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This article was first published on the 31st of March 2022
You could argue that if enough people see the glass as half full, the storm clouds will gather, and the rain will come pelting down to fill it. So long as we remain positive, there’ll be enough water to see us through any drought. Except that the universe doesn’t work quite like that. For Magnus Heystek of Brenthurst Wealth, the storm clouds have been gathering for quite some time and it doesn’t bode well for South Africa. Certainly not as well as the ebullient and positive Discovery CEO Adrian Gore would have us believe. Gore’s can-do attitude built an empire now at the cutting edge of health funding, but Heystek believes his characteristic buoyancy and outlook are out of kilter with the reality we live with today. He goes further to say it’s politic, given the incipient NHI’s existential threat to Discovery Health. Then to add insult to injury (nothing personal, he likes and admires Gore), he provides a host of real-life examples of why this country will likely go to the dogs. – Chris Bateman
SA no country for rich people
By Magnus Heystek*
Adrian Gore, CEO of the Discovery Group, is one of the smartest and most likeable people I know. He has also built up several great local and international businesses over the past 25 years or so, ever since he left Liberty when the old guard there didn’t buy into his vision of what he wanted to achieve. Instead, he trotted over to the much younger and gung-ho RMB-threesome of Paul Harris, GT Ferreira and Laurie Dippenaar who had … in the process making great fortunes for all.
I wrote an article for The Star at the time when all of this was going down and compared the average age of directors at Liberty (57) to that at RMB (33) and concluded that the Liberty directors were winding down the clock to their retirement and were not going to be doing anything to upset the value of their share options, meant to fund a very cosseted retirement, either in SA or in other parts of the world, as what happened to Donny Gordon.
The RMB founders saw the upside and provided the seed capital for Discovery and the results are here for all to see today.
In this instance, the blue-sky potential and optimism were rewarded, mainly for the founding directors and early shareholders. We are talking billions here, not mere millions.
Gore, over the years, was always the fount of optimism, wherever and whenever he spoke in public. First at the Investment Planning Summits sponsored by Discovery where world leaders and rock stars were flown in to inspire and motivate an increasingly demotivated South African audience who were starting to feel the impact of the slow deterioration of business and society in general. This was during the height of the Zuma years and the era of state capture.
Last week, at Cyril’s Investment Summit in Sandton, he was at it again. “South Africa has tremendous potential and the narrative around the country is much worse than the reality,” he was quoted as saying. “Assets are underpriced, opportunities are overlooked and underpriced and people are distracted … I think that is the opportunity in South Africa. The economy is less risky than people tend to think. Forget about emotions and opinions … look to crunch the data,” he said (Businesstech).
Unemployment at record levels
Almost on the same day, three different pieces of economic news broke. First, Statistics SA announced SA’s unemployment rate was at a new record high of 36,5%. If one included those people who have stopped looking for work, the number was well over 40%.
Then, Massyns – a well-known national road transport and logistics group whose trucks are very familiar on roads all over SA – announced it was closing shop. Company director Frans Massyn said the closure was mainly due to the market conditions in the road freight industry and the vandalism and damages the company experiences on our roads, which included among others, theft, looting, arson, poor road conditions as well as corruption by law enforcement agencies.
A few days later, Bell Equipment, producers of the world’s largest range of articulated dump trucks, announced it is moving more of its manufacturing away from SA and the “risk presented by the volatility of the SA landscape going forward”. Bell said that South Africa remains a tough environment with low business confidence and that the civil unrest in KwaZulu-Natal last year in July – which temporarily closed its Richard Bay factory – exacerbated supply-chain challenges and logistical issues created by the pandemic.
There are many other ‘Massyns’ or ‘Bells’ in South Africa at the moment. They do not announce anything but simply close up shop and walk away. A visit to almost any town or city in South Africa will reveal hundreds, if not thousands of such ignominious business endings with a loss of production, employment and tax revenues.
Even Cosatu last week warned the government that entire small towns in many parts of the country have been abandoned by people and businesses, leaving locals nowhere to go than the larger cities.
Last year, Clover announced the closure of its milk- and cheese-processing factory in Lichtenburg in the North West to somewhere in the Durban region. Clover blamed this move on the collapse in the roads, infrastructure and unhelpful municipality. Talk about jumping from the frying pan into the fire!
And during the national unrest in July last year, Toyota came very close to shutting up shop. In a letter written by Toshimitsu Imai, Toyota’s regional head for Africa, to eThekwini mayor Mxolisi Kaunda expressed his concerns about the state of affairs. It is very rare for a Japanese company to air such grievances in public. It was rumoured at the time that Toyota was very close to pulling the plug on its SA operations. That would have been catastrophic to SA’s image in the business world.
Unfortunately, he said the incidents in the city (Durban) have left Toyota feeling very uncertain about the future of its business in KwaZulu-Natal.
Gore has taken some serious flack – rightly so in my view – for this uber-optimistic view of the economy, which is not backed up by many facts. Gore feebly tried to protest that the general narrative is misplaced and that investors are not seeing the blue-sky potential that South Africa offers. His comments about how rapidly the SA economy had recovered post-Covid-19 had all the elements of a little porker. It simply wasn’t true as many studies have shown the SA economy had fared very poorly in its recovery relative to other developing countries.
He also omitted to mention that SA had lost two million jobs during the Covid-19 pandemic, which have not been recreated again. Facts and reality come before the narrative, not the other way around. South Africans from all spheres of life – from the lowly paid worker catching (or not) a train to the executive dodging the potholes to his offices – are experiencing the slow-moving destruction of infrastructure, state-owned entities and general failure of our towns and cities.
In Cape Town, the municipality cannot move people squatting on a railway line that was abandoned because of the continued arson of trains in SA’s second city.
Many other prominent businesspeople in recent days and weeks have been warning about SA’s trajectory towards being a failed state. These include Mike Brown from Nedbank, Claude Baissac from Eunomics, and Neil Froneman from Sibanje-Stillwater.
If SA’s potential is lurking somewhere in the statistics, as Gore says they are, I am failing to find them. In fact, the more I delve into the numbers, the more I remain convinced that SA’s trajectory towards becoming a failed state in parts will not be arrested or stopped altogether.
Almost every day brings yet more proof of the wholesale and systemic looting and destruction of infrastructure that still takes place. The Lotto, SA Post Office, municipal debt to Eskom, Charlotte Maxeke Hospital, roads and railway, the ANC stealing money from its own workers and not paying SARS and then calling it a cash-flow problem. These are but a few of them.
It’s these things, Adrian, that create the narrative, not the other way around. If things were going well, you would have seen the full-throated roar of unbridled capitalism and opportunity-seeking ventures. But we are not. Instead, SA’s high-net-worth individuals (assets of $30m or more) are heading for hills in ever-increasing numbers.
SA no country for rich people
Last year, during the BizNews Investment seminar in August, mercurial speaker Rob Hersov – who obviously moves in those circles – warned that SA’s rich are fleeing the country. This has now been confirmed by a report from Knight Franks that SA’s already under pressure HNWIs shrank from 603 to 561 during 2021, a reduction of 7%, mainly due to emigration and declining local fortunes. Hell, we can now get almost all of our HNWIs into one Airbus 380 heading to Dubai or Mauritius.
Financial Mail editor Rob Rose writes about this as follows: “If indeed SA’s wealthiest individuals are fleeing the country, as the new Frank Knight wealth report suggests, this could have a worryingly disproportionate impact on the country’s tax base.”
SA’s fall was the most pronounced on the list, alongside Vietnam. Furthermore, and in a finding alluding to rising emigration, it added that 31% of SA’s HNWIs plan to apply for a second passport or citizenship.
SA’s rich and even not so rich are very well informed as to what is happening in the country. They are concerned about many things: retaining their wealth, the safety and security of their families and also future levels of taxation. The biggest concerns right now, in my view, are the proposed health insurance scheme being contemplated by the government, and how to fund the soon-to-be-announced basic income grant.
I am more than convinced that Discovery – either the medical aid or investment company – are experiencing these things first-hand. It’s a well-known statistic that medical aid membership numbers, including at Discovery, have been stagnant or declining in recent years.
One of its competitors, PPS recently warned that emigration among its members has risen sharply. In September last year, CEO Izak Smit – of the company that offers investment and insurance products to graduate professionals – red-flagged the exodus of SA’s most skilled workers who not only provide tax revenues, but also support jobs across the economy.
According to a report in Business Day on 21 September 2021, about 600 of the 2,500 members who left PPS cited emigration as a reason for leaving. In the same report, it quoted Jannie Rossouw from Wits Business School as saying emigration among high-income earners is bedevilling SA’s already stretched personal income tax base.
In the last two years, about 9,000 people earning a taxable income of R750,000 or more had emigrated. “SA is losing its tax base,” Rossouw is quoted as saying.
No wonder SARS in the recent Budget announced that all people with assets in excess of R50m must now provide market-related valuations for their assets. This is another additional administrative burden to taxpayers (how do you evaluate private, unlisted businesses?). It is also a clear sign that SARS is gearing up for a major assault on the remaining wealth left in SA via a kind of wealth tax.
One gets the impression that Gore is desperately sidling up to the ANC and Cyril Ramaphosa in order to protect his Discovery medical aid business, in light of the plans by the government to virtually do away with medical aid schemes. The market, as yet, does not seem worried about this happening, but at some stage, it could. Perhaps Discovery is trying to convince the government that it should manage the NHI scheme. I don’t know first-hand, but one can speculate.
In a strange way, I hope that Gore is right that I am (and the others who agree with me) are wrong.
I live in this country and so do my six children and four grandchildren. But I must be looking into a different crystal ball than the one Gore looks in every morning before he drives to that shiny new head office of Discovery in Sandton, where office vacancies are now running at about 25%.
- Magnus Heystek is investment strategist at Brenthurst Wealth. He can be reached at [email protected] or follow him on twitter @magnusheystek.
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