus Heystek starts the year questioning the sustainability of the economic conditions in South Africa. The past 10 years South Africa has vastly under performed relative to global markets, with the JSE All Share Index climbing a mere 3% per annum. This while global markets, specifically the US indices, have been climbing in excess of 15% per annum in what has been a goldilocks era for equity markets. South Africans are poorer today than they’ve ever been relative to the rest of the world. Magnus also touches on the topic of emigration, which is increasingly unaffordable for South Africans, given the consistent weakening of the rand. – Justin Rowe-Roberts

Will our Decennium Horribilis turn into a Vicennium Horribilis?

By Magnus Heystek*

IT was in 1992 that Queen Elizabeth,  head of the British monarchy, looking back at the year just passed, uttered these famous words:

“1992 is not a year to which I shall look back with undiluted pleasure … it has turned out to be an annus horribilis.”

She was, of course, exasperated by the things her children were involved in including Prince Charles, Princess Ann and even in those years Prince Andrew.

Queen Elizabeth is no longer the monarch of the Republic of South Africa, but if she were, she would surely have been entitled to comment on the “decennium horribilis” which her former colony had to endure over the decade 2011-2021.

For those who are even worse at Latin than me, decennium refers to a period of 10 years or a decade. Vicennium – heaven forbid – refers to two decades.

For almost all South Africans the decade from 2011 to 2021 has been horrible, a financial, political and economic blow out of almost unprecedented range and effect. And without urgent and fairly fundamental changes to the way the economy is being managed, do we run the risk of experiencing another decade of such financial and societal collapse. Slowly but surely.

As I try and explain, without the ANC out of power and away from any spigot of state/provincial or municipal money, could we sink even deeper into the morass, heading closer to being a failed state. I see a lot of political commentators are confidently forecasting that the ANC will be gone after the election in 2024 (Dr. Piet Croucamp, amongst others), but I am not so certain. I think anyone who thinks the ANC is just going to hand over power and slink away into political oblivion lives in cloud-cuckoo land. An ANC/EFF-tie up is a certainty and with that, even more political looting of state and civil coffers to feed the hungry beast.

Soccer World Cup aftermath

But let’s go back to 2011 to get a sense of how far we have fallen in such a short space of time. When the calendar flipped over into  1st January 2011 we were still basking in the after-glow of hosting the hugely successful Soccer World Cup in 2010 with the final taking place on 11 July 2010.

Our country was awash with foreign tourists, we were the media-darling of more than just the sporting world and as South Africans we were also quietly very cocky and self-assured that we managed to pull off the largest sporting tournament in the world without a major problem.

Waka Waka: This was our time. Come 2011 and come the future.

The economy was growing very solidly, SA had an investment rating from all the three major credit agencies and most of the major financial indicators were flashing a steady green, with a little bit of amber here and here. The JSE actually had a very good year in 2011 and was one of the top-performing markets in the world.

A mere 10 years later and virtually ALL these indicators are flashing red or amber. The ANC government is seemingly oblivious to the strident calls from global agencies, such as the International Monetary Fund (IMF) which as recently as this week (again) urged the government to implement radical changes to the way to economy is managed.

Time and space does not permit a full breakdown and analysis of how we featured on all the major economic indicators from 2011 to end 2021. Just read my articles going back to 2013 on this and other websites. It’s all there in black and white.

Let’s take the rand/dollar exchange for starters.

In January 2011 I could with R1m buy myself $134,000. Today, such a transaction will only put $64,000 into my pocket. As an importer I pay so much more for my goods or, I just get so much less for the same amount of money. Not by an inflation-adjusted reduction, but by a massive decline of more than 50% in less than a decade.

Ten years ago I could probably afford an average house in the USA with my R1m. Today, to the drop in value of the rand and soaring US property prices, I can only buy a quarter of the house, or thereabouts.

Lest one thinks that it only effects the well-to-do, that is simply not the case. From the rich to the poor pay more for any imported goods such as oil/petrol/diesel, medical devices, cell phones, motor cars and the like.

The price of motor cars has been rising at double the inflation rate for over 40 years now, which is one reason why annual new car sales has been on a decade long-decline.

The performance of the JSE also started to decline against the rest of the world. First, this under-performance was against the roaring developed market stock indices, Wall Street in particular, but also in recent years against its emerging markets peers. Let’s take the same R1m 10 years or so ago. In short, over a 10 year period the JSE has returned just over 3% per annum while the S&P 500 as been growing at 16% per annum over the same time. The MSCI world index grew by 13% per annum over the same time.

R1m invested into the Allan Gray Equity fund in January 2012 gives me an amount of R2.5m. Not bad, but only giving you back your money after inflation and costs. The same investment in the Franklin US Opportunities fund, a US based equity fund today gives you R9.8m in your pocket. You can buy almost 4 times the house/car/luxury goods than you can today when compared to SA’s largest equity fund.

And if you had the foresight to invest 100% into the Nasdaq your R1m would have turned into R15.7m today.

At first it was performance only, but in the second half of the decade just passed, something more ominous started happening: new listings on JSE virtually dried up while a large – scale delisting of companies started, initially quite small, but which has since then turned into a torrent. Over the past decade about 143 JSE-listed companies have either delisted or moved their listings elsewhere.

This has happened in the midst of a raging global bull market (2009 to date) and with literally thousands of new listings all over the world during the same time. Foreign investors have also been heading for the hills, with about R650bn moving out of the JSE over the past 5 years.

Bonfire of bad news

What can I add to this bonfire of bad news over the past decade?

  1. SA’s growth rate has dropped to an average of 1,2% per annum, the lowest average returns outside of a world war scenario.
  2. SA’s unemployment rate has risen from an already high 23% of population in 2011 to 42% today. In all, more  people today are unemployed than those who are employed..
  3. The number of people receiving some kind of state-assistance is now in excess of 18 m people.
  4. A basic income grant for all is on the cards.
  5. Vast swathes of the country’s infrastructure has already been destroyed including our rail network which, in years gone by, was the best in Africa. Eskom’s debt is now in excess of R400bn while State Owned Enterprise’s debt has ballooned to R692bn by December 2021.
  6. SA’s national debt owed by government is R3,92trn as of today, almost R1trn more than just two years ago..
  7. SA’s commercial and industrial property markets have now shown zero growth in 10 years, courtesy of collapsing municipal infrastructure and rapidly rising administered prices by municipalities across the country. Lesser-informed and friends and family severely doubt me when I point out that the value of our beautiful (some of them) shopping centres scattered around the country’s major cities, have experienced declines in value ranging from between 30% and 80% in some instances.
  8. The return on SA’s pension and privately managed retirement funds have been strangled by an antiquated regulatory system (reg28) which prescribes a maximum of 30% offshore (currently; it was 25% until recently.) The end result thus far (Reg 28 was introduced in 2010) is that most members of these pension funds have had to be content with returns barely beating inflation after all costs and fees have been deducted. This while the rest of the world has enjoyed a tremendous stock market boom since 2010. Add to that equation the boom in residential property prices all over the world (US residential property prices have, on average, double over the past 10 years),

The SA residential property market, by comparison, has been moribund with average prices showing declines in real terms of about 23% since the peak in 2008 (Source FNB Barometer) and by about 55% when prices in US dollars.

In short: SA and its people has become very poor in per capita terms, while even the so-called rich have suffered a sharp decline in global purchasing power unless that have moved a large deal of their money offshore or into asset swap funds.

To emigrate or not?

That brings me to my final point: emigration. After the July riots in KZN/Gauteng I and probably many wealth managers across the country have had some serious sessions with their HNW clients about upping and leaving. And I think many of these discussions have ended with the realisation that (a) unless there are some familial links to a country, most countries in the world actually don’t want South Africans and have been putting up barriers to entry (New Zealand / Australia / Canada etc.)

In addition, even a fortune of say R50m to R100m in South African terms, does not leave you with much after you’ve bought a house or apartment, two cars and capital to fund a monthly income of say $5,000 per month. Interest rates are zero, which means you have to draw down from you’re your capital, either in SA or abroad.  A stock market decline of 20-40% will quickly wipe out a lot of that capital, making the numbers even more unattainable.

I don’t have any statistics to back me up  as yet, but I think the massive outflow of High-Net-Worth Individuals (HNWI’s) has slowed down considerably. Instead, the western and southern Cape has become the go-to areas for affluent people and their families wanting to escape the collapse of almost everything in the north of the country.

For the second year running I have been spending my Xmas-break at my apartment at Val de Vie just outside Paarl, probably the premier residential estate in SA.

I have spent many a day in the pool or gym chatting to “inkommers” – newly arrived fellow South Africans moving into the estate, if they can find something to buy. It really feels surreal but the developers have virtually run out of land to sell while there is a scramble for rental houses.

I am often offered R25,000 per month and more for my 2-bedroomed apartment, which in Johannesburg or Pretoria will afford you a mansion on one of the many over-developed golfing estates. But people and their families prefer to be in the Paarl area with its great schools and a host of outdoor activities.

It seems to me that the new Plan B is to move to the Western/Southern Cape while getting as much investments offshore as possible, leaving enough in SA bonds or enhanced income funds for income-requirements. The lifestyle SA offers – mostly in the western Cape are still incomparable to what can be enjoyed and afforded elsewhere in the world.

Younger people, especially professional ones with their young families, are still heading offshore in great numbers, but they haven’t made their fortunes as yet and would also like to explore the world and its opportunities. Many will leave, some will even come back.

The next 10 years

Ten years is a long time and I have no clue what the Royal family will get up to. The ANC, on the other hand is far more predictable and I offer the following:

It will try and increase its spending to stay in power or do a deal with the EFF and it might still succeed one more time at the 2024 general election. Then the already horrid state of SA’s finances and infrastructure will go into a free fall. I have become particularly bearish on the currency as it has remained relatively stable (surprisingly) over the past 5 years or so, but a tightening of US quantitative easing with higher interest rates globally, could hurt the rand bulls very soon.

Don’t wait too long to implement the real PLAN B soon. That opportunity too could be gone very soon.

*Magnus Heystek is investment strategist at Brenthurst Wealth (www.bwm.co.za). You can follow him on twitter @magnusheystek.

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