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In 2015, South Africa’s Treasury unleashed a seismic shift by increasing offshore investment allowances, liberating the wealth of high-net-worth individuals. Initially underestimated, this move prompted an exodus of capital, creating a thriving industry of forex dealers, emigration specialists, and global fund marketers. Local asset managers, reliant on historical performance, were slow to adapt, leading to a stark underperformance of the JSE compared to global indices. As disillusionment with the ANC’s economic policies grew, investors flocked offshore, leaving the JSE in the shadows. With the mood among local investors hitting a record low, the question arises: Can the JSE reclaim its prominence amid this wealth exodus?
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HOW TREASURY CHANGED THE RULES OF THE GAME FOR ASSET MANAGERS
By Magnus Heystek*
In the 2015 budget, Treasury surprised the local investment industry by increasing the individual offshore investment allowance to R1m and R10m respectively.
R1m was the Single Discretionary Allowance (SDA) and R10m was the Individual Investment Allowance, R11m in total per taxpayer. The R1m could be moved quickly and effectively, without much paperwork, but the permission to move R10m per year required substantially more paperwork, including tax clearance and proof of funds. In effect, this meant the end of foreign exchange controls for most wealthy individuals whose tax affairs were up to date.
During that time the rand was trading at around R12/USD, which meant you received about $82 000 per R1m. At today’s rate of around R19/USD, R1m only buys you about $52 000, which means a sharp decline in the true benefit of the offshore allowance. Nevertheless, it is still being utilised at an extreme rate, calculated in the tens of billions of rands each year, if not more.
The outflow of capital from the local market to global markets since 1 April 2015 – when the new allowances kicked in – has been enormous, surprising many commentators and, particularly, the local asset management industry which initially did not see the threat to their businesses materialising.
After being cooped up and restricted by foreign exchange controls for so many decades, globally-orientated investors grabbed the opportunity to externalise some, or even all, of their liquid assets with both hands. The reporting on this outflow has been rather muted as information on the outflows are particularly hard to come by. For some reason, the SA Reserve Bank is very coy about sharing this kind of information.
In my experience, most High Net Worth Individuals (HNWIs) have, by now, exported a great deal of their discretionary capital, and they have benefitted immensely, making them even wealthier.
In the process, several new businesses were created almost overnight as astute local businesspeople saw the opportunities opening up. Forex dealers, emigration specialists and marketers of offshore global funds sprang up overnight and, today, are an established part of the local financial services industry. Local property marketers also jumped onto the bandwagon, offering properties for sale in Portugal, Spain, Mauritius and other countries.
Initially the local asset managers were almost indifferent to this looming threat, relying instead on historical performance figures which showed that the JSE was a good, if not excellent, performer in world terms over many years and decades. They also tried, on many platforms, to downplay the benefits of offshore investing, suggesting that the JSE, with its large offshore exposure, was enough to keep local investors happy with their investment returns. And for a while it did, as the difference in performance between local and offshore was marginal, at best.
The local media – no doubt, aware of who butters their bread – tried in vain to spread the word that “local is lekker” and that offshore investing is dangerous, volatile and, above all, disloyal and unpatriotic. Even today, there is such an undertone when these issues are discussed and analysed.
Commentators and advisors, such as myself, who recommended offshore investment to clients were lashed on social media as being “negative” or disloyal to crown and country. I don’t pay much attention to comments on social media, but when respectable publications such as Business Day calls you Dr Doom, as it did, you feel the bile rising. The editor of Rapport called me a “polis-smous”, but it reflected a superficial understanding of how the investment world operates and what drives investment returns.
In 2016, or thereabouts, a well-known financial writer for the Afrikaans newspaper, Rapport, 100% rejected the idea of any offshore exposure, proudly proclaiming, in print, that “we are ‘bittereinders’, and don’t need any offshore funds in our portfolios”. It reminded me of the days, many decades ago, when no self-respecting Afrikaans family would allow one of their sons or daughters to marry a ‘bloody’ Englishman.
All good and well, but the 100% pure local funds have been a disaster since then….
Thankfully, I think that those days are now behind us, and one can have a normal and nuanced discussion comparing the expected returns of the various asset classes available to local investors, which now includes a major exposure to offshore investments.
Regulation 28, which governs pension funds, was also amended a while ago to allow as much as 45% offshore allocation in retirement funds.
I think many commentators and analysts underestimated the enormous damage that the ANC’s destructive economic policies were inflicting on companies and the greater economy at large. This euphoria reached a high around the time Cyril Ramaphosa became president of SA, in2018. The rand was strong, money was flowing into the country, and it felt like the start of a boom period. This mood, however, didn’t last long and soon it became evident that nothing had changed and the disappointment set in. Economic growth remained low, foreign investors started withdrawing capital from the JSE and government finances continued to unravel.
The question now is, how much of an investors’ money should be invested locally and how much offshore?
Some investors can and should have 100% of their discretionary investments offshore, while some cannot tolerate any offshore exposure.
Anyone planning to emigrate someday – a fact of life in SA – will be exposed to a major currency risk in the future, once they actually emigrate, considering the long and steady decline of the local currency.
On the other hand, investors who have a limited amount of capital and need to generate maximum income from it, will be exposed to a higher degree of volatility in their offshore investments. These investors need all their capital to generate a high income which, fortunately, it has done. In fact, over the past 10 years local income funds have beaten the return on local balanced funds – the mainstay of the local investment world – at a lower cost and lower fees.
Most large local fund managers have either started promoting their offshore funds substantially more, or have tied up with one of the large global fund houses in recent years. Today there is not a single large asset manager that has not tied up with one of the global names, so as to offer offshore to their clients. It’s a case of, “if you can’t beat them, join them”. And quite rightly so. Comparative investment returns from 1 April 2015 show that the local market has vastly underperformed against global markets over the past 8 years, and longer.
WHAT THE CHARTS SHOW…
The following charts shows just how poorly the JSE has performed since 1 April 2015 when compared to the MSCI World Index, S&P 500 or the Nasdaq exchange.
Investors who opted for the Nasdaq – admittedly riskier and more volatile than the JSE – today have a portfolio almost 4 times more than they would have had, had they not followed the offshore route.
Some would say the comparison with the Nasdaq is unfair, but it is the third largest exchange in the world.
But even the MSCI-World Index returned almost DOUBLE what the JSE did over the same period. R10m invested into each of the following indices results in the following values (as calculated on 13 November, and rounded off the nearest million):
Satrix ALSI Index: R16 000 000
MSCI World Index: R31 000 000
S&P 500 Index: R39 000 000
NASDAQ: R61 000 000
The difference between local and offshore has been one of a fair retirement versus a great and carefree one.
Is the JSE now cheap and ready to start outperforming global markets, as one fund manager recently suggested?
I think that is a brave, if not self-serving, call. Some would even say a desperate call, such is outflow of funds from the local market. I have seen some recent statistics that reveal that the local asset management industry has suffered its first real decline in AUM ever over the last quarter. It’s a combination of massive outflows combined with the poor performance of the JSE year to date (YTD). For instance, the Japan market is up 24% YTD, the S&P500 is up 14% YTD, while the JSE is minus 14% YTD, when measured in USD terms.
In the mean time, the delisting from the JSE continues while the outflow of foreign capital shows no signs of abating. Something extraordinary, even magical, needs to happen in SA for such an outflow to be reversed. The JSE still primarily continues to be driven by the commodity sector, which has now all but reversed all its gains following the Covid-pandemic. There is not much left to ignite the market or the interest of investors, both locally and offshore.
Year to date, the JSE has also been very poor, with the JSE down about 4% versus the S&P which is up 29% YTD. The FAANGS, as measured by the Sygnia FAANG Fund, is up an astonishing 85% YTD. The JSE simply is not where the action is right now. Even the Japan and India markets have vastly outperformed the local one.
THE MOOD OF THE MARKET
The mood amongst local investors is currently at a record low. I do not come across investors wanting exposure to the local market. They simply don’t trust the ANC with their financial futures and are making optimal use of the foreign investment allowances, while they still can….
It doesn’t mean that offshore investing is plain sailing all the time. There have been times (and will be again) when the rand strengthens and offshore markets weaken at the same time. This happened from November 2021 to May 2022, and timing does play a role in these matters.
Offshore investing also needs to be judged over a 5-7 year period, like any other risk investment.
But until such time as the ANC steers away from its current ideological direction, there is no way that I can see a change in the relative fortunes of the JSE vis-à-vis offshore markets.
- Magnus Heystek: South Africa’s looming economic catastrophe – Debt crisis threatens stability
- Dump the junk – Magnus Heystek debunks the Big Mac Index
- Heystek: What needs to happen for me to change my mind about investing in SA
*Magnus Heystek is the Director and Investment Strategist at Brenthurst Wealth Management
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