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The company Debtbusters recently calculated that average personal disposable incomes have declined by 43% over the past 5 years. The consumer is maxed out, overdrawn and overtaxed and salaries have not kept pace with inflation. We pay 40% more for anything imported – the most visible increase being the price of petrol, which is determined by a combination of global oil prices and the currency – not to mention the increased price of air travel and medical expenses. Unemployment for people under the age of 35 is as high as 65% and millions of people will probably never enter the formal economy, never have a stable income and will never get finance to buy a house or a motor car. How can South Africans possibly be in a much better position than four years ago – yet this is what many SA economists proclaim. Read Magnus Heystek’s views below to assess for yourself. – Sandra Laurence
The scourge of sunshine economists
By Magnus Heystek*
Whenever I travel the N12 from Johannesburg to the ORT Airport, at the point somewhere in Edenvale where the road splits (one going to Germiston) I’m reminded that the very large building at the intersection used to be named Gundle Plastics. It was a landmark building, still there today, but now occupied by some logistics company. Gundle Plastics is no more and the Gundle family have long ago moved on to running a successful hedge fund in London.
But what I remember from those days—sometime in the mid to late 80s, is that Gundle Plastics, despite its massive advertising sign on the company building, is no more: a victim of the 1985 recession. I also remember an interview soon thereafter with the owner Clifford Gundle on the reasons why the company failed. “Our economists”—he named them, but it’s not relevant for the purposes of this article—” were very bullish on the economy, and on the basis of their optimism we expanded greatly. The timing was very poor, as the economy went into a tailspin because of the 1985 unrest and interest rates went up sharply. We had no defence and liquidated”.
This little anecdote, although second-hand and based on newspaper reports, tells me that even in those years businesspeople and, for that matter, ordinary consumers, placed great reliance on the views of formal economists. They bought cars, houses, businesses and made investment decisions on the strength of what this or that prominent economist had said or forecast. Not much has changed since then, it would seem.
No wonder that almost every large bank and asset manager in this country has an official economist used by the media for commentary on just about every subject under the sun. Most media houses have a list of economists somewhere which are approached—the dial-a-quote phenomenon—for commentary. Some economists over the years have built massive, almost cult followings, such as the late Mike Schüssler and Dawie Roodt, for instance.
Hell, there is even an annual ”competition” amongst economists which has been run via Naspers and the Bureau for Economic Research at the University of Stellenbosch for more than 30 years. Winning such an award is a career booster and in the case of asset management companies, a major marketing tool. By and large, people place a lot of faith in what economists have to say.
Often, I have to deal or answer questions from clients and the public based on what this or that economist has said. Life-changing decisions are often made on that basis. Most economists tend to bunch up in the generalised area of economic forecasts. Then there’s the more radical economists who tend not to be working for mainstream business in SA, who love to shine their torches where it is darkest. Roodt, Chris Hart and Russell Lamberti from Sakeliga come to mind.
Then you have the so-called “sunshine economists” who you can always rely on to spread an optimistic and uplifting story but not always a reflection of reality. Over the past 5-7 years this grouping has been more wrong than right. I will include Dr Roelof Botha, JP Landman and Johann Els from Old Mutual in this grouping. Things are forever getting better and the turnaround is perennially “just around the corner”.
SA “undeniably” in a better position
On 15 July this year, News24 published an article written by JP Landman, who is under contract to Nedbank Private Wealth. Always optimistic, he wrote the following: “The country is undeniably better off than it was five years ago.” Take note of the “undeniably.” Landman argued at length that removal of former president Jacob Zuma from power has enabled current president Cyril Ramaphosa to embark on a course of political cleansing and renewal. He has subsequently been raving about the game changing announcements concerning Eskom, and the massive changes coming in allowing the private sector to generate their own electricity.
Johann Els, chief economist of Old Mutual wrote a similarly gushing piece about SA’s future in News24 earlier this month, also reported in Rapport, that “the time has passed for talking about SA as a failed state and an economy that will never recover. As far as economic growth and public debt is concerned, the country is already in a much better position than it was four years ago—after President Ramaphosa presented a concrete plan last week to solve the energy crisis, calling it a different kind of Radical Economic Transformation. Just like Landman, he says South Africans are in a much better position than four years ago.
What is interesting is that in the comments under his article in Rapport, 61 of the 65 comments were scathing about his views, with many comments stating outright that they disagreed. With due respect, as they say in court when the opposition advocate makes an outrageous statement, I also disagree with these two eminent gentlemen. They are both trying to fabricate a narrative about our future that simply does not exist currently. It might one day happen—but not soon. It is clear to me that they have a mandate from their respective employers, the Old Mutual and Nedbank group, to try and influence investment and consumer behaviour—regardless of what the possible outcome might be. Remember what these companies do: they sell life insurance and investments, and finance cars and houses.
The average person/household has suffered a dramatic decline in wealth and personal living standards over the past four to five years. Very little, if ever, is said about this and the reasons why.
Let me show you why.
I think it’s fair to say that what we know is living standards for middle to upper income individuals are determined by one or more of the following factors:
- Salary and salary increases
- Returns on pension and private investments
- Value of residential property
- Rental on property income
- Global purchasing power of the local currency
- Employment situation
- Ever higher tax rates
On all of these counts, the average middle to upper class person or household unit has suffered a sharp decline over the past 5 years.
- Average wages in private sector not keeping pace with inflation
The company Debtbusters recently calculated that average personal disposable incomes have declined by 43% over the past 5 years. Just before his death Brenthurst Wealth consulting economist Mike Schüssler calculated virtually the same numbers. This is a devastating number, probably worse than the decline in spending power in the period 1985 during the sanction years. The consumer is maxed out, overdrawn and overtaxed and salaries have not kept pace with inflation. Don’t expect the consumer to save the economy going forward.
- Returns on pension and private investments.
If one assumes that most pension/retirement funds are invested in the three broad multi-asset categories of high, medium and low equity exposure, one sees the following: Not one of those categories managed to beat (a) a good income fund and (b) the inflation rate over the period. I often look at the investment returns of Reg 28 pension funds and it’s clear that many, if not most pension funds, have beaten inflation after all costs over 5 and even 7 years.
3 Value of residential property.
Residential property prices have shown very little nominal growth over five years on average. Over the past 5 years property prices after inflation have declined between 3-4% per annum. This is continuation of a 13-year decline since May 2008 when the property market peaked. Over that time properties have lost about 20% of their values in real terms. The hardest hit sector is in the price bracket above R3,5m, which is now considered to be upper-class or super luxury. And it takes almost 3 months to sell a home on average.
Have a careful look at this graph, supplied by FNB. It reveals a residential property market growing at well below the inflation rate, especially for homes in the price bracket R5m and above. Not only have prices declined in real terms (while the rest of the modern world has experienced incredible growth) but it has become much harder to sell them.
- Loss of global purchasing power.
We live in a global world where our global purchasing power is measured in US dollars. Here too, the average South African person/household has suffered a drop of more than 40% against the US dollar, from around R12,40 in the months before Cyril Ramaphosa was elected as head of the ANC to its current value of around R17,40. That means we pay 40% more for anything imported. The most visible one is the price of petrol which is determined by a combination of global oil prices and the currency. Add things such as air travel, medical equipment and Gucci handbags, which are all priced in USD.
All it means is that people will travel less globally (which is good for the local tourism industry), buy smaller cars and drive them for longer. Just about every product we consume and service we use is affected by the slow burn of a currency decline. Even if we sit at home and watch TV every night we will be affected. Netflix, Showmax and all those channels are priced in US dollars.
5. Gross Domestic Product per capita
GDP per capital reached a peak in 2011 at $8810,9. Ever since then the trend has been down with a small uplift post Covid-19, but now stands at $6 994,2. A country suffering a declining GDP-rate per capita means that we wake up a little poorer every morning. In less than 10 years, says Claude Baissac, SA will have declined to a lower-middle income country, in the same grouping as poor countries such as Greece.
6. Unemployment rate.
In 2017 the unemployment rate was 27,4%. For 2021 the average rate was 33,56%. How could more unemployment translate into “you’ve never had it so good”?
Unemployment for people under the age of 35 is as high as 65% and millions of people will probably never enter the formal economy, never have a stable income and will never get finance to buy a house or a motor car. I don’t see these issues disappearing soon. Middle-class and even upper-class South Africans have seen their wealth evaporate or stagnate, unless they have built up a substantial offshore asset base. I have earned myself the moniker of Dr Doom and a “financial pornographer” by colleagues and other commentators, but buying offshore property and/or equity investments over the past 10 years—with the exception of the last 10 months or so—have materially done better than sticking to SA assets.
I have yet to find ONE single client who intends liquidating offshore investments in order to invest locally.
Investors today are far better informed than these so called sunshine economists are led to believe and are very alert to the massive risk to their wealth lurking on the horizon, which includes our banks being placed on the global grey list (very rand negative), changes to property ownership laws, collapse of infrastructure, collapse of municipalities, rising crime and more.
I can understand why Els from Old Mutual has to beat the “things are getting better” drum. As SA’s third largest asset manager, Old Mutual has most of its assets tied up in SA. I don’t have any actual numbers to back it up as far as OM is concerned, but both Coronation and Allan Gray numbers show a slow and steady decrease in assets under management with large chunks of assets moving abroad. Only this week Asisa published its latest AUM-numbers, showing that R21 billion has been withdrawn from the greater investment pot in SA so far this year.
This pot has dropped to below R3 trillion—still a large number—but not growing anymore. Connect the dots, as they say.
I think, and have stated so many times over the years, that the actual numbers – when seen holistically- show an economy in much deeper trouble than we suspect. Middle-class purchasing power is under tremendous pressure, which can be seen in the share prices of domestic consumption stocks such as Shoprite and Pick n Pay, for instance, which have shown very little growth in over 10 years.
Fortunately, we still have straight shooting economists such as Kevin Lings from Stanlib who still seems to have retained his intellectual principles and calls it as it, and not as his employer wants it to be. Please listen to this brilliant interview between Alec Hogg and Lings earlier this week.
The economics editor of the Financial Mail, Claire Bisseker has also been doing some excellent reporting on the state of the middle-class but many financial journalists on other websites still seem to think it is unpatriotic to report on the bad news.
So to these starry-eyed economists I say: You can fool some of the people some of the time, but you cannot do it all the time.
- Magnus Heystek is director and investment strategist at Brenthurst Wealth, one of SA’s leading boutique wealth managers.
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